Citizen Financial Services: An Interesting Listing Story (OTCMKTS: CZFS)

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Introduction

Some regional banks and community banks do not get the attention they deserve simply because they are listed on the OTC or pink sheets, which immediately makes them a no-go area for many investors. In some cases, the banks make the (intelligent) decision to continue to upgrade and that is exactly what Citizens Financial Services (OTCPK: CZFS) now continues. This small Pennsylvania-based bank has topped its pink leaf list as the size of its balance sheet now exceeds $2 billion and is pursuing a Nasdaq listing. This should put the bank on a lot more radar screens and I wanted to see if I should go there long before the listing actually happened.

Actions of Citizen Financial Services
Data by YCharts

A review of the 2021 results shows very satisfactory results

Citizens Financial Services is the holding company of First Citizens Community Bank in Pennsylvania, where it operates approximately 30 branches with a particular focus on agricultural loans in addition to normal home loans and commercial loans.

Thanks to the broadening of the bank’s asset base (total balance sheet size increased from less than $1.9 billion at the end of 2020 to more than $2.1 billion at the end of 2021 ), reported interest income also increased, from $70.3 billion. M in 2020 to $73.2M in 2021. And despite the expanded balance sheet, interest expense declined, which further increased net interest income from $62.2M to $66.1M .

Income statement of financial services to citizens

Citizens Financial Investor Relations

The bank was also able to report stable net non-interest expense of approximately $29.2 million, which translated to pre-tax income and loan loss provision of approximately $37 million. of dollars. We also note that Citizens Financial Services recorded a provision of $1.55 million for loan losses. This is interesting for two reasons: firstly, despite recording a relatively low provision in 2020. And despite the increase in the size of the balance sheet, it is very intriguing to see that loan loss provisions are now lower than in 2019, when the bank ended the year. with a balance sheet total of less than $1.5 billion. I will discuss the bank loan book in the next section of this article.

Net income shows net income of just over $29.1 million, which is $7.38 per share based on the average number of shares of 3.95 million shares throughout the year. The bank currently pays a dividend of $0.47 per share on a quarterly basis and while that means the dividend yield is just under 3%, the dividend is also very safe as the payout ratio is around 25 % of financial results.

The total amount of non-performing assets has shrunk, and the majority is tied to just three borrowers

I like local and regional banks because I like to think they have a better understanding of local markets and are able to better serve their customers (both on the deposit and borrower side), with personalized service . It was very interesting to see that the bank barely increased the size of its loan portfolio in 2021 despite an influx of almost $250 million in deposits. The vast majority of cash inflows were either kept in cash or invested in securities. These tend to be more liquid and therefore safer, which has also made the bank’s balance sheet safer. At the end of 2020, “only” 20% of assets were held in cash or debt securities, but this rose to almost 28% at the end of 2021.

Report on financial services to citizens

Citizens Financial Investor Relations

This also explains why interest income has not increased despite an influx of deposits of hundreds of millions of dollars. It is safer to retain the inflow of cash and securities, but it also means that interest income will be lower.

The image above shows that the total size of the loan portfolio has increased from $1.39 billion to $1.42 billion, which is only a very small increase.

My next step is to always take a look at the breakdown of this loan portfolio. The vast majority of the $1.42 billion is made up of real estate related loans and commercial real estate plays a very important role. That being said, I also like the $201 million in residential real estate and the over $300 million in agriculture-related real estate assets.

Breakdown of Citizen Financial Services loan portfolio

Citizens Financial Investor Relations

We also note that the bank has already set aside $17.3 million as a provision to cover loan losses, which is an increase of approximately 10% over the prior year. Despite a higher amount of provisions, the total amount of loans that are no longer classified as performing has actually decreased on an annual basis. We see the total amount of non-performing loans going from $11.3M to $7.66M.

Citizen Financial Services PNP

Citizens Financial Investor Relations

This is good news for CZFS. Not only because the total amount of non-performing loans has decreased, but also because the increase in provisions now translates into a significantly improved coverage ratio. At the end of 2020, the total amount of provisions was $15.8 million for $11.3 million in bad debts for a coverage rate of 140%. At the end of 2021, the total provision increased to $17.3 million while the total amount of non-performing loans decreased to $7.66 million, which increased the coverage ratio to 226% and c is obviously a much healthier situation.

I also appreciate the color provided by CZFS on non-performing loans, as the majority of these loans (61.4%) appear to be caused by three borrowers, and CZFS has confirmed in its annual report that no specific reservations are necessary for these three loans.

Citizens Financial Services Sour Loan Explanation

Citizens Financial Investor Relations

Of course, we must continue to monitor credit quality, as approximately $68 million of the loan portfolio is classified as “special mention” or “below standard”. Although this is a substantial decrease from the nearly $75 million at the end of 2020, I expect the bank to continue to record provisions for the foreseeable future to ensure that she can go on with the potential fallout of additional loans going bad.

Investment thesis

Watching loans deteriorate is part of banking and there is not a single bank in the world that has never had a loan loss. So if there’s something you can’t avoid, it’s important to see how it’s done and CZFS’s strength is in keeping its loan portfolio under control. I like the bank’s decision to further strengthen its cash and liquid asset position and although the NPL coverage ratio has improved, we should bear in mind that around 5% of its non-residential mortgages is classified as “special mention” or “sub-standard”.

I like CZFS for its financial performance and its rapid increase in tangible book value thanks to the low profit distribution rate. While the 2.8% dividend yield on its own isn’t terribly exciting, the bank is adding over $5/share to its tangible book value which stood at $45.55 at the end of 2021. The P Current /TBV of 1.5 is relatively high, but given that the bank will likely end 2022 with a TBV of over $50, I don’t mind paying 1.35 times the year-end TBV for a bank which trades at less than 10 times earnings.

I think CZFS will appear on a lot more radar screens once the listing is complete and I may be looking to initiate a small initial long over the next few weeks as I familiarize myself with the bank’s performance and wait to see it’s Q1 and H1 performance.

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