Citizens Financial Services, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed March 8, 2018. The company is a Pennsylvania bank holding company whose business is primarily community banking through First Citizens Community Bank, with an insurance agency subsidiary. Figures below are consolidated and in U.S. dollars; “year over year” compares with FY 2016.
Financial performance and condition
| Metric | FY 2017 / year-end 2017 | FY 2016 / year-end 2016 |
|---|---|---|
| Total assets | $1.362 billion | $1.223 billion |
| Net interest income (GAAP) | $42.254 million | $37.964 million |
| Non-interest income | $8.656 million | $7.899 million |
| Provision for loan losses | $2.540 million | $1.520 million |
| Non-interest expenses | $29.314 million | $28.671 million |
| Net income | $13.025 million; $3.74 per diluted share | $12.638 million; $3.60 per diluted share |
| Net interest margin | 3.80% | 3.68% |
| Return on average assets / equity | 1.03% / 10.04% | 1.06% / 10.24% |
| Efficiency ratio | 54.82% | 57.97% |
| Gross loans | $1.001 billion | $799.6 million |
| Deposits | $1.105 billion | $1.006 billion |
| Borrowed funds | $114.7 million | $79.7 million |
| Stockholders’ equity | $129.0 million | $123.3 million |
- Net income increased 3.1%. Higher loan balances lifted interest income, while the net interest margin also improved; higher loan-loss provisions and expenses partly offset those gains.
- Provision for income taxes rose to $6.031 million from $3.034 million. The Tax Cuts and Jobs Act reduced the value of deferred tax assets and added a one-time $1.531 million charge. Management reported an effective tax rate of approximately 31.7%, versus 19.4% in 2016.
- Cash and cash equivalents were $18.5 million at year-end, compared with $17.8 million. Operating cash flow was $15.7 million; investing cash outflow was $105.4 million, principally reflecting $161.1 million of net loan growth; financing cash inflow was $90.4 million. Cash increased $0.8 million overall.
- Loan quality metrics improved: nonperforming loans were $10.7 million, or 1.07% of loans, versus $11.9 million, or 1.48%. The allowance was $11.2 million, 1.12% of loans and 104.3% of nonperforming loans; net charge-offs were $0.236 million, or 0.03% of average loans.
- The company and Bank were categorized as well capitalized. At year-end, company total risk-based, Tier 1 risk-based, common equity Tier 1, and Tier 1 leverage ratios were 13.20%, 12.04%, 11.27%, and 9.18%, respectively. Bank ratios were 12.58%, 11.42%, 11.42%, and 8.71%.
Material changes versus FY 2016
- Loans grew 25.1% to $1.001 billion, while deposits rose 9.9% to $1.105 billion. The company attributed much of loan growth to agricultural and commercial lending expansion in central and south-central Pennsylvania; year-end loan totals also included the State College branch acquisition.
- The December 8, 2017 State College branch acquisition added approximately $39.8 million of loans and $37.9 million of deposits and established a presence in Centre County. The transaction added $2.2 million of goodwill.
- Investment securities declined 18.9% to $254.8 million as portfolio cash flows were used to fund loan growth. Borrowed funds increased 43.9%, mainly from short-term FHLB advances.
- Non-interest income included $1.035 million of net securities gains, versus $0.255 million in 2016. The 2017 result included a $1.149 million gain from selling much of the equity securities portfolio in anticipation of new accounting treatment.
- Fourth-quarter net income was $2.604 million, or $0.75 per diluted share, compared with $3.171 million, or $0.91, in Q4 2016. The Q4 2017 income tax provision was $2.934 million.
Outlook, commentary, risks and contingencies
- No specific earnings, growth, or margin guidance was provided. Management expected liquidity to be supported by operating cash flows, deposits, available-for-sale securities, and borrowing capacity, including approximately $453.4 million of FHLB capacity. The Bank also had a $10 million unsecured federal funds line and a $4.4 million FRB borrowing-in-custody line.
- Management noted a flat yield curve and warned that further flattening or inversion could pressure margins. Its rate-shock model projected net interest income declines of 2.68% under a +100 basis-point shock and 8.81% under +300 basis points; these are model estimates, not forecasts.
- Credit risk is concentrated in real estate and agriculture: commercial real estate was 30.8% of loans, agricultural real estate 24.0%, and total agricultural lending 27.8%. Dairy-industry loans were $137.5 million, or 13.7% of loans. Natural-gas-related activity, agricultural conditions, local economic weakness, and municipal funding or Pennsylvania budget delays could affect borrower repayment, deposits, collateral values, and liquidity.
- Three customer relationships represented 63.3% of nonperforming loans. Management considered the loans well collateralized and reported no specific reserves for the three described relationships; one was affected by a borrower bankruptcy proceeding, and others were exposed to weak natural-gas activity.
- Commitments to extend credit and standby letters of credit totaled $203.7 million. These are off-balance-sheet contractual exposures, not necessarily expected cash outflows. The acquired MPF loan portfolio had up to $0.980 million of recourse exposure after the FHLB’s $0.123 million first-loss position; no losses had been experienced.
- Management reported no material pending legal proceedings beyond ordinary-course matters. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management and auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Separate organic loan and deposit growth from the State College acquisition contribution, and monitor funding costs and reliance on short-term FHLB advances.
- Track agricultural, dairy, commercial real estate, and municipal exposures, including criticized loans, nonperforming relationships, and allowance adequacy as the portfolio expands.
- Assess whether margin performance can withstand deposit repricing and a flatter yield curve, in light of the company’s rate-sensitivity estimates.
- Distinguish recurring earnings from the securities-sale gain and the one-time deferred-tax charge; review the resulting tax rate and future earnings comparability.
- Confirm liquidity availability, capital ratios, dividend capacity, and the potential utilization of the $203.7 million in credit commitments.
- The filing’s selected financial data labels non-interest income differently from the audited income statement. The audited statement reports $8.656 million for 2017, including securities gains; verify figures against the audited statements when comparing reported metrics.