Citizens Financial Services, Inc. — 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013; quarterly figures are also shown for Q4. The Pennsylvania bank holding company operates First Citizens Community Bank and an insurance agency, serving north-central Pennsylvania and southern New York. Its community-bank activities include lending, deposits, trust and investment services. The filing was signed March 6, 2014.
Financial performance and condition
- Profitability: FY2013 net income was $13.375 million, down 5.9% from $14.215 million in 2012; diluted EPS was $4.42 versus $4.65. Q4 net income was $3.296 million versus $3.549 million in Q4 2012; diluted EPS was $1.10 versus $1.17.
- Income and margins: Interest income was $36.234 million and interest expense $6.315 million, producing net interest income of $29.919 million, down 1.7%. Tax-equivalent net interest margin declined to 3.87% from 3.99%; net interest spread was 3.72% versus 3.82%. Non-interest income was $7.269 million, down 7.2%; non-interest expense rose 1.9% to $19.656 million. The efficiency ratio increased to 48.12% from 46.10%.
- Credit: Provision for loan losses was $405,000, compared with $420,000. Net charge-offs were $91,000, or 0.02% of average loans. Nonperforming loans increased to $8.794 million (1.63% of loans) from $8.573 million (1.71%); nonperforming assets were $10.154 million (1.88% of loans). The $7.098 million allowance equaled 1.31% of loans and 80.7% of nonperforming loans.
- Balance sheet and funding: Total assets rose 3.7% to $914.9 million. Loans were $540.6 million, up 7.6%; deposits were $748.3 million, up 1.5%; stockholders’ equity was $92.1 million. Borrowed funds increased to $66.9 million from $46.1 million, primarily reflecting $43.0 million in short-term FHLB advances. Cash and cash equivalents fell to $10.1 million from $26.3 million.
- Cash flow: Net cash from operating activities was $17.8 million. Investing activities used $60.9 million, including $38.6 million of net loan growth; financing activities provided $26.9 million. Cash and cash equivalents declined $16.25 million over the year.
- Capital and liquidity: The Bank was classified as well capitalized. Its total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 17.35%, 16.07% and 10.18%, respectively. Management cited $250.8 million of FHLB borrowing capacity, a $10 million federal funds line and other liquidity sources. The parent company separately reported $1.6 million in liquid assets.
Material changes versus 2012
- Net income and net interest income declined as lower asset yields and lower loan-sale and securities gains more than offset reduced funding costs. Average loan yield fell to 5.77% from 6.16%; average investment yield fell to 2.90% from 3.18% on a tax-equivalent basis.
- Loan growth accelerated to 7.6% from 3.1%, led by commercial real estate, residential real estate, commercial/agricultural and municipal lending. Deposits grew modestly, with balances shifting from certificates of deposit toward more liquid accounts.
- Borrowings rose materially, while cash decreased. The securities portfolio’s fair value was $317.3 million, versus amortized cost of $317.5 million; unrealized losses increased to $4.7 million from $344,000, mainly amid rising long-term rates. The company reported no other-than-temporary impairment at year-end.
- Accumulated other comprehensive income moved from $4.6 million to a $1.2 million loss, primarily reflecting the decline in available-for-sale securities values. Return on assets fell to 1.51% from 1.62%, and return on equity to 14.89% from 17.48%.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said available liquidity sources were expected to meet obligations and off-balance-sheet commitments as due, and described a securities strategy emphasizing shorter-maturity agency securities and higher-coupon municipal bonds. The Bank had applied to convert its Lock Haven loan production office to a full-service branch.
- Management highlighted sensitivity to interest rates and margin pressure. Its model estimated prospective one-year net interest income would decline 3.5% under a +100-basis-point shock and 15.0% under +400 basis points; these are modeled estimates, not forecasts.
- Credit risk is concentrated in commercial real estate, agriculture, construction and municipal lending, and approximately 92.8% of deposits and 78.2% of loans came from the Bank’s primary market area. Marcellus Shale activity supports local deposits and real estate values, but lower gas prices, reduced drilling or regulatory changes could weaken customer cash flows and loan demand.
- Four borrower relationships represented approximately 70.3% of nonperforming loans. One $4.1 million commercial relationship secured by residential properties was in nonaccrual status, had a forbearance arrangement, and was in Chapter 11 bankruptcy; a trustee was appointed in January 2014. Management reported the collateral was believed to be adequate, while noting it was monitoring the proceedings.
- Total troubled debt restructurings were $7.211 million, including $4.701 million nonaccrual and $2.510 million accruing. Foreclosed assets held for sale increased to $1.360 million from $616,000.
- Commitments to extend credit were $89.847 million and standby letters of credit $12.014 million. Management said no pending legal matters beyond ordinary-course proceedings were expected to be material. The independent auditor issued unqualified opinions on the financial statements and internal control; management reported effective controls and no material weaknesses.
Important facts for investors to verify
- Whether the decline in net interest margin and earnings stabilizes, particularly as assets reprice and funding costs change.
- Loan quality trends, allowance adequacy, and developments in the large commercial relationships, including the bankruptcy and TDR portfolios.
- Exposure to local natural-gas activity and the effect of further drilling slowdowns on borrowers, collateral, deposits and loan demand.
- The sustainability of deposit growth and the increased reliance on short-term FHLB borrowing, alongside year-end cash levels and available borrowing capacity.
- Potential effects of securities valuation changes on equity and capital, and the company’s capacity to maintain dividends and repurchases under regulatory and liquidity constraints.