Citizens Financial Services, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. The company is a Pennsylvania bank holding company whose principal subsidiary, First Citizens Community Bank, operates in north-central Pennsylvania and southern New York.
Financial performance and condition
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Interest income | $35.291 million | $36.234 million | Down 2.6% |
| Net interest income | $30.338 million | $29.919 million | Up 1.4%; tax-equivalent amount rose 1.8% to $33.117 million |
| Net interest margin | 3.84% | 3.87% | Down 3 basis points |
| Noninterest income, including securities gains | $7.356 million | $7.423 million | Down 0.9%; securities gains were $0.616 million |
| Noninterest expense | $20.165 million | $19.810 million | Up 1.8% |
| Provision for loan losses | $0.585 million | $0.405 million | Up 44.4% |
| Net income | $13.385 million | $13.375 million | Up 0.1% |
| Diluted earnings per share | $4.40 | $4.38 | Up slightly |
| Total assets | $925.0 million | $914.9 million | Up 1.1% |
| Loans, gross | $554.1 million | $540.6 million | Up 2.5%, versus 7.6% growth in 2013 |
| Deposits | $773.9 million | $748.3 million | Up 3.4% |
| Borrowed funds | $41.8 million | $66.9 million | Down 37.6% |
| Stockholders’ equity | $100.5 million | $92.1 million | Up 9.2% |
| Cash and cash equivalents | $11.4 million | $10.1 million | Up $1.3 million |
Profitability and capital: Return on assets was 1.48% (1.51% in 2013); return on equity was 13.73% (14.89%). The efficiency ratio was 48.61% (48.12%). At year-end, the company reported Tier 1 leverage of 10.99%, Tier 1 risk-based capital of 17.30%, and total risk-based capital of 18.55%; the company and Bank were classified as well capitalized.
Cash flow: Operating activities provided $16.2 million, investing activities used $8.2 million, and financing activities used $6.6 million. Cash and cash equivalents increased $1.3 million. Management cited core deposits, cash, available-for-sale securities, FHLB borrowing capacity and other funding lines as liquidity sources. FHLB borrowing capacity was approximately $262.6 million, inclusive of outstanding advances.
Credit quality: Nonperforming loans were $7.4 million, or 1.34% of loans, compared with $8.8 million, or 1.63%, in 2013. The allowance was $6.8 million, 1.23% of loans and 91.7% of nonperforming loans, versus 1.31% and 80.7%, respectively, in 2013. Net charge-offs increased to $0.868 million from $0.091 million; two borrowers accounted for most of the 2014 charge-offs. Nonperforming assets were $9.2 million, or 1.67% of loans.
Material changes versus 2013
- Net interest income improved as lower funding costs more than offset reduced interest income. Average loan yields fell to 5.43% from 5.77%, while the average cost of interest-bearing liabilities declined to 0.70% from 0.90%.
- Loan growth slowed to 2.5% from 7.6%. State and political subdivision loans increased $13.8 million; commercial real estate loans declined $2.1 million. Loan participations accounted for all reported loan growth in 2014.
- Deposits increased $25.6 million, with growth in noninterest-bearing and transaction accounts partly offset by a $17.6 million decline in certificates of deposit.
- Borrowed funds fell $25.1 million, primarily due to repayment of short-term FHLB advances. Long-term borrowings increased, including $6.8 million of new term loans.
- Net income was essentially flat, while the provision for loan losses rose and noninterest expenses increased. Lower gains on mortgage loan sales reflected reduced refinancing activity; securities gains increased.
- Cash dividends declared rose to $2.17 per share from $1.21, including a $0.60-per-share special dividend. A 1% stock dividend was also distributed in June 2014.
Outlook, commentary, risks and unusual items
- No formal earnings or growth guidance is provided. Management expects comparable cash dividends to continue, subject to earnings, financial condition, legal limits and other factors.
- Management describes a flattening yield curve and warns that further flattening or inversion could pressure net interest margin. Its rate-shock model estimates a 3.34% decline in prospective one-year net interest income under an immediate +100-basis-point shock and a 12.48% decline under +400 basis points; these are model estimates, not forecasts.
- The local economy is exposed to natural-gas exploration and drilling. Activity was curtailed amid low gas prices; regulation or further industry weakness could affect customers, loan demand, deposits, collateral values and credit quality.
- Credit concentrations include commercial real estate, agricultural and municipal lending. Three customer relationships represented about 62.6% of nonperforming loans; one large relationship was in Chapter 11 bankruptcy but had remained current under a forbearance agreement.
- Available-for-sale securities had $0.916 million of gross unrealized losses across 58 securities. Management concluded these losses were not other-than-temporary; further deterioration could require an earnings charge.
- Other items: the company purchased $5.1 million of bank-owned life insurance; its pension plan moved from a $0.780 million funded surplus to a $0.738 million deficit, reflecting actuarial changes; and a new branch was under construction and opened in February 2015. Routine legal proceedings were described as immaterial, and no other material off-balance-sheet transactions were reported.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor reported effective controls and no material weaknesses.
Most important facts for investors to verify
- Whether the 2014 increase in net interest income is sustainable despite falling asset yields and the disclosed sensitivity to rate changes.
- Whether credit losses remain contained after the sharp increase in charge-offs, and whether the allowance remains adequate relative to concentrated exposures and nonperforming loans.
- How natural-gas activity, loan participations and municipal lending affect future loan growth, credit quality and concentration risk.
- Whether deposit growth and reduced borrowings persist, and how liquidity and capital hold up under adverse conditions.
- How the special dividend, ongoing repurchases and other distributions affect capital, and whether future dividends remain supportable within regulatory restrictions.