Citizens Financial Services, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also presents unaudited fourth-quarter results. Citizens is a Pennsylvania bank holding company whose results are driven primarily by First Citizens Community Bank, serving communities in Pennsylvania and southern New York.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income, GAAP | $49.9 million | $47.2 million |
| Net interest margin, tax-equivalent | 3.72% | 3.66% |
| Non-interest income | $8.4 million | $7.7 million |
| Non-interest expense | $33.3 million | $31.6 million |
| Provision for loan losses | $1.7 million | $1.9 million |
| Net income | $19.5 million | $18.0 million |
| Diluted earnings per share | $5.53 | $5.09 |
| Total assets at year-end | $1.466 billion | $1.431 billion |
| Loans, gross | $1.116 billion | $1.082 billion |
| Deposits | $1.211 billion | $1.185 billion |
| Borrowings | $85.1 million | $91.2 million |
- Net income rose 8.1%. Higher loan balances and yields supported interest income; rising deposit and borrowing costs partly offset the benefit. The tax-equivalent margin increased six basis points.
- Operating cash flow was $21.8 million; investing activities used $32.3 million and financing activities provided $12.3 million. Cash and cash equivalents ended at $18.5 million, up from $16.8 million.
- Stockholders’ equity was $154.8 million. The Bank was categorized as well-capitalized: total risk-based capital was 13.34%, common equity Tier 1 was 12.09%, and Tier 1 leverage was 9.23%.
- Return on assets was 1.34%, return on equity 13.00%, and the efficiency ratio 54.27%.
- Fourth-quarter net income was $5.0 million, or $1.43 diluted EPS, compared with $4.5 million and $1.28 in fourth-quarter 2018.
Material changes versus 2018
- Gross loans increased 3.1%, led by commercial real estate and agricultural lending; growth was concentrated in central and south-central Pennsylvania. Deposits increased 2.2%, including growth in non-interest-bearing balances, while certificates of deposit declined.
- Borrowings declined 6.7%, reflecting deposit growth and other funding dynamics. Non-interest expense rose 5.7%, principally from compensation and benefits; 2019 also included $466,000 of merger-related costs.
- Nonperforming loans fell to $12.0 million from $13.8 million (1.08% of loans versus 1.27%). However, foreclosed assets rose to $3.4 million from $0.6 million, largely following settlement of a commercial customer bankruptcy.
- The allowance for loan losses increased to $13.8 million, or 1.24% of loans, from $12.9 million, or 1.19%. Net charge-offs were $714,000, compared with $231,000 in 2018.
- Available-for-sale securities had a $240.7 million fair value and $302,000 of gross unrealized losses at year-end; management reported no other-than-temporary impairment.
Outlook, risks and notable items
- The Company agreed to acquire MidCoast Community Bancorp. The merger was expected to close in the second quarter of 2020, subject to regulatory and shareholder approvals. MidCoast shareholders were to receive cash or Citizens shares, with cash limited to 25% of MidCoast shares; specified circumstances could allow termination, including a qualifying decline in Citizens’ share value. A $1.2 million termination fee may apply in certain circumstances.
- Management gave no specific earnings or growth guidance. It described liquidity as adequate, supported by deposits, cash, securities, FHLB borrowing capacity and other funding lines. The Bank reported approximately $547.2 million of FHLB borrowing capacity, inclusive of outstanding amounts.
- Credit risks include concentrations in commercial and agricultural real estate and dairy lending. Agricultural loans totaled $366.6 million; dairy exposure was $153.6 million, or 13.8% of total loans. Three borrower relationships represented 57.4% of nonperforming loans. Management considered the allowance adequate but noted estimates could change with economic conditions.
- Management highlighted sensitivity to local agricultural and natural-gas-related economies, interest-rate and yield-curve movements, competition, and Pennsylvania municipal funding conditions. A modeled 400-basis-point rate increase was projected to reduce prospective one-year net interest income by 8.73%; actual results may differ from model assumptions.
- As a smaller reporting company, Citizens reported that the expected-credit-loss standard (CECL) effective date was deferred to fiscal years beginning after December 15, 2022. Management had not yet determined the adoption impact and expected a possible increase in the allowance.
- The Company adopted lease accounting in 2019, recording operating lease right-of-use assets and liabilities of approximately $1.2 million at year-end. The FNB pension plan was terminated and settled in 2019. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions.
Important facts for investors to verify
- Progress and final terms of the proposed MidCoast merger, including approvals, share issuance, integration costs and any termination conditions.
- Credit quality and collateral values for the three large nonperforming relationships, dairy exposure, and the increase in foreclosed assets.
- Whether loan-loss coverage remains adequate as CECL implementation approaches and as local agricultural and natural-gas conditions evolve.
- Deposit pricing, funding mix and net interest margin performance after the 2019 rate cuts and amid a flat or inverted yield curve.
- Liquidity and capital after merger-related funding needs, dividends and repurchases; the filing notes that bank dividends to the parent are subject to regulatory limits.