Citizens Financial Services, Inc. — FY2023 Form 10-K
Reporting period: Year ended December 31, 2023. Citizens is a Pennsylvania bank holding company operating primarily through First Citizens Community Bank, serving markets in Pennsylvania, New York, Delaware and New Jersey. The June 16, 2023 acquisition of HV Bancorp expanded the company into southeast Pennsylvania.
Financial performance and position
| Metric | FY2023 / year-end | FY2022 / comparison |
|---|---|---|
| Interest and dividend income | $127.1 million | $83.4 million |
| Net interest income (GAAP) | $80.3 million | $72.1 million |
| Net interest margin (tax-equivalent) | 3.21% | 3.41% |
| Net income | $17.8 million | $29.1 million, down 38.7% |
| Diluted EPS | $4.06 | $7.25 |
| Noninterest income | $11.6 million | $9.7 million |
| Noninterest expense | $64.8 million | $44.7 million |
| Cash from operating activities | $26.5 million | $33.2 million |
| Cash and cash equivalents | $52.8 million | $26.2 million |
| Total assets | $2.98 billion | $2.33 billion |
| Loans, gross | $2.25 billion | $1.72 billion |
| Deposits | $2.32 billion | $1.84 billion |
| Borrowed funds | $322.0 million | $257.3 million |
| Stockholders’ equity | $279.7 million | $200.1 million |
Interest expense rose to $46.9 million from $11.2 million as deposit and borrowing costs repriced upward. The company’s efficiency ratio increased to 66.72% from 52.55%. Cash dividends declared were $1.94 per share, versus $1.88.
Material changes and unusual items
- HV Bancorp added $475.3 million of loans and $533.4 million of deposits at acquisition. The company issued 693,858 shares and paid cash; total purchase price was $76.7 million. Acquisition accounting added $54.4 million of goodwill.
- Net income included $9.3 million of merger and acquisition expense. The income statement also included a $4.6 million day-one credit-loss provision for acquired non-PCD loans; total credit-loss provision was $5.5 million.
- Loan growth was $523.8 million, primarily acquisition-related; reported organic loan growth was $44.0 million. Deposits grew $477.3 million including the acquisition, but would have declined $56.1 million excluding it.
- Adoption of CECL on January 1, 2023 increased retained earnings by $1.8 million net of tax and reduced the loan allowance by $3.3 million, while increasing the off-balance-sheet credit reserve.
Credit, liquidity, capital and outlook
- The allowance for credit losses on loans was $21.2 million, or 0.94% of loans, compared with $18.6 million, or 1.08%, in 2022. Nonperforming loans rose to $12.7 million from $6.9 million; nonperforming assets were 0.59% of loans. Management considered the allowance adequate, but noted that five relationships represented 53.7% of nonperforming loans.
- Commercial real estate was 48.6% of loans; agricultural real estate was 14.0% and construction 8.7%. Management identifies local economic conditions, agriculture, natural-gas-related businesses, borrower concentration and collateral values as credit risks.
- Available-for-sale securities had $453.3 million amortized cost and $417.6 million fair value, including $36.0 million of gross unrealized losses. Management attributed losses to market rates, reported no credit-loss allowance, and said it did not expect to need to sell the securities before recovery.
- Liquidity sources include cash, deposits, securities cash flows, FHLB borrowing capacity of approximately $1.07 billion, $34.0 million of federal-funds lines and a $54.5 million Federal Reserve term-funding line, of which $20.0 million was drawn. Borrowed funds totaled $322.0 million; deposit outflows excluding acquired balances and reliance on wholesale funding warrant monitoring. Uninsured deposits were estimated at $1.09 billion, including $512.8 million supported by reciprocal-network coverage or collateralized deposits.
- The Bank reported an 8.54% community bank leverage ratio and was in the framework’s grace period. Management says liquidity and capital are monitored, but the filing gives no specific earnings or margin guidance. Management commentary describes a volatile rate environment and an inverted yield curve; model scenarios show net interest income declining 2.57% under an immediate +100-basis-point shock and 11.19% under +400 basis points.
- Other risks include rising funding costs, competition, acquisition integration, cybersecurity, and market-area economic conditions. The company reported no material cybersecurity impact to date, no material pending legal proceedings, and effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion and identified credit-loss estimation and acquired-loan/core-deposit valuation as critical audit matters.
Important facts for investors to verify
- How quickly the HV Bancorp acquisition’s one-time costs abate and whether expected operating benefits materialize.
- Deposit retention, deposit pricing, uninsured-deposit composition and the level and cost of borrowings as funding conditions change.
- Credit trends, particularly nonperforming loans, the five concentrated relationships, commercial real estate, construction and agricultural exposures.
- Whether securities unrealized losses recover without forced sales, and the resulting effects on equity and liquidity.
- The Bank’s progress out of the CBLR grace period and the holding company’s capacity to fund dividends: company-only liquid assets were limited, and dividends depend substantially on Bank distributions.
- Actual cash-flow and earnings results versus the filing’s interest-rate sensitivity assumptions; the filing provides no formal numerical forecast.