Citizens Financial Services, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with 2020. The company is a Pennsylvania bank holding company whose principal subsidiary, First Citizens Community Bank, provides community banking, lending, trust, investment, and insurance services across Pennsylvania, southern New York, and Delaware.
Financial performance and position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total assets | $2,143.9 million | $1,891.7 million | Up 13.3% |
| Total loans, gross | $1,441.5 million | $1,405.3 million | Up 2.6% |
| Total deposits | $1,836.2 million | $1,588.9 million | Up 15.6% |
| Borrowed funds | $74.0 million | $88.8 million | Down $14.9 million |
| Stockholders’ equity | $212.5 million | $194.3 million | Up 9.4% |
| Net interest income | $66.1 million | $62.2 million | Up 6.3% |
| Net income | $29.1 million | $25.1 million | Up 16.0% |
| Diluted earnings per share | $7.38 | $6.53 | Up 13.0% |
Net interest margin on a tax-equivalent basis was 3.52%, down from 3.92%; management attributed the decline to asset yields falling more than funding costs. The efficiency ratio improved to 51.57% from 53.62%. Return on average assets was 1.45% and return on average equity was 14.26%.
Net cash provided by operating activities was $38.7 million, compared with $11.8 million in 2020. Investing activities used $158.2 million, while financing activities provided $223.7 million. Cash and cash equivalents rose to $172.8 million from $68.7 million. The bank reported $756.2 million of maximum FHLB borrowing capacity, inclusive of outstanding amounts, and $34.0 million in federal funds lines.
The allowance for loan losses was $17.3 million, or 1.20% of loans, versus $15.8 million, or 1.13%, a year earlier. Nonperforming loans declined to $7.7 million from $11.3 million; nonperforming assets were $8.8 million, or 0.61% of loans. The bank’s CBLR leverage ratio was 8.94% at year-end, and the filing describes the bank as well-capitalized under that framework.
Material changes and notable items
- Deposit growth was driven by customers holding more cash and pandemic-related government stimulus. No brokered certificates of deposit remained outstanding at year-end.
- Loan growth was led by commercial real estate lending in Delaware and construction lending. PPP balances declined to $6.8 million from $37.2 million as loans were forgiven or repaid.
- The investment portfolio grew by $117.6 million to approximately $412.4 million. Its effective tax-equivalent yield fell to 1.96% from 2.55%; unrealized losses on available-for-sale securities totaled $4.0 million, which management attributed principally to market changes and did not consider other-than-temporary.
- Noninterest income increased 7.7% to $12.3 million, including $1.2 million of death benefits within bank-owned life insurance earnings. Gains on residential mortgage loan sales fell to $1.3 million from $2.2 million.
- Noninterest expense rose 1.7% to $41.6 million, while merger and acquisition expense fell to zero from $2.2 million as MidCoast integration costs subsided. The 2020 comparison includes MidCoast only from its April 2020 acquisition date.
- The company issued $10 million of subordinated notes in 2021. Borrowings also include a $7.5 million note payable; total borrowed funds at year-end were $74.0 million.
- Fourth-quarter 2021 net income was $6.9 million, compared with $7.2 million in fourth-quarter 2020. Fourth-quarter 2021 provision for loan losses was zero, versus $0.9 million a year earlier.
Outlook, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management said it expected to open a full-service branch in Ephrata, Pennsylvania, in the second half of 2022. The board expected comparable cash dividends to continue, subject to earnings, financial condition, legal restrictions, and other factors.
- Key risks include the continuing effects of COVID-19, changing interest rates and funding costs, local economic conditions, competition, cybersecurity and third-party operational risks, and regulatory requirements.
- Credit exposure is concentrated in commercial and agricultural real estate: together these categories represented 69.3% of loans. Agricultural loans totaled $351.9 million, and dairy exposure was $127.4 million, or 8.8% of loans.
- The 40 largest borrower relationships totaled $393.8 million, approximately 27.3% of loans. Three relationships represented 61.4% of nonperforming loans; management said no specific reserves were required for them at year-end.
- Unfunded commitments to extend credit were $276.0 million and standby letters of credit were $17.1 million. Drawdowns could increase liquidity needs and credit exposure.
- Management identified no material pending legal proceedings, but disclosed possible PPP-related litigation and potential SBA guarantee disputes if deficiencies are found in loan origination, funding, or servicing.
- The company expected to adopt CECL in fiscal years beginning after December 15, 2022. It could not yet estimate the effect; adoption may increase the allowance for credit losses.
- Interest-rate sensitivity modeling projected one-year net interest income to change by -1.76% under a 100-basis-point rate decline and +2.22% under a 200-basis-point increase. These are model estimates based on assumptions, not forecasts.
Important facts for investors to verify
- Review the quality and collateral coverage of the three large nonperforming borrower relationships, and whether their status or reserves changed after year-end.
- Assess whether deposit growth tied to pandemic-era cash accumulation is durable and how the substantial available liquidity will be deployed.
- Monitor net interest margin, deposit pricing, and investment-security valuation as interest rates change.
- Check the timing and financial effect of CECL adoption, including the opening allowance adjustment.
- Confirm the progress and economics of the planned Ephrata branch, dividend capacity, and subordinated-note terms.