Citizens Financial Services, Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022; balance-sheet comparisons are to December 31, 2022. The company is a Pennsylvania-based bank holding company operating First Citizens Community Bank and related subsidiaries across Pennsylvania, southern New York, and Delaware.
Key financial results
| Metric | Q1 2023 | Comparable / change |
|---|---|---|
| Interest income | $25.1 million | Up from $17.8 million |
| Net interest income | $18.1 million | Up 11.2% from $16.3 million |
| Net interest margin, tax-equivalent | 3.30% | 3.27% in Q1 2022 |
| Provision for credit losses | None | $250,000 in Q1 2022 |
| Noninterest income | $2.2 million | Down 10.6% from $2.4 million |
| Noninterest expense | $11.8 million | Up 15.1% from $10.2 million |
| Net income / diluted EPS | $6.9 million / $1.73 | Net income up 1.9%; EPS was $1.69 |
| Annualized return on assets / equity | 1.26% / 11.49% | 1.26% / 12.46% in Q1 2022 |
| Operating cash flow | $10.4 million | $12.0 million in Q1 2022 |
Higher loan and securities yields and loan growth lifted interest income, while higher deposit and borrowing costs increased interest expense. Management reported tax-equivalent net interest income of $18.4 million, up 11.3% year over year. Salary and benefits rose $764,000; merger costs were $244,000. Net equity-security losses were $218,000 versus $45,000 a year earlier.
Financial position, liquidity and credit
- Assets and loans: Total assets were $2.335 billion, up $2.0 million from year-end. Gross loans were $1.723 billion and net loans $1.708 billion, broadly stable since year-end.
- Deposits and borrowings: Deposits declined $44.5 million (2.4%) to $1.800 billion; borrowed funds rose $30.8 million to $288.1 million. Management attributed deposit declines to customers moving funds to higher-yield alternatives and seasonal municipal outflows.
- Liquidity: The balance sheet reports cash and cash equivalents of $26.2 million. Management cites access to core deposits, FHLB funding, correspondent-bank lines, brokered CDs, and portfolio cash flows. It reports an approximately $887.3 million FHLB borrowing capacity and an undrawn $54.5 million Bank Term Funding Program line.
- Credit quality: Nonperforming loans increased to $10.5 million from $6.9 million at year-end; nonperforming assets were $10.9 million. Five borrower relationships represented 73.8% of nonperforming loans. Net charge-offs were $2,000. The loan allowance was $15.3 million, or 0.88% of loans; the off-balance-sheet credit allowance was $1.2 million.
- Capital and securities: Stockholders’ equity was $213.2 million, including accumulated other comprehensive loss of $26.8 million. The Bank’s community bank leverage ratio was 9.02% at March 31, above the 9% well-capitalized threshold. Available-for-sale securities had fair value of $443.4 million and gross unrealized losses of $38.6 million.
- Cash dividends: $0.485 per share was paid in the quarter; the filing reports a 28.0% payout ratio.
Material changes and unusual items
- The Bank adopted CECL on January 1, 2023. Adoption increased retained earnings by $1.8 million net of tax; the loan allowance decreased $3.3 million and the off-balance-sheet allowance increased $1.1 million. The filing cautions that post-adoption allowance measures are not directly comparable with prior-period measures.
- Nonperforming loans rose by approximately $3.5 million, primarily after two commercial relationships secured by real estate were placed on nonaccrual. One construction relationship had a specific reserve of $257,000.
- Unrealized losses on available-for-sale securities improved during the quarter as longer-term market rates declined; accumulated other comprehensive loss narrowed by $6.4 million.
- The pending HV Bancorp acquisition had received shareholder and regulatory approvals and was expected to close June 16, 2023. Consideration provides for no more than 20% cash at $30.50 per share, with the remainder in Citizens shares at 0.40 shares per HVBC share, subject to agreement terms.
Outlook, commentary and risks
The filing provides no quantified earnings or revenue guidance. Management said Q1 loan activity was limited and higher market rates had slowed activity. It expects to open an approved Williamsport, Pennsylvania branch in the second half of 2023. Management views liquidity as adequate, but identifies funding access and costs, deposit behavior, interest-rate movements, borrower performance, economic conditions, and the HV Bancorp transaction as relevant uncertainties. The filing also highlights exposure to agricultural and commercial customers, including a dairy-industry concentration of $116.8 million, or 6.8% of loans.
The company’s interest-rate sensitivity model estimates that a parallel 100-basis-point rate increase would reduce prospective one-year net interest income by 2.72%; a 400-basis-point increase would reduce it by 10.93%. These are model estimates and actual results may differ. Management reported no known litigation expected to materially affect financial position.
Important facts for investors to verify
- Reconcile the MD&A statement that cash and cash equivalents were $23.2 million with the balance-sheet figure of $26.2 million.
- Reconcile reported borrowed funds of $288.1 million with the liquidity discussion’s statement that $300.0 million was outstanding at the FHLB.
- Track the nonperforming-loan increase, borrower-specific collateral and guarantees, and the adequacy of the CECL allowance as credit conditions evolve.
- Assess deposit trends, reliance on wholesale borrowing, borrowing costs, and actual availability of contingent liquidity sources.
- Monitor completion and integration of the HV Bancorp acquisition, related costs, and final consideration mix.
- Review subsequent filings for actual margin, deposit, capital, and credit performance; management notes that one quarter is not necessarily indicative of full-year results.