Citizens Financial Services, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated results. The company operates a community banking business through First Citizens Community Bank and related subsidiaries, serving markets in Pennsylvania, southern New York and Delaware.
Key financial results
| Metric | Q1 2022 | Comparable / prior period |
|---|---|---|
| Net interest income | $16.262 million | $16.441 million, Q1 2021 |
| Provision for loan losses | $0.250 million | $0.650 million, Q1 2021 |
| Noninterest income | $2.431 million | $4.235 million, Q1 2021 |
| Noninterest expense | $10.231 million | $9.947 million, Q1 2021 |
| Net income / diluted EPS | $6.740 million / $1.71 | $8.463 million / $2.14, Q1 2021 |
| Net interest margin, tax-equivalent | 3.27% | 3.73%, Q1 2021 |
| Annualized return on assets / equity | 1.26% / 12.46% | 1.77% / 17.25%, Q1 2021 |
| Cash dividends per share | $0.475 | $0.460, Q1 2021 |
Net income declined 20.4% year over year. Management attributed weaker net interest income largely to lower PPP fee amortization and a lower yield on interest-earning assets. The sharp decline in noninterest income included the absence of a $1.155 million life-insurance death benefit recognized in Q1 2021, lower mortgage loan-sale gains, and a shift from equity-security gains to losses.
Financial position, cash flow and liquidity
- Assets: $2.178 billion at March 31, 2022, up from $2.144 billion at year-end 2021. Net loans were $1.461 billion, up $36.9 million; total loans were $1.479 billion.
- Deposits and borrowings: Deposits were $1.879 billion, up $42.9 million from year-end. Borrowed funds were $68.2 million, down from $74.0 million.
- Cash: Cash and cash equivalents fell to $114.1 million from $172.8 million, principally as the company purchased securities and funded loan growth. Q1 operating cash flow was $12.0 million; investing cash flow was negative $106.1 million; financing cash flow was positive $35.3 million.
- Capital and equity: Stockholders’ equity was $202.7 million, down $9.7 million from year-end, primarily reflecting a $14.6 million net-of-tax other comprehensive loss. The Bank’s community bank leverage ratio was 8.83%; management said the Bank was within the applicable grace period to meet the 9.0% threshold.
- Liquidity access: Management said available cash, core deposits, FHLB financing, correspondent-bank lines and maturing assets were adequate for expected needs. FHLB borrowing capacity was approximately $777.4 million, including outstanding amounts; two undrawn federal funds lines totaled $34.0 million.
Material changes and notable items
- Commercial real estate loans increased $37.5 million from year-end, while construction loans rose $11.7 million. Management identified Delaware markets as a key source of loan growth.
- Available-for-sale securities totaled $461.5 million, up $49.1 million. Their gross unrealized losses increased to $21.5 million from $4.0 million at year-end, which management attributed primarily to market-rate changes and did not consider other-than-temporary impairment. The related decline contributed to the reduction in equity through accumulated other comprehensive loss.
- The allowance for loan losses was $17.6 million, or 1.19% of loans, compared with $17.3 million, or 1.20%, at year-end. Nonperforming loans were $7.8 million; nonperforming assets totaled $9.0 million. Three borrower relationships accounted for 59.3% of nonperforming loans.
- The dairy-industry concentration was $123.9 million, or 8.4% of loans, down from $127.4 million, or 8.8%, at year-end. The filing also highlights risks to borrowers connected to agriculture and the natural-gas support industry.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $397.4 million, up from $293.1 million at year-end.
Outlook, risks and contingencies
The filing gives no specific earnings, revenue or margin guidance. Management expected to open an approved Ephrata, Pennsylvania branch in the second half of 2022 and stated that student lending was expected to pick up over the remainder of the year. These are forward-looking expectations, not quantified financial guidance.
Management cited interest-rate changes, economic conditions, COVID-19 effects, borrower repayment capacity, agricultural volatility, poultry-sector disruption, loan concentrations, competition, fraud, regulatory requirements and execution of strategic initiatives as risks. It cautioned that a prolonged downturn could increase nonperforming assets, charge-offs and loan-loss provisions. The Bank’s interest-rate model estimated prospective one-year net interest income would change by +0.18% under a 100-basis-point rate increase and by -2.50% under a 100-basis-point decrease; management noted actual results could differ materially.
The company had not modified loans under its COVID-19 relief program during Q1 2022. It reported no material pending litigation known to management. The filing also notes that adoption of the expected-credit-loss standard (CECL) was scheduled for fiscal years beginning after December 15, 2022 for the company, with the financial impact not yet reasonably estimable.
Important facts for investors to verify
- Whether subsequent results confirm the company’s ability to stabilize net interest margin as interest rates change, given the 3.27% Q1 tax-equivalent margin and modeled rate sensitivity.
- Whether the securities portfolio’s unrealized losses recover or affect regulatory capital, liquidity or the company’s ability to avoid selling securities at a loss.
- Credit performance in the commercial real estate, agricultural and dairy-related portfolios, including the three relationships that represented 59.3% of nonperforming loans.
- The Bank’s progress toward the 9.0% community bank leverage ratio threshold and any effect of the applicable grace period.
- The scale and funding implications of the $397.4 million in off-balance-sheet credit commitments, and the eventual CECL adoption impact.