Citizens Financial Services, Inc. — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it is not a standalone fourth-quarter report. The company is a Pennsylvania bank holding company whose principal subsidiary, First Citizens Community Bank, provides community banking, lending, trust, brokerage, and insurance services across Pennsylvania, New York, and Delaware.
Financial performance and condition
- Profitability: Net income was $29.1 million, down $58,000 (0.2%) from 2021. Basic and diluted EPS were both $7.32, versus $7.31. Return on average assets fell to 1.29% from 1.45%; return on average equity was 12.98% versus 14.26%.
- Interest income and margins: Interest and dividend income rose 13.8% to $83.4 million; interest expense increased to $11.2 million from $7.1 million. GAAP net interest income increased 9.1% to $72.1 million. Tax-equivalent net interest margin narrowed to 3.41% from 3.52%, as funding costs rose faster than asset yields.
- Other income and expenses: Noninterest income declined 20.9% to $9.7 million, including lower gains on mortgage loan sales and securities and lower bank-owned life insurance income. Noninterest expense rose 7.6% to $44.7 million, mainly reflecting compensation, staffing, occupancy, and professional fees.
- Loans and credit: Total loans were $1.725 billion, up 19.7%; net loans were $1.706 billion. Growth was driven particularly by commercial and construction real estate lending in Delaware, as well as student and municipal loans. The allowance for loan losses was $18.6 million, or 1.08% of loans, versus 1.20% a year earlier. Nonperforming loans declined to $6.9 million from $7.7 million.
- Cash flow: Operating activities provided $33.2 million; investing activities used $362.5 million, primarily reflecting $281.4 million of net loan growth and securities purchases. Financing activities provided $182.6 million, including increased short-term borrowings. Cash and cash equivalents fell $146.6 million to $26.2 million.
- Funding and liquidity: Deposits increased 0.4% to $1.844 billion, while borrowings rose to $257.3 million from $74.0 million, principally to fund loan growth. The bank reported FHLB borrowing capacity of approximately $871.2 million, $34.0 million in federal funds lines, and an unused $20.0 million bank line of credit. Estimated uninsured deposits were $732.2 million.
- Capital and equity: Stockholders’ equity declined 5.8% to $200.1 million, principally due to a $33.0 million after-tax other comprehensive loss associated mainly with unrealized available-for-sale securities losses. The bank’s year-end ratios included 12.01% total risk-based capital, 11.00% Tier 1 risk-based capital, 11.00% common equity Tier 1, and an 8.77% leverage ratio. After its leverage ratio fell below the 9% community bank leverage ratio threshold, the bank reverted to the prompt corrective action framework; the filing reports it was well-capitalized under that framework.
Material changes versus 2021
- Loan growth accelerated, but deposit growth slowed sharply from 15.6% in 2021 to 0.4% in 2022; reliance on borrowings increased materially.
- Net interest income rose with loan and investment growth, but the net interest margin contracted as deposit and borrowing costs increased amid rapid Federal Reserve rate hikes.
- Available-for-sale securities had $47.5 million of gross unrealized losses at year-end, compared with $4.0 million in 2021. Management attributed the declines principally to market interest rates and stated the losses were not considered other-than-temporary.
- Cash and cash equivalents dropped from $172.8 million to $26.2 million. Nonperforming loans and the allowance-to-loans ratio declined, while the allowance balance increased to $18.6 million.
Outlook, risks, contingencies, and unusual items
- Pending acquisition: The company agreed to acquire HV Bancorp, parent of Huntingdon Valley Bank. Consideration is $30.50 cash or 0.40 company shares per HVBC share, with cash capped at 20% of HVBC shares. Closing was expected in the first half of 2023, subject to regulatory and shareholder approvals. Certain circumstances permit a termination fee of $2.8 million; a significant decline in the company’s share price could also affect the transaction terms or HVBC’s ability to terminate.
- Credit concentrations: Commercial real estate, agricultural real estate, construction, and municipal lending are material portfolio exposures. The top 40 borrower relationships totaled $530.5 million, or about 30.7% of loans. Agricultural borrowers face risks from commodity prices, input costs, weather, and supply chains; some local customers are also exposed to natural-gas industry activity.
- Interest-rate and securities risk: Management’s model estimated prospective one-year net interest income would decline 8.47% under an immediate 400-basis-point rate increase. The filing cautions that model assumptions may differ from actual results. Further rate increases may pressure funding costs and securities values.
- Accounting change: CECL took effect January 1, 2023. Management estimated adoption would reduce the allowance for loan losses and unfunded-commitment reserves by a combined 10%–15%; the estimate remained subject to refinement.
- Commitments and legal matters: Off-balance-sheet commitments to extend credit were $437.4 million and standby letters of credit were $16.0 million. The company described ordinary-course legal proceedings and believed they would not have a material adverse effect, while noting unexpected developments could be material.
- Other items: The company recorded no goodwill impairment. It declared $1.90 per share in cash dividends for 2022 and said comparable dividends were expected, subject to earnings, financial condition, and legal restrictions. No specific earnings or margin guidance was provided.
Investor facts to verify
- Track whether loan growth is funded by stable core deposits or continued increases in higher-cost borrowings, and monitor deposit pricing and uninsured deposit trends.
- Review subsequent securities balances, unrealized losses, liquidity needs, and whether securities sales or impairments affect earnings or capital.
- Assess credit trends in commercial real estate and agricultural lending, especially large relationships, classified loans, nonaccrual loans, and CECL reserve assumptions.
- Confirm the HV Bancorp acquisition’s final approval, consideration mix, completion, and integration costs or benefits.
- Compare actual net interest margin and net interest income with rate sensitivity assumptions as market rates and the yield curve change.