Citizens Financial Services, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014 unless noted. Citizens is a Pennsylvania bank holding company whose business is conducted primarily through First Citizens Community Bank in north-central Pennsylvania and southern New York. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period / December 31, 2014 |
|---|---|---|
| Total assets | $930.0 million | $925.0 million at year-end |
| Total loans / net loans | $565.2 million / $558.3 million | $554.1 million / $547.3 million at year-end |
| Deposits | $788.8 million | $773.9 million at year-end |
| Borrowed funds | $29.4 million | $41.8 million at year-end |
| Stockholders’ equity | $102.3 million | $100.5 million at year-end |
| Interest income / interest expense | $8.771 million / $1.184 million | $8.781 million / $1.269 million in Q1 2014 |
| Net interest income | $7.587 million | $7.512 million in Q1 2014 |
| Net interest income after loan-loss provision | $7.467 million | $7.332 million in Q1 2014 |
| Noninterest income / expense | $1.728 million / $5.335 million | $1.787 million / $5.091 million in Q1 2014 |
| Net income / diluted EPS | $3.120 million / $1.03 | $3.176 million / $1.04 in Q1 2014 |
| Net interest margin, tax-equivalent | 3.89% | 3.87% in Q1 2014 |
| Annualized return on assets / equity | 1.36% / 12.38% | 1.41% / 13.38% in Q1 2014 |
| Operating cash flow | $3.093 million | $3.557 million in Q1 2014 |
- Net income declined $56,000, or 1.8%, year over year. Net interest income rose 1.0%, and the provision for loan losses fell to $120,000 from $180,000; these gains were outweighed by higher noninterest expense and lower noninterest income.
- Noninterest expense increased 4.8%, including higher salaries and benefits, insurance claims, furniture and equipment costs, and other real-estate-owned costs. Noninterest income declined 3.3%, notably reflecting lower service charges and securities gains.
- The effective income tax rate was 19.2%, versus 21.2% in Q1 2014. Management attributed the relatively low rate primarily to tax-exempt income and tax credits.
- Comprehensive income was $3.956 million, including $836,000 of other comprehensive income, largely related to available-for-sale securities.
- Cash and cash equivalents increased to $18.8 million. Q1 investing cash flow was $4.037 million and financing cash flow was $230,000. The company paid $1.223 million in dividends, or $0.405 per share, and repurchased 18,424 shares for approximately $979,000.
Material changes, credit quality, and liquidity
- Loans grew 2.0% from year-end, led by state and political subdivision loans, other commercial and agricultural loans, and commercial real estate. Deposits grew 1.9%. Borrowed funds fell by $12.4 million, primarily after repayment of overnight FHLB borrowings, partly offset by new long-term borrowing.
- The allowance for loan losses was $6.922 million, or 1.22% of total loans, versus $6.815 million, or 1.23%, at year-end. Nonperforming loans were $7.552 million, up $117,000 from year-end; nonaccrual loans were $7.149 million. Nonperforming assets totaled $9.325 million, or 1.65% of loans net of unearned income.
- Management reported that approximately 60.1% of nonperforming loans related to three commercial customer relationships. It cited local unemployment, agricultural product prices and feed costs, and increased residential delinquencies as factors affecting allowance assumptions. One major nonaccrual relationship involves a borrower in Chapter 11 bankruptcy.
- Management said liquidity needs were met by cash, core deposits, securities and loan cash flows, and available borrowing sources. The Bank reported approximately $266.4 million of FHLB borrowing capacity, with $16.5 million outstanding, plus undrawn $10.0 million federal funds and approximately $9.2 million Federal Reserve lines. The parent company reported $7.1 million in liquid assets.
- The company and Bank reported capital ratios above the stated “well capitalized” thresholds. At the company level, total risk-based capital was 19.00%, Tier 1 risk-based capital 17.72%, and Tier 1 leverage 11.04%.
Outlook, commentary, and risks
- The filing provides no quantified earnings or financial guidance. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Management described a low-rate environment and competition as pressures on asset yields and loan pricing. Its investment strategy emphasized shorter-maturity agency securities and higher-coupon municipal bonds, with limited purchases amid rate volatility and somewhat higher loan demand.
- Management identified potential exposure to interest-rate changes, regional economic conditions, borrower delinquencies, agricultural price and cost swings, and natural-gas exploration activity and regulation. It also cited competition, regulatory and legal changes, fraud and information theft, and execution of strategic initiatives.
- The company’s model estimated prospective one-year net interest income declines of 2.88% under a +100-basis-point shock and 9.83% under +400 basis points. Management cautioned that model assumptions mean actual results could differ.
- The Mill Hall branch opened in February 2015; branch-related costs contributed to higher expenses and capital spending. Investment securities generated net gains of $126,000, compared with $171,000 in Q1 2014. Management stated that unrealized security losses were not considered other-than-temporary impairments.
- Management said the allowance was adequate at quarter-end, while noting that economic deterioration, collateral-value declines, or regulatory examination could require higher provisions. No material litigation or material change in reported risk factors was disclosed; disclosure controls were deemed effective.
Key facts for investors to verify
- Whether loan and deposit growth, particularly municipal, commercial, agricultural, and certificate-of-deposit balances, is sustainable and maintains acceptable pricing and funding costs.
- Trends in nonperforming and delinquent loans, the three concentrated commercial relationships, the Chapter 11 borrower, and the adequacy of the allowance.
- Whether expense growth, including staffing, insurance, and new-branch costs, moderates relative to revenue growth.
- Exposure to rising interest rates, securities valuation changes, and the assumptions behind the disclosed interest-rate shock analysis.
- Cash and liquidity availability, including the terms and actual accessibility of borrowing facilities, and the effect of dividends and share repurchases on capital.