Citizens Financial Services, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results primarily reflect the First Citizens Community Bank. Unless noted, amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $17.729 | $16.212 | $33.991 | $32.653 |
| Provision for loan losses | $0.450 | $0.500 | $0.700 | $1.150 |
| Non-interest income | $2.304 | $2.706 | $4.735 | $6.941 |
| Non-interest expense | $11.200 | $10.320 | $21.431 | $20.267 |
| Net income | $6.901 | $6.647 | $13.641 | $15.110 |
| Diluted EPS | $1.74 | $1.67 | $3.43 | $3.79 |
- Q2 net income rose 3.8%; first-half net income fell 9.7%. Annualized return on assets and equity were 1.25% and 12.49% for Q2; first-half figures were 1.25% and 12.48%.
- Tax-equivalent net interest margin was 3.43% in Q2 (3.46% a year earlier) and 3.35% for the first half (3.59%). First-half tax-equivalent net interest income increased 4.0% to $34.460 million.
- At June 30, total assets were $2.213 billion; net loans $1.578 billion; deposits $1.879 billion; borrowed funds $110.5 million; and stockholders’ equity $195.0 million. Since year-end 2021, loans increased $153.8 million, deposits $42.6 million, borrowings $36.6 million, and equity declined $17.5 million.
- Six-month operating cash flow was $15.1 million, investing cash outflow $241.4 million, and financing cash inflow $74.1 million. Cash and cash equivalents fell $152.2 million to $20.7 million, principally reflecting loan growth and security purchases.
- Cash dividends were $0.470 per share in Q2 and $0.941 per share for the first half. First-half dividend payout ratio was 27.7%.
Material changes and balance-sheet developments
- First-half net interest income increased 4.1%, supported by growth in average earning assets and lower interest expense. The margin nevertheless contracted, reflecting lower asset yields and reduced PPP fee amortization.
- First-half non-interest income decreased 31.8%. Notable factors included lower bank-owned life insurance income (the 2021 comparison included $1.155 million of death benefits), reduced mortgage-sale gains, equity-security losses versus gains, and lower derivative-related fees. Service-charge and brokerage/insurance income increased.
- Non-interest expense rose 5.7% in the first half, led by salaries and benefits, which increased 10.1% amid merit increases and additional staffing, primarily in Delaware.
- Available-for-sale securities increased to $462.9 million fair value, while their gross unrealized losses increased to $36.8 million from $4.0 million at year-end, primarily as market interest rates rose. First-half other comprehensive loss was $26.4 million after tax; accumulated other comprehensive loss reached $26.6 million. Management said it did not consider the securities’ impairment other-than-temporary.
- Total loans grew 10.7% from year-end, with commercial real estate, construction, consumer, and state and municipal lending among the growth areas. Commercial real estate was 50.1% of loans; the dairy industry concentration was $121.6 million, or 7.6% of loans.
- Non-performing loans were $7.4 million, down $0.3 million from year-end; non-performing assets were $8.4 million. The allowance was $17.6 million, or 1.10% of loans, versus 1.20% at year-end. Three relationships represented 61.6% of non-performing loans; management reported no specific reserves for those relationships at quarter-end.
Outlook, risks, and contingencies
- The filing gives no quantified earnings or revenue guidance. Management expected to open approved branches in Ephrata, Pennsylvania, and Greenville, Delaware, in the second half of 2022, and anticipated further student-loan growth.
- Management described liquidity as adequate, citing core deposits, FHLB financing, correspondent-bank federal funds lines, and maturing loans and securities. FHLB borrowing capacity was approximately $789 million, with $123.1 million outstanding; $34 million of federal funds lines were undrawn.
- The Bank’s community bank leverage ratio was 8.81% at June 30, below the 9.0% threshold for “well-capitalized” status. The filing said the Bank was within the applicable grace period and would need to meet 9.0% by the end of Q3 2022 to be considered well-capitalized.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $438.0 million. Loan commitments increased from $276.0 million at year-end.
- Interest-rate simulations projected one-year net interest income below the base case for all disclosed rate shocks: down 200 basis points, 5.85% lower; up 100 basis points, 1.11% lower; and up 400 basis points, 5.23% lower. Management cautioned that model assumptions may differ from actual outcomes.
- Key risks cited include changing interest rates and economic conditions, borrower delinquencies, agricultural and dairy-sector volatility, natural-gas-related activity, poultry-sector disruption, fraud and information theft, competition, regulatory changes, and possible effects of COVID-19. Management reported no material change in risk factors from the 2021 Form 10-K and no material pending litigation known to it.
- The company expected to adopt the current expected credit loss standard (ASC 326) on January 1, 2023, but had not determined its financial effect; it warned adoption could affect the allowance, equity, regulatory capital, and internal controls.
Most important facts for investors to verify
- Whether deposit pricing and loan repricing sustain net interest income as rates change, given margin compression and the sensitivity analysis.
- Whether the Bank reaches the 9.0% CBLR threshold by the stated Q3 deadline and how capital is affected by accumulated securities losses and forthcoming ASC 326 adoption.
- Whether rapid loan growth—particularly commercial real estate and construction—and the dairy concentration lead to higher delinquencies, charge-offs, or allowance needs.
- Whether cash declines and increased borrowings remain manageable alongside $438.0 million of commitments and planned branch openings.
- How recurring non-interest income and expenses compare with the first-half results, which included unusual 2021 life-insurance death benefits and lower 2022 mortgage-sale activity.