Citizens Financial Services, Inc. — Q3 2021 Form 10-Q
Business context and period: Regional bank holding company reporting the quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The bank operates in Pennsylvania, southern New York and Delaware; the 2020 MidCoast acquisition expanded its Delaware presence. Figures below are in millions of dollars unless otherwise noted.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $16.59 | $16.47 | $49.24 | $45.65 |
| Provision for loan losses | $0.40 | $0.55 | $1.55 | $1.50 |
| Noninterest income | $2.85 | $3.54 | $9.79 | $7.46 |
| Noninterest expense | $10.40 | $9.69 | $30.67 | $30.03 |
| Net income | $7.06 | $8.01 | $22.17 | $17.88 |
| Basic EPS | $1.79 | $2.02 | $5.62 | $4.69 |
Profitability and margins: Nine-month net income rose 24.0%; Q3 net income fell 11.8%. Annualized nine-month return on assets and equity were 1.49% and 14.66%, respectively, versus 1.43% and 13.85%. Tax-equivalent net interest margin was 3.55% for the first nine months (3.96% in 2020) and 3.47% for Q3 (3.88% in 2020). The nine-month effective tax rate was 17.3%.
Balance sheet at September 30: Total assets were $2.05 billion, up $155.5 million from year-end 2020. Net loans were $1.43 billion, up $36.1 million; available-for-sale securities were $397.0 million, up $101.9 million. Deposits grew $152.1 million to $1.74 billion, with growth attributed largely to pandemic-related stimulus-related inflows. Borrowed funds declined $10.6 million to $78.2 million. Stockholders’ equity was $209.0 million, up 7.6% since year-end.
Cash flow and liquidity: Nine-month operating cash flow was $32.4 million, compared with cash use of $2.4 million in 2020; investing used $134.2 million and financing provided $135.0 million. Cash and equivalents ended at $102.0 million, up $33.3 million. Management said available cash, deposits, FHLB financing, correspondent-bank lines and maturing investments and loans support liquidity. FHLB borrowing capacity was approximately $749.7 million, with $110.8 million outstanding; two $34.0 million federal funds lines were undrawn.
Credit and capital: Allowance for loan losses was $17.3 million, or 1.20% of loans, compared with $15.8 million, or 1.13%, at year-end. Nonperforming loans declined 20.6% to $8.9 million; nine-month net charge-offs were $31,000. The bank reported an 8.90% community bank leverage ratio and said it met applicable capital requirements. Contractual commitments to extend credit and standby letters of credit totaled $290.1 million.
Material changes versus comparable periods
- Nine-month net interest income increased 7.9%, supported by loan and securities growth and lower funding costs. The increase in average earning-asset volume was partly offset by lower asset yields; management attributed the margin decline primarily to the low-rate environment.
- Nine-month noninterest income rose 31.3%, including a $1.13 million increase in bank-owned life insurance earnings, reflecting $1.155 million in death benefits received during Q1. Equity securities shifted from a $276,000 loss to a $288,000 gain.
- Q3 noninterest income declined 19.4%, notably as gains on loans sold fell $560,000 and other income fell $330,000. Q3 expenses rose 7.3%, including higher salaries and other expenses.
- Nine-month noninterest expense increased 2.1%; the absence of $2.18 million of prior-year MidCoast acquisition costs partly offset higher compensation and occupancy expenses.
- Unrealized available-for-sale securities losses contributed to a $1.6 million decline in accumulated other comprehensive income since year-end. Management attributed the securities’ unrealized losses to market and other rating changes and concluded they were not other-than-temporary impairments.
Outlook, commentary and risks
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year performance.
- Management reported that all 19 COVID-related loan modifications made in 2021, totaling $26.7 million, had returned to original terms by September 30. PPP loans outstanding totaled $20.8 million across 267 loans; the loans carry a 1% rate and remaining deferred fees of approximately $947,000 are expected to be recognized over time, subject to loan repayment or forgiveness.
- Risk factors include COVID-19 and its effects on borrowers and operations, interest-rate and economic changes, acquisition integration, competition, cybercrime and fraud, agricultural and dairy exposure, and concentrations in certain industries. Agricultural loans were 23.7% of outstanding loans; dairy loans were 9.2%. The filing identifies hotels/motels, restaurants and amusement/theme parks as higher-risk pandemic-affected sectors.
- Three borrower relationships represented 57.7% of nonperforming loans. The filing describes collateral and repayment concerns for these borrowers; one agricultural relationship had a $63,000 specific reserve. Management nevertheless considered the overall allowance adequate, while noting estimates could require adjustment if conditions differ from assumptions.
- The company expects to adopt the CECL credit-loss standard for fiscal years beginning after December 15, 2022; it had not determined the adoption impact. The filing reports no material litigation, material change in risk factors, or material control changes during the quarter.
Important facts for investors to verify
- Whether the weaker Q3 earnings and continuing net interest margin pressure persist, and the sensitivity of earnings to rate changes.
- Loan quality and allowance adequacy, especially the larger nonperforming relationships, construction-loan growth and agricultural, dairy and pandemic-sensitive exposures.
- Whether deposit growth is sustained as stimulus-related balances change, and how liquidity and funding needs evolve.
- The future impact of securities valuation changes on accumulated other comprehensive income and capital, and the eventual effect of CECL adoption.
- How much of nine-month earnings growth reflects recurring operations versus the unusual bank-owned life insurance death benefits and other gains.