citizens financial services, inc. reports unaudited full year and fourth quarter 2017 financial results

MANSFIELD, PENNSYLVANIA— January 30, 2018 – Citizens Financial Services, Inc. (OTC Pink: CZFS), parent company of First Citizens Community Bank, released today its unaudited financial results for the three months and year ended December 31, 2017.

Highlights

·

Net income was $13.0 million for 2017, which is 3.1% higher than 2016's net income.  Fourth quarter and full year income was negatively impacted by an increase in income tax expense.  The Tax Cuts and Jobs Act, enacted on December 22, 2017, lowered the federal corporate income tax rate from 34% to 21% effective January 1, 2018.  As a result, the carrying value of net deferred tax assets was reduced, which increased income tax expense by $1.5 million, or $.44 per share.

·	Net interest income before the provision for loan losses of $42.3 million for the year ended December 31, 2017 was an increase of $4.3 million, or 11.3%, compared to 2016.

·	Net organic loan growth totaled $161.2 million in 2017, or 20.2%.

·

Return on average equity for the three months (annualized) and the year ended December 31, 2017 was 7.82% and 10.04%, compared to 10.12% and 10.24% for the three months (annualized) and the year ended December 31, 2016. Excluding the impact of the increase in tax expense, the return on average equity for the three months (annualized) and the year ended December 31, 2017 would have been 12.31% and 11.22%, respectively, on a non-GAAP basis.

·

Return on average assets for the three months (annualized) and the year ended December 31, 2017 was 0.80% and 1.03%, compared to 1.05% and 1.06% for the three months (annualized and the year ended December 31, 2016. Excluding the impact of the increase in tax expense, the return on average assets for the three months (annualized) and the year ended December 31, 2017 would have been 1.26% and 1.16%, respectively, on a non-GAAP basis.

·	The acquisition of a full service branch in State College, Pennsylvania was completed in December resulting in an increase in loans and deposits of $39.8 million and $37.9 million, respectively.

2017 Compared to 2016

·

For 2017, net income totaled $13,025,000 which compares to net income of $12,638,000 for 2016, an increase of $387,000 or 3.1%.  Basic earnings per share of $3.74 for 2017 compares to $3.60 for 2016.  Excluding the write-down of the net deferred tax assets, 2017 net income would have been $14.6 million, or $4.18 per share on a non-GAAP basis.

·

Net interest income before the provision for loan loss for 2017 totaled $42,254,000 compared to $37,964,000 for 2016, resulting in an increase of $4,290,000, or 11.3%.    Average interest bearing assets increased $69.2 million in 2017 compared to last year.  Average loans increased $157.5 million while average investment securities decreased $75.4 million. The net interest margin for 2017 was 3.80% compared to 3.68% for 2016.

 

 

·	The provision for loan losses for 2017 was $2,540,000 compared to $1,520,000 for 2016, an increase of $1,020,000.  The increased provision primarily reflects the loan growth experienced during 2017.

·

Total non-interest income was $8,656,000 for 2017 compared to $7,899,000 for 2016, an increase of $757,000. Investment security gains increased $780,000 compared to last year.  As a result of the pending adoption of accounting standard ASU 2016-01, the Company chose to sell a significant portion of its equity securities portfolio in the fourth quarter, which resulted in realized gains of $1.0 million before tax.

·

Total non-interest expenses for 2017 were $29,314,000 compared to $28,671,000 for 2016, which is an increase of $643,000, or 2.2%.  Salaries and benefits increased $1,046,000 primarily due to the increased costs associated with the additional lending teams hired during the second and third quarters of 2016, branch and loan production office expansion, and normal employee merit increases. Other expenses decreased $522,000, which was primarily due to a decrease in the losses associated with fraudulent charges from compromised customer accounts.

·

The provision for income taxes increased $2,997,000 in 2017 to $6,031,000. A portion of the increase, $1,531,000 is attributable to the Tax Cuts and Jobs Act and the immediate write-down of deferred tax assets due to the change in the corporate tax rate.  The remaining increase is attributable to the increase in income before the provision of income taxes of $3,384,000 as well as a tax credit being fully utilized in 2016.

Fourth Quarter of 2017 Compared to the Fourth Quarter of 2016

·

For the three months ended December 31, 2017, net income totaled $2,604,000 which compares to net income of $3,171,000 for the fourth quarter of 2017, a decrease of $567,000, or 17.9%.  Basic earnings per share of $0.75 for the fourth quarter of 2017 compares to $.91 for the same period last year.  Annualized return on equity for the three months ended December 31, 2017 and 2016 was 7.82% and 10.12%, while annualized return on assets was 0.80% and 1.05%, respectively. Earnings per share and the annualized return equity and assets were significantly impacted by the write-down of net deferred tax assets associated with the Tax Cuts and Jobs Act.

·

Net interest income before the provision for loan loss was $11,236,000 compared to $9,876,000 for the fourth quarter last year, an increase of $1,360,000, or 13.8%.  Average interest bearing assets increased $92.1 million, including an increase in average loans of $165.3 million.  This was offset by a decrease in average investment securities of $77.0 million.  The net interest margin for the three months ended December 31, 2017 was 3.88% compared to 3.75% for the same period in 2016.

 

·	Total non-interest income was $2,812,000 for the three months ended December 31, 2017, which is $720,000 more than the comparable period in 2016. Investment security gains increased $731,000 primarily as a result of the sales from the Company's equity securities portfolio.

·

Total non-interest expenses for the three months ended December 31, 2017 totaled $7,710,000 compared to $7,258,000 for the same period in 2016.  Increases were experienced in salary and benefit costs as a result of an increase in profit sharing and health care expenses.  ORE expenses increased as a result of an increase in legal fees associated with a customer's bankruptcy and other general expense items.

 

 

·

The provision for income taxes increased $2,145,000 for the three months ended December 31, 2017, to $2,934,000, of which $1,531,000 is attributable to the Tax Cuts and Jobs Act and the immediate write-down of deferred tax assets due to the change in the corporate tax rate. The remaining increase is attributable to the increase in income before the provision of income taxes of $1,578,000.

Balance Sheet and Other Information:

·	At December 31, 2017, total assets were $1.36 billion, compared to $1.22 billion at December 31, 2016.

·	Available for sale securities of $254.8 million at December 31, 2017 decreased $59.2 million from December 31, 2016. The decrease was utilized to fund growth in the loan portfolio, which is part of the balance sheet strategy to shift interest-earning assets into loans.

·

Net loans as of December 31, 2017 totaled $989.3 million and have increased $198.6 million from December 31, 2016. The acquisition of the branch in State College resulted in an increase in loans of $39.8 million, with the remaining increase attributable to organic growth. The organic growth was driven primarily by agricultural real estate loans and other agricultural loans.

·

The allowance for loan losses totaled $11,190,000 at December 31, 2017, which is an increase of $2,304,000 from the amount at December 31, 2016.  The increase is due to recording a provision for loan losses of $2,540,000 and recoveries of $77,000, offset by charge-offs of $213,000.  Net charge-offs for 2017 were .03%.  The allowance as a percent of total loans was 1.12% as of December 31, 2017 compared to 1.11% as of December 31, 2016.

·	Deposits have increased $99.4 million from December 31, 2016, to $1.1 billion at December 31, 2017, of which $37.9 million of the growth is attributable to the State College branch acquisition. Borrowed funds have increased $35.0 million from December 31, 2016 to $115.0 million at December 31 2017.

·

Stockholders' equity totaled $129.0 million at December 31, 2017, compared to $123.3 million at December 31, 2016, an increase of $5.7 million.  The increase was attributable to net income for the year ended December 31, 2017 totaling $13.0 million, offset by cash dividends for the year totaling $5.9 million.  As a result of sales and changes in interest rates impacting the fair value of investment securities, the unrealized gain on available for sale investment securities decreased $1.5 million from December 31, 2016.

Dividend Declared

On December 5, 2017, the Board of Directors declared a cash dividend of $0.43 per share, which was paid on December 29, 2017 to shareholders of record at the close of business on December 15, 2017. The quarterly cash dividend is an increase of 7.5% over the regular cash dividend of $0.40 per share declared one year ago, as adjusted for the 5% stock dividend declared in June 2017.

Citizens Financial Services, Inc. has nearly 1,700 shareholders, the majority of whom reside in markets where its offices are located.

Note: A reconciliation of the non-GAAP financial measures of performance and earnings as a result of the additional tax charge related to The Tax Cuts and Jobs Act included above to the comparable GAAP financial measures is included at the end of the press release. Management believes disclosure of 2017 earnings results, adjusted to exclude the additional income tax provision as a result of The Tax Cut and Jobs Act, provides useful information to investors for comparison with 2016 results.

Note: This press release may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.  These statements are not historical facts; rather, they are statements based on the Company's current expectations regarding its business strategies and their intended results and its future performance.  Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions.  Forward-looking statements are not guarantees of future performance.  Numerous risks and uncertainties could cause or contribute to the Company's actual results, performance and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, changes in general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; and other factors disclosed periodically in the Company's filings with the Securities and Exchange Commission.  Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this press release or made elsewhere periodically by the Company or on its behalf.  The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

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