Citizens Financial Services, Inc. — Q1 2014 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2014; financial statements are unaudited. The Pennsylvania bank holding company operates First Citizens Community Bank and an insurance agency, primarily serving north-central Pennsylvania and southern New York.
Financial performance and position
Unless stated otherwise, dollar amounts are in millions. Income-statement comparisons are with Q1 2013; balance-sheet comparisons are with December 31, 2013.
| Metric | Q1 2014 / March 31, 2014 | Comparison |
|---|---|---|
| Net interest income | $7.512 | Up 2.7% from $7.313 |
| Total non-interest income | $1.743 | Down 5.9% from $1.852 |
| Net interest income plus non-interest income | $9.255 | Versus $9.165 |
| Provision for loan losses | $0.180 | Versus $0.150 |
| Non-interest expense | $5.047 | Up 4.7% from $4.822 |
| Net income; diluted EPS | $3.176; $1.05 | Net income down 3.4%; EPS was $1.08 |
| Tax-equivalent net interest margin | 3.87% | Down from 3.90%; tax-equivalent net interest income rose to $8.180 from $7.975 |
| Annualized ROA; ROE | 1.41%; 13.38% | Versus 1.50%; 15.22% |
| Cash flow from operating activities | $3.557 | Versus $5.547 |
| Total assets; stockholders’ equity | $902.626; $95.584 | Assets down 1.4%; equity up 3.8% |
| Loans, net of allowance | $525.990 | Down 1.4%; gross loans declined $7.389 |
| Deposits; borrowed funds | $753.643; $45.728 | Deposits up $5.327; borrowings down $21.204 |
| Cash and cash equivalents | $11.409 | Up $1.326 from year-end |
Investing activities provided $14.742 million and financing activities used $16.973 million; cash and equivalents increased $1.326 million during the quarter. The company reported total capital of 18.24% of risk-weighted assets and Tier 1 capital of 16.92%; it stated that it met the well-capitalized standards.
Material changes and credit quality
- Lower funding costs supported net interest income: interest expense fell $0.417 million, while interest income declined $0.218 million. The average yield on interest-earning assets fell 25 basis points to 4.47%; the average rate on interest-bearing liabilities fell to 0.72% from 0.99%.
- Higher non-interest expenses and lower non-interest income more than offset the increase in net interest income. Salaries and benefits rose $0.112 million, partly reflecting merit increases and staffing for the strategic plan. Other expense increased $0.091 million, including higher foreclosed-property costs and $0.030 million of fraud-related charge-offs associated with customer account activity.
- Non-performing loans increased 4.2% from year-end to $9.165 million; non-performing assets were $10.539 million. The allowance was $7.233 million, or 1.36% of loans, versus $7.098 million, or 1.31%, at year-end. Net charge-offs were $0.045 million.
- Management said roughly 66.3% of non-performing loans related to four customer relationships. One commercial relationship of about $0.936 million had a $0.463 million specific reserve; another significant relationship was in bankruptcy, although payments under a forbearance agreement were current through quarter-end. A previously modified $0.483 million commercial loan defaulted during the quarter.
Outlook, risks and other notable matters
- The filing provides no specific earnings or revenue guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Management cited soft local loan demand, increased pricing competition, and reduced Marcellus Shale exploration amid low natural-gas prices. It continues to target commercial, agricultural and municipal lending and described investment purchases focused on shorter-maturity agency securities and higher-coupon municipal bonds.
- Risks include changes in interest rates and economic conditions, borrower credit deterioration, financial-market disruption, regulatory and legal changes, fraud and information theft, and exposure to local customers affected by natural-gas exploration. The loan portfolio is concentrated in the company’s regional markets.
- In modeled parallel-rate shocks, prospective one-year net interest income declined 4.48% with a 100-basis-point increase and 12.81% with a 400-basis-point increase; management said results depend on assumptions and actual outcomes may differ.
- Unrealized gains on available-for-sale securities improved accumulated other comprehensive income by $1.372 million after tax during the quarter. Management did not consider the portfolio’s unrealized losses other-than-temporary.
- Commitments to extend credit were $98.692 million and standby letters of credit were $9.330 million. Management reported no litigation expected to have a material adverse effect and no material change in reported risk factors.
Important facts for investors to verify
- Whether the decline in loans and local loan demand persists, and whether competitive pricing pressures affect yields and underwriting.
- Developments in the four large non-performing customer relationships, including collateral values, bankruptcy proceedings, the settlement expected to close in May 2014, and any resulting reserve or charge-off needs.
- Whether funding-cost reductions can continue to offset lower asset yields, especially under rising-rate scenarios.
- The sustainability of earnings given higher operating expenses and lower mortgage-sale gains; confirm the effect of fraud-related and foreclosed-property costs.
- Liquidity and capital resilience, including the availability and terms of borrowing facilities and the potential use of substantial off-balance-sheet credit commitments.