citizens financial services, inc. reports unaudited full year  and fourth quarter 2020 financial results

MANSFIELD, PENNSYLVANIA— January 25, 2021 – Citizens Financial Services, Inc. (OTC Pink: CZFS), parent company of First Citizens Community Bank, released today its unaudited consolidated financial results for the three months and year ended December 31, 2020.

Highlights

•	The acquisition of MidCoast Community Bancorp, Inc. in the second quarter of 2020 contributed significant growth to net interest income in the second half of 2020 and to significant organic growth in the fourth quarter of 2020.

•	To further support our customers acquired as part of the MidCoast acquisition and to further our expansion efforts, in November,  we opened a full service branch in Kennett Square, Pennsylvania.

•	Net income for 2020 was $25.1 million, which is 28.8% higher than 2019’s net income. The effective tax rate for 2020 was 17.3% compared to 16.4% in 2019.

•	Net income was $7.2 million for the three months ended December 31, 2020, which is 43.3% higher than the net income for 2019’s comparable period. The effective tax rate for the three months ended December 31, 2020 was 17.8% compared to 16.6% in the comparable period in 2019.

•	Net interest income before the provision for loan losses was $62.2 million for the year ended December 31, 2020, an increase of $12.3 million, or 24.5%, over the same period a year ago.

•	Non-performing assets decreased $2.3 million, or 15.1%, during 2020 and totaled 0.93% of loans as of December 31, 2020 compared to 1.38% as of December 31, 2019.

•	Return on average equity for the three months (annualized) and the year ended December 31, 2020 was 15.20% and 14.21% compared to 13.05% and 13.00% for the three months (annualized) and the year ended December 31, 2019, respectively.

•	Return on average tangible equity (non-GAAP) for the three months (annualized) and the year ended December 31, 2020 was 18.37% and 17.16% compared to 15.52% and 15.58% for the three months (annualized) and the year ended December 31, 2019, respectively. (1)

•	Return on average assets for the three months (annualized) and the year ended December 31, 2020 was 1.55% and 1.46% compared to 1.37% and 1.34% for the three months (annualized) and the year ended December 31, 2019, respectively.

Covid 19 pandemic response and loan profile

•

During 2020, the Company participated in the Paycheck Protection Program (PPP) for loans provided under the auspices of the Small Business Administration (SBA). Through the program, we issued 591 loans with aggregate balances of $54.3 million. As of December 31, 2020, the Company had 451 loans with aggregate balances of $37.2 million outstanding under the program. During 2020, we received payments and forgiveness on 192 loans totaling $17.1 million with 140 loans being completely paid off or forgiven by December 31, 2020. The remaining loans earn interest at 1% per annum and the processing fee paid by the SBA will be accreted into income over the life of the loans. The SBA has issued guidance for forgiveness with a streamlined approach for loans of $150,000  or less. Of the PPP loans remaining, 379 loans, or 84.0% of the remaining PPP loans, had an original balance less than $150,000. The outstanding balance for these 379 loans as of December 31, 2020 was approximately $13.6 million.

•

Under our loan modification program, we provided relief to customers with outstanding balances of $206.8 million on 539 loans, which includes residential and commercial customers. As of December 31, 2020, there were 4 commercial  loans outstanding with aggregate balances of $8.7 million that are under modified terms through March 2021.

•

The Company tracks industry concentrations to identify risks that could lead to additional credit exposure. As a result of the Covid 19 pandemic, the Company has determined that Hotels/Motels,  restaurants, and amusement/theme parks represent a higher level of credit risk. At December 31, 2020, the Company had limited loan concentrations to these industries as follows:

o	Hotels/Motels - $49.9 million or 3.6% of outstanding loans

o	Restaurants - $26.1 million or 1.9% of outstanding loans

o	Amusement/Theme parks - $13.9 million, or 1.0% of outstanding loans

•

Agricultural lending continues to be an area of emphasis with the Bank. As of December 31, 2020, agricultural lending comprised approximately $363.9 million, or 25.9% of total loans. Agriculture was significantly impacted in the early part of the pandemic as dairy farmers were forced to dump milk, and milk futures remain extremely volatile. Other producers experienced difficulties in getting livestock to market and reduced proceeds from sales as well as difficulty in obtaining supplies. A return to stay at home orders and school closures could significantly impact this portion of our loan portfolio.

2020 Compared to 2019

•

For 2020, net income totaled $25,103,000 which compares to net income of $19,490,000 for 2019, an increase of $5,613,000 or 28.8%.  Basic earnings per share of $6.60 for 2020 compares to $5.48 for 2019. Return on equity for 2020 and 2019 was 14.21% and 13.00%, while return on assets was 1.46% and 1.34%, respectively. If merger and acquisition costs are excluded, the  return on average equity and average assets would be 15.21% and 1.56%, respectively, for 2020 (non-GAAP).

•

Net interest income before the provision for loan losses for 2020 totaled $62,191,000 compared to $49,940,000 for 2019, resulting in an increase of $12,251,000, or 24.5%.  Average interest earning assets increased $241.0 million for 2020 compared to 2019, primarily due to the MidCoast acquisition. Average loans increased $189.3 million while average investment securities increased $21.0 million. The yield on interest earning assets decreased 17 basis point to 4.42%, while the cost of interest-bearing liabilities decreased 45 basis points to 0.64%. The yield on interest earning assets benefitted approximately $820,000 from pay-offs of purchase credit impaired loans acquired as part of The First National Bank of Fredericksburg acquisition in 2015.  The decrease in the cost of interest-bearing liabilities was due to the Federal Reserve interest rate reductions in response to the COVID-19 pandemic. The tax effected net interest margin for 2020 was 3.92% compared to 3.72% for 2019.

•

The provision for loan losses for 2020 was $2,400,000 compared to $1,675,000 for 2019, an increase of $725,000.  The provision was higher in 2020 than 2019 primarily due to the economic environment as a result of the COVID-19 pandemic and the higher levels of unemployment and organic loan growth in the fourth quarter.

•

Total non-interest income was $11,422,000 for 2020, which is $3,036,000 more than the non-interest income of $8,386,000 for last year. The primary drivers were an increase of $1,695,000 in the gains on loans sold, as a result of the increased number of loans sold in 2020 compared to 2019 due to the low interest environment and an increase in other income of $1,406,000 due to fee income on derivative transactions for customers.  We experienced a $41,000 decrease in the value of equity securities during 2020, compared to an increase of $120,000 in 2019 period and a decrease in service charges of $466,000 as a result of our COVID-19 response and reduced customer spending as a result of mandatory stay at home orders. Gains of the sale of available for sale securities totaled $305,000 in 2020 compared to $24,000 in 2019.

•

Total non-interest expenses for 2020 totaled $40,847,000 compared to $33,341,000 for the same period last year, which is an increase of $7,506,000, or 22.5%. The primary driver of the increase is the merger and acquisition costs of completing the MidCoast acquisition that totaled $2,179,000 and the additional salary and operational costs associated with the employees and branches acquired as part of the acquisition.

•	The provision for income taxes increased $1,443,000 when comparing 2020 to 2019 as a result of an increase in income before income tax of $7,056,000. The  effective tax rate was 17.3% and 16.4% for 2020 and 2019, respectively, compared to the statutory rate of 21%.

Fourth Quarter of 2020 Compared to the Fourth Quarter of 2019

•

For the three months ended December 31, 2020, net income totaled $7,227,000 which compares to net income of $5,043,000 for the comparable period of 2019, an increase of $2,184,000 or 43.3%.  Basic earnings per share of $1.85 for the three months ended December 31, 2020 compares to $1.42 for the 2019 comparable period. Annualized return on equity for the three months ended December 31, 2020 and 2019 was 15.20% and 13.05%, while annualized return on assets was 1.55% and 1.37%, respectively.

•

Net interest income before the provision for loan losses for the three months ended December 31, 2020 totaled $16,545,000 compared to $12,790,000 for the three months ended December 31, 2019, resulting in an increase of $3,755,000, or 29.4%. Average interest earning assets increased $365.3 million for the three months ended December 31, 2020 compared to the same period last year as a result of the acquisition and organic loan and deposit growth.  Average loans increased $275.9 million while average investment securities increased $46.2 million. The tax effected net interest margin for the three months ended December 31, 2020 was 3.82% compared to 3.74% for the same period last year, which was impacted by the decrease in the average cost on interest bearing liabilities of 47 basis points to 0.54%.

•

The provision for loan losses for the three months ended December 31, 2020 was $900,000, a $375,000 increase to the comparable period in 2019. Net organic growth during the fourth quarter totaled $39.4 million, which is net of PPP loan forgiveness and payments of $16.8 million and $18.5 million of municipal loan pay-offs that occurred in the fourth quarter. The provision for 2020 was also impacted by the Covid-19 pandemic and its impact on local and national economies.

•

Total non-interest income was $3,964,000 for the three months ended December 31, 2020, which is $1,815,000 more than the comparable period last year.  The primary drivers were the gains on loans sold of $752,000 and an increase in other income of $787,000 due to fee income on derivative transactions for customers. As a result of the pandemic, service charges decreased $75,000 for the three months ended December 31, 2020 when compared to the 2019 period. The equity portfolio experienced gains of $235,000 for the three months ended December 31, 2020 compared to gains of $50,000 for the comparable period of 2019.

•

Total non-interest expenses for the three months ended December 31, 2020 totaled $10,821,000 compared to $8,368,000 for the same period last year, which is an increase of $2,453,000, or 29.3%. The increase was due to the additional salary and benefit costs of employees added as a result of the MidCoast acquisition and occupancy expenses associated with the new branches acquired as part of the merger. FDIC insurance increased due to receiving a credit from the FDIC in the fourth quarter of 2019.  There was no credit from the FDIC in the fourth quarter of 2020.The increase in other expenses is due to the Delaware Franchise fee and other periodic pension expenses due to the settlement of the pension plan in December of 2019 that was acquired as part of The First National Bank of Fredericksburg acquisition in 2015.

•

The provision for income taxes increased $558,000 when comparing the three months ended December 31, 2020 to the same period in 2019 as a result of an increase in income before income tax of $2,742,000.  The effective tax rate was 17.8% and 16.6% for the three months ended December 31, 2020 and 2019, respectively.

Balance Sheet and Other Information:

•	At December 31, 2020, total assets were $1.89 billion compared to $1.47 billion at December 31, 2019. The loan to deposit ratio as of December 31, 2020 was 88.45% compared to 92.11% as of December 31, 2019.

•

Available for sale securities of $295.2 million at December 31, 2020 increased $54.5 million from December 31, 2019. The yield on the investment portfolio decreased from 2.85% to 2.55% on a tax equivalent basis due to a number of securities purchased at a discount that were called in the third quarter of 2019.

•

Net loans as of December 31, 2020 totaled $1.39 billion and increased $287.7 million from December 31, 2019 as a result of the acquisition, PPP program and organic growth in the fourth quarter, which was primarily in the Delaware market. Excluding the acquisition and the PPP program, loans increased $27.0 million during 2020.

•

The allowance for loan losses totaled $15,815,000 at December 31, 2020 which is an increase of $1,970,000 from December 31, 2019.  The increase is due to recording a provision for loan losses of $2,400,000 and recoveries of $102,000, offset by charge-offs of $532,000. The allowance as a percent of total loans was 1.13% as of December 31, 2020 and 1.24% as of December 31, 2019. Loans acquired in an acquisition are marked to fair value at acquisition and excluded from the allowance, unless there has been a downgrade in the loan since acquisition. Non-performing assets decreased $2,334,000 since December 31, 2019 to $13.1 million. As a percent of total loans, non-performing assets decreased from 1.38% at December 31, 2019 to 0.93% at December 31, 2020.

•

Deposits increased $377.7 million from December 31, 2019, to $1.59 billion at December 31, 2020, primarily due to the acquisition, which increased deposits by $208.8 million and customers holding more cash due to the pandemic. Brokered CD’s increased $8.8 million.  Non-interest-bearing deposits increased $100.05 million due to the acquisition, PPP program and additional cash holdings by customers.

•

Stockholders’ equity totaled $194.3 million at December 31, 2020, compared to $154.8 million at December 31, 2019, an increase of $39.5 million. The increase was attributable to issuing 373,356 shares with a value of $19.2 million as part of the acquisition and net income for 2020 totaling $25.1 million, offset by cash dividends for 2020 totaling $6.5 million and net treasury stock activity of $788,000.  As a result of changes in interest rates impacting the fair value of investment securities, the unrealized gain on available for sale investment securities, net of tax, improved $4.0 million from December 31, 2019.

Dividend Declared

On December 4, 2020, the Board of Directors declared a cash dividend of $0.46 per share, which was paid on December 29, 2020 to shareholders of record at the close of business on December 15, 2020. The quarterly cash dividend is an increase of 3.3% over the regular cash dividend of $0.445 per share declared one year ago, as adjusted for the 1% stock dividend declared in June 2020.

Citizens Financial Services, Inc. has nearly 1,900 shareholders, the majority of whom reside in markets where its offices are located.

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.