Citizens Financial Services, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. The company is a Pennsylvania-based community bank holding company serving north-central Pennsylvania and southern New York. Financial amounts below are in millions of dollars unless noted.
Financial performance and position
- Earnings: Net income was $3.449 million, up 21.9% from $2.830 million. Diluted EPS was $1.19 versus $0.97. Annualized return on assets was 1.57% and return on equity was 17.76%, compared with 1.38% and 16.57% a year earlier.
- Income and margins: Interest income was $9.637 million; interest expense was $2.079 million, producing net interest income of $7.558 million, up 9.0%. Tax-equivalent net interest margin increased to 4.02% from 3.98%. Non-interest income rose 13.8% to $1.843 million; non-interest expense rose 1.6% to $4.855 million. Income before taxes was $4.441 million, and the effective tax rate was 22.3%.
- Credit costs: The loan-loss provision fell to $105,000 from $225,000. Net charge-offs were $47,000. The allowance was $6.545 million, or 1.33% of loans.
- Cash flow: Operating activities provided $4.113 million; investing activities used $49.490 million, primarily reflecting securities purchases; financing activities provided $26.782 million. Cash and cash equivalents fell $18.595 million to $11.837 million.
- Balance sheet and funding: Assets were $909.426 million, up 3.5% from year-end. Net loans were $484.747 million, up 0.8%; available-for-sale securities were $362.148 million, up 13.6%. Deposits rose 1.2% to $742.826 million. Borrowed funds increased 35.1% to $72.768 million, including $19.338 million of FHLB advances at quarter-end. Stockholders’ equity was $83.776 million.
- Capital and distributions: The company reported total risk-based capital of 16.25% and Tier 1 capital to average assets of 9.00%; the Bank reported 15.32% and 8.45%, respectively. Dividends paid were $0.295 per share. The company repurchased 2,230 shares at an average $36.17 per share.
Changes versus comparable periods
- Net income increased $619,000 year over year. Lower funding costs were a key driver: interest expense declined $454,000 as the average rate on interest-bearing liabilities fell to 1.19% from 1.53%.
- Average interest-earning assets increased $52.0 million, but their yield declined to 5.04% from 5.31%. Tax-equivalent net interest income increased $665,000.
- Service-charge income rose 14.1%, and brokerage and insurance income increased 57.9%; the latter benefited in part from a large annuity purchase. Salaries and benefits rose 9.5%, while professional fees increased 70.7%, mainly due to the Bank’s charter conversion.
- Compared with year-end 2011, non-performing loans increased to $9.586 million from $9.440 million, and non-performing assets rose to $10.422 million from $10.300 million. Compared with March 31, 2011, management said non-performing assets were lower.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Management increased investment portfolio duration in response to the Federal Reserve’s indication that rates would remain very low through late 2014, purchasing mortgage-backed securities and longer-term agencies. Some securities purchases were funded with overnight borrowings, which management intends to repay from security maturities or calls.
- Credit exposure is concentrated: management stated that three customer relationships represented approximately 83.2% of non-performing loans; one relationship accounted for 54.5%. The allowance is based on estimates and could require adjustment; regulators may also require additional reserves.
- Management cited potential local risks from natural-gas prices and activity in the Marcellus Shale region, including customer departures, as well as lower milk prices affecting agricultural borrowers. Other stated risks include interest-rate and economic changes, competition, regulation, fraud, and loan delinquencies.
- The securities portfolio had $700,000 of gross unrealized losses at March 31; management concluded the losses were not other-than-temporary. Other comprehensive income included a $337,000 after-tax loss for the quarter, primarily reflecting securities valuation changes.
- Off-balance-sheet commitments included $107.631 million to extend credit and $3.517 million of standby letters of credit. Management reported no litigation expected to have a material adverse effect and no material change in risk factors from the 2011 Form 10-K.
Most important facts for investors to verify
- Whether the large non-performing commercial relationships remain current or require additional reserves, and the collateral and guarantee support for those loans.
- Whether securities-funded borrowing is repaid as planned and how the strategy affects funding costs, liquidity, and interest-rate exposure.
- Loan quality trends, including the allowance’s adequacy, past-due balances, and exposures to natural-gas and agricultural markets.
- Whether lower asset yields, deposit pricing, and continued expense growth affect net interest margin and earnings in subsequent quarters.