Business Overview and History Citizens Financial Services, Inc. (NASDAQ:CZFS) is a Pennsylvania-based bank holding company that has been serving its local communities for over a century. With a focus on delivering personalized banking solutions, the company has grown to become a respected financial institution in the region.
Citizens Financial Services, Inc. was founded in 1982 as the parent company of First Citizens Community Bank. The company's roots, however, trace back to 1906 with the establishment of the First National Bank of Mansfield, Pennsylvania. Over the decades, Citizens Financial Services has expanded its footprint across north central, central, and south central Pennsylvania, as well as into southern New York and Delaware. In 2020, the company completed the acquisition of MidCoast Bancorp, Inc., which added branches in the Wilmington and Dover, Delaware markets, as well as serving customers in the surrounding Chester County, Pennsylvania area. Most recently, in 2023, Citizens Financial Services acquired HVBC Bancorp, Inc., further expanding the company's presence in southeastern Pennsylvania, including Montgomery, Bucks, and Philadelphia counties, as well as Burlington County, New Jersey. This acquisition added five full-service branches, four mortgage centers, and one business banking facility to the company's operations.
Throughout its history, Citizens Financial Services has maintained a focus on prudent risk management practices, including robust underwriting standards and regular independent loan portfolio reviews. The company has also prioritized diversifying its loan portfolio, reducing its concentration in any one industry or geographic region. These strategies have enabled Citizens Financial Services to navigate various economic cycles and challenges over the past four decades.
In 2022 and 2023, the company faced a challenge due to reduced exploration and drilling activity for natural gas in its north central Pennsylvania market. This impacted some of the company's commercial loan customers who provided services to the natural gas industry. However, management was able to work with these customers to restructure loans and provide additional collateral to address the cash flow issues.
Today, Citizens Financial Services operates a network of 47 banking facilities, 39 of which are full-service bank branches, serving both commercial and retail customers. The company's primary business activities include commercial and consumer lending, deposit-taking, and wealth management services. As of September 30, 2024, Citizens Financial Services had total assets of $3.03 billion, loans of $2.33 billion, and deposits of $2.45 billion.
Financial Performance and Ratios Citizens Financial Services has demonstrated a steady financial performance over the years. For the nine months ended September 30, 2024, the company reported net income of $19.84 million, a significant increase of 93.1% compared to the same period in 2023. This improvement was primarily due to the absence of one-time merger and acquisition costs and a decrease in the provision for credit losses recorded in the prior year period.
The company's profitability metrics remain healthy, with a return on assets (ROA) of 0.88% and a return on equity (ROE) of 8.45% for the first nine months of 2024. The net interest margin, a key measure of the bank's earnings power, stood at 3.09% during the same period, slightly lower than the 3.25% reported in the prior year.
Citizens Financial Services' balance sheet is well-capitalized, with a total risk-based capital ratio of 11.75% and a Tier 1 risk-based capital ratio of 10.84% as of September 30, 2024, both well above the regulatory requirements for a "well-capitalized" institution. The company's non-performing assets ratio was 0.89% at the end of the third quarter of 2024, up from 0.54% at the end of 2023, primarily due to a few larger commercial and agricultural relationships that were placed on non-accrual status.
For the fiscal year 2023, Citizens Financial Services reported revenue of $91.86 million and net income of $17.81 million. The company generated operating cash flow of $26.54 million and free cash flow of $23.92 million during the same period.
In the most recent quarter (Q3 2024), the company reported revenue of $25.079 million, representing a 4.7% increase compared to Q3 2023. Net income for Q3 2024 was $7.536 million, a slight decrease of 0.2% from the same quarter in the previous year. This decrease in net income was primarily attributed to higher professional fees and FDIC insurance costs, partially offset by an increase in gains on loans sold. Operating cash flow for Q3 2024 was $1.123 million, while free cash flow stood at $1.349 million.
Liquidity and Cash Flows Citizens Financial Services maintains a strong liquidity position, with cash and cash equivalents of $36.76 million as of September 30, 2024. The company's net loan-to-deposit ratio was 94.3% at the end of the third quarter, indicating ample funding sources to support lending activities.
Operating cash flow for the first nine months of 2024 was $22.70 million, compared to $10.33 million in the same period of 2023. Free cash flow, defined as operating cash flow less capital expenditures, was $21.85 million for the nine-month period, providing the company with the flexibility to invest in growth initiatives, pay dividends, and repurchase shares.
The company's debt-to-equity ratio stood at 0.7759 as of September 30, 2024, reflecting a balanced approach to leverage. Citizens Financial Services had a maximum borrowing capacity at the Federal Home Loan Bank (FHLB) of approximately $1.07 billion, of which $384.8 million was outstanding at the end of Q3 2024. Additionally, the bank maintained two federal funds lines with third-party providers for $34.0 million as of September 30, 2024, which were undrawn upon.
The current ratio and quick ratio, both at 0.8345 as of September 30, 2024, indicate the company's ability to meet its short-term obligations.
Shareholder Returns and Dividends Citizens Financial Services has a history of returning capital to its shareholders through a consistent dividend program. The company paid a quarterly dividend of $0.49 per share during the third quarter of 2024, representing a dividend yield of approximately 2.75% based on the current stock price.
For the nine months ended September 30, 2024, the company's dividend payout ratio was 35.1%, indicating a balanced approach to capital allocation between reinvesting in the business and rewarding shareholders.
Product Segments and Business Lines Citizens Financial Services' primary lending focus is on real estate loans, which constitute a significant portion of their loan portfolio. As of September 30, 2024, real estate loans comprised 84.7% of the total loan portfolio, with commercial real estate being the largest segment at 47.6%, followed by residential mortgages at 15.2%, agricultural real estate at 14.2%, and construction loans at 7.7%.
The company also maintains other commercial and agricultural loan segments, which made up 6.9% and 1.1% of the total loan portfolio, respectively. Additionally, the bank offers a consumer loan segment, accounting for 6.1% of total loans.
From December 31, 2023, to September 30, 2024, the bank's total loan portfolio increased by $82.2 million, or 3.7%. This growth was primarily driven by increases in the commercial real estate, agricultural real estate, and consumer loan segments.
On the funding side, Citizens Financial Services' deposit base reached $2.45 billion as of September 30, 2024, representing an increase of $128.7 million, or 5.5%, from the end of 2023. This growth was attributed to increases in non-interest bearing deposits, NOW accounts, money market deposit accounts, and certificates of deposit. Interest-bearing deposits constituted 77.6% of total deposits, while non-interest bearing deposits accounted for 22.4%.
To supplement its deposit funding, the company also utilizes borrowed funds, which decreased by $90.3 million to $231.7 million as of September 30, 2024, primarily due to a reduction in short-term borrowings.
In addition to its core lending and deposit operations, Citizens Financial Services generates non-interest income from various sources. For the nine months ended September 30, 2024, the company reported $12.06 million in non-interest income, up $3.95 million, or 48.6%, compared to the same period in 2023. The primary drivers of this increase were higher gains on loans sold ($974,000 increase), brokerage and insurance income ($344,000 increase), and earnings on bank-owned life insurance ($393,000 increase). The company also recognized a $1.1 million gain on the sale of its Braavo division during the first quarter of 2024.
Geographic Markets Citizens Financial Services primarily operates in north central, central, and south central Pennsylvania, southern New York, and Wilmington and Dover, Delaware. The recent HVBC acquisition expanded the company's lending markets further into southeast Pennsylvania, including Montgomery, Bucks, and Philadelphia Counties, as well as Burlington County, New Jersey.
Risks and Challenges Like any financial institution, Citizens Financial Services faces various risks, including interest rate risk, credit risk, and regulatory compliance. The company's loan portfolio is concentrated in commercial real estate, which accounted for approximately 47.6% of total loans as of September 30, 2024. Management has implemented heightened risk management procedures and strong underwriting criteria to monitor this concentration, but a significant downturn in the commercial real estate market could adversely impact the company's financial performance.
Additionally, the company operates in a highly competitive banking environment, with intense rivalry from both traditional banks and emerging fintech players. Maintaining a strong market position and adapting to technological changes will be crucial for Citizens Financial Services' continued success.
Conclusion Citizens Financial Services, Inc. has demonstrated its resilience and ability to navigate challenging market conditions. The company's steady financial performance, strong balance sheet, and commitment to shareholder returns make it an interesting prospect for investors seeking exposure to a well-established community bank. As the company continues to execute on its growth strategy and manage its risks effectively, it may warrant further consideration as a potential investment opportunity. The diverse product segments, focus on real estate lending, and expanding geographic footprint provide a solid foundation for future growth, while the company's strong liquidity position and prudent risk management practices help mitigate potential challenges in the dynamic banking landscape.