Business context and reporting period
Citizens Financial Services, Inc. is a Pennsylvania bank holding company whose principal business is community banking through First Citizens Community Bank. This Form 10-K covers the fiscal year ended December 31, 2020; it is an annual filing, not a quarterly report. The bank serves Pennsylvania, southern New York, and Delaware markets.
On April 17, 2020, the company acquired MidCoast Community Bancorp for approximately $26.8 million in cash and stock, adding three Delaware offices and expanding its loan and deposit base. Results include MidCoast only from the acquisition date, so year-over-year comparisons reflect both acquired scale and organic performance.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Interest and dividend income | $70.3 million | $62.0 million |
| Net interest income, GAAP | $62.2 million | $49.9 million |
| Net interest margin, tax-equivalent | 3.92% | 3.72% |
| Non-interest income | $11.4 million | $8.4 million |
| Non-interest expense | $40.8 million | $33.3 million |
| Provision for loan losses | $2.4 million | $1.7 million |
| Net income | $25.1 million | $19.5 million |
| Diluted earnings per share | $6.59 | $5.47 |
- Net income increased 28.8%. Lower funding costs helped raise net interest income; the tax-equivalent net interest margin expanded 20 basis points as interest expense declined faster than asset income.
- Non-interest income growth included higher mortgage-sale gains ($2.2 million versus $0.5 million), $1.4 million in fees from customer derivative contracts, and $0.3 million in securities gains. Service charges declined, partly reflecting pandemic-related effects.
- Non-interest expense rose 22.5%, reflecting MidCoast-related costs, added staff and branches, and higher FDIC insurance and technology costs. Merger and acquisition expense was $2.2 million.
- At year-end, total assets were $1.892 billion, loans $1.405 billion gross ($1.389 billion net), deposits $1.589 billion, borrowings $88.8 million, and stockholders’ equity $194.3 million. Assets grew 29.0%, loans 26.0%, and deposits 31.2% from 2019.
- Cash and cash equivalents were $68.7 million, up from $18.5 million. Operating cash flow was $11.8 million, compared with $21.8 million in 2019; financing activities provided $149.1 million, while investing activities used $110.7 million.
- Credit measures: allowance for loan losses was $15.8 million, or 1.13% of loans, covering 140.5% of nonperforming loans. Nonperforming loans were $11.3 million (0.80% of loans), and nonperforming assets were $13.1 million (0.93% of loans). Net charge-offs were 0.03% of average loans.
- The Bank reported an 8.75% community bank leverage ratio and was considered well-capitalized under the temporary 2020 CBLR framework. Year-end stockholders’ equity was 10.27% of assets. Dividends declared were $1.92 per share; the payout ratio was 29.32%.
Material changes versus the prior comparable period
- MidCoast added $223.2 million of loans and approximately $208.8 million of deposits at acquisition, along with Delaware operations. The acquisition contributed $4.9 million of reported net income from April 17 through year-end, before considering that company-wide results also include acquisition-related costs and purchase-accounting effects.
- Loan growth also included $37.2 million of PPP loans outstanding at year-end. The Bank originated $54.3 million under the program and received $2.1 million in processing fees; $1.1 million of fees remained deferred at year-end.
- Deposit growth was also supported by customers holding additional cash amid the pandemic and government stimulus. Non-interest-bearing deposits increased to 19.1% of deposits from 16.9%.
- Residential mortgage refinancing increased loans originated for sale; loans held for sale rose to $14.6 million from $0.8 million, and mortgage-sale gains increased. The allowance-to-loans ratio decreased from 1.24%, partly because acquired loans generally did not carry over the seller’s allowance.
- Reported annual net income is not directly comparable with a full-year pro forma view: unaudited pro forma net income, assuming MidCoast had been acquired January 1, was $23.3 million for 2020 and $22.3 million for 2019. These estimates are not forecasts and exclude potential integration benefits.
Outlook, risks, contingencies, and unusual items
- The filing provides no formal numerical earnings or revenue guidance. Management said liquidity sources were expected to meet cash obligations and commitments, and that modeled interest-rate scenarios remained within Bank policy limits. Its one-year model projected net interest income declines of 1.6% to 4.7% under rate shocks from -100 to +400 basis points, respectively; actual results may differ.
- Management emphasized uncertainty around COVID-19, including borrower repayment, collateral values, business disruption, funding needs, and operational and cybersecurity risks. Pandemic-related modifications had fallen to four loans totaling $8.7 million at December 31, 2020, from 539 loans totaling $207.1 million at modification dates; management cautioned that credit quality could deteriorate if conditions worsened.
- Credit concentrations warrant attention: commercial and agricultural real estate represented substantial portions of lending, and agricultural loans totaled 25.9% of the portfolio. The filing identifies dairy, hospitality, natural-gas-related service businesses, and large borrower relationships as areas of potential vulnerability. The top 40 relationships totaled $331.7 million, or 23.6% of loans.
- Other risks include low interest rates and margin pressure, competition for deposits and loans, LIBOR transition, acquisition integration and goodwill impairment, and the future adoption of CECL. The company said it could not yet estimate CECL’s impact; adoption was deferred for the company to fiscal years beginning after December 15, 2022.
- Off-balance-sheet commitments to extend credit were $274.3 million and standby letters of credit were $22.0 million. Management reported routine legal proceedings as immaterial overall, but disclosed potential PPP-related litigation and possible SBA guarantee risk if loan origination, funding, or servicing deficiencies are found.
- The independent auditor issued an unqualified opinion on the financial statements. Audit critical matters included the allowance for loan losses and fair-value estimates for the MidCoast acquisition. Management reported effective internal control over financial reporting and no identified material weaknesses; the auditor did not provide an ICFR effectiveness opinion.
Most important facts for investors to verify
- Separate MidCoast’s contribution and one-time integration costs from recurring earnings; assess progress in the Delaware franchise and whether pro forma comparisons are informative.
- Track pandemic-related borrower performance, criticized and nonperforming loans, collateral values, large relationships, and the adequacy of the allowance, including the impact of CECL adoption.
- Verify PPP forgiveness, remaining balances and deferred fees, and any exposure to SBA guarantee disputes or PPP-related litigation.
- Assess the durability of deposit growth, funding costs, available borrowing capacity, and liquidity against $296.3 million of credit commitments and letters of credit.
- Review earnings dependence on mortgage-sale gains, securities gains, and derivative fees, alongside expense growth and net interest margin sensitivity.