citizens financial services, inc. reports unaudited second quarter 2021 financial results

MANSFIELD, PENNSYLVANIA— July 23, 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 and six months ended June 30, 2021.

Highlights

•	The financial results of the Company continue to benefit from the acquisition of MidCoast Community Bancorp, Inc. that closed in the second quarter of 2020.

•	Net income was $15.1 million for the six months ended June 30, 2021, which is 53.1% higher than the net income for 2020’s comparable period. The effective tax rate for the six months ended June 30, 2021 was 16.9% compared to 16.4% in the comparable period in 2020.

•	Net income was $6.6 million for the three months ended June 30, 2021, which is 24.5% higher than the net income for 2020’s comparable period. The effective tax rate for the three months ended June 30, 2021 was 17.9% compared to 16.5% in the comparable period in 2020.

•	Net interest income before the provision for loan losses was $32.7 million for the six months ended June 30, 2021, an increase of $3.5 million, or 11.9%, over the same period a year ago.

•	Non-performing assets decreased $2.2 million from year end and $3.3 million since June 30, 2020 and totaled $10,942,000 as of June 30, 2021. As a percent of loans, non-performing assets totaled 0.77%, 0.93% and 1.04% as of June 30, 2021, December 31, 2020 and June 30, 2020.

•	Return on average equity for the three and six months (annualized) ended June 30, 2021 was 13.19% and 15.19% compared to 12.28% and 11.90% for the three and six months (annualized) ended June 30, 2020.

•	Return on average tangible equity for the three and six months (annualized) ended June 30, 2021 was 15.77% and 18.22% compared to 14.98% and 14.31% for the three and six months (annualized) ended June 30, 2020 (non-GAAP). (1)

•	Return on average assets for the three and six months (annualized) ended June 30, 2021 was 1.32% and 1.54% compared to 1.25% and 1.24% for the three and six months (annualized) ended June 30, 2020.

•	If the life insurance proceeds on a former employees are excluded, the return on average equity and average assets would be 14.03% and 1.42%, respectively, for six months (annualized) ended June 30, 2021 (non-GAAP). (1)

Covid 19 pandemic response and loan profile

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During 2021, the Company continued to participate in the Paycheck Protection Program (PPP) for loans provided under the auspices of the Small Business Administration (SBA). As of June 30, 2021, 419 loans with a balance of $27.1 million remain outstanding under this program. From January 1, 2021 to June 30, 2021, we issued 388 loans with aggregate balances of $24.3 million. As of June 30, 2021, 44 loans that were issued under this program in 2020 remain outstanding and have a balance of $3.9 million. The 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 outstanding, 372 loans, or 88.8% of the remaining PPP loans, had an original balance less than $150,000. The outstanding balance for these 372 loans as of June 30, 2021 was approximately $11.4 million.

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Under our COVID loan modification program, during 2021 we provided relief to 19 customers with outstanding balances of $26.7 million, which includes residential, commercial and agricultural customers. As of June 30, 2021, there was 1 commercial loan outstanding with a balance of $6.2 million that is under modified terms through August 2021.

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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 June 30, 2021, the Company had limited loan concentrations to these industries as follows:

o	Hotels/Motels - $70.9 million or 5.0% of outstanding loans

o	Restaurants - $26.7 million or 1.9% of outstanding loans

o	Amusement/Theme parks - $9.4 million, or 0.7% of outstanding loans

Six Months Ended June 30, 2021 Compared to 2020

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For the six months ended June 30, 2021, net income totaled $15,110,000 which compares to net income of $9,869,000 for the first six months of 2020, an increase of $5,241,000 or 53.1%.  Basic earnings per share of $3.83 for the first six months of 2021 compares to $2.64 for the first six months last year.  Annualized return on equity for the six months ended June 30, 2021 and 2020 was 15.19% and 11.90%, while annualized return on assets was 1.54% and 1.24%, respectively.

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Net interest income before the provision for loan loss for the six months ended June 30, 2021 totaled $32,653,000 compared to $29,176,000 for the six months ended June 30, 2020, resulting in an increase of $3,477,000, or 11.9%.  Average interest earning assets increased $368.2 million for the six months ended June 30, 2021 compared to the same period last year, primarily due to the assets acquired as part of the MidCoast acquisition in the second quarter of 2020 being outstanding for the entire period of 2021. Average loans increased $204.5 million while average investment securities increased $75.5 million. The yield on interest earning assets decreased 60 basis points to 3.99%, while the cost of interest-bearing liabilities decreased 21 basis points to 0.53%. The yield on interest earning assets in 2020 benefitted approximately $600,000 or 10 basis points from the pay-off of a purchase credit impaired loan 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 rate cuts made in response to the COVID-19 pandemic in the first quarter of 2020. The tax effected net interest margin for the six months ended June 30, 2021 was 3.59% compared to 4.01% for the same period last year.

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The provision for loan losses for the six months ended June 30, 2021 was $1,150,000 compared to $950,000 for the six months ended June 30, 2020, an increase of $200,000.  The increase in the provision is attributable to loans maturing that were acquired as part of the MidCoast acquisition, which were refinanced with the Company and are subject to the Company’s allowance calculation.

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Total non-interest income was $6,941,000 for the six months ended June 30, 2021, which is $3,021,000 more than the non-interest income of $3,920,000 for the same period last year. The primary drivers were the earnings of bank owned life insurance, which increased $1,144,000 as the result of the passing of two former employees, gains on loans sold which increased $387,000 and an increase in equity security gains of $459,000 as a result of market performance. Other income increased $482,000 due to fee income on derivative transactions for customers.

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Total non-interest expenses for the six months ended June 30, 2021 totaled $20,267,000 compared to $20,334,000 for the same period last year, which is a decrease of $67,000. The primary driver of the decrease was the merger and acquisition costs incurred in 2020 of $2,179,000 as a result of the MidCoast acquisition. Salary and benefit costs and occupancy costs increased compared to the same period in 2020 due to the additional headcount and branches acquired as part of the MidCoast acquisition.

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The provision for income taxes increased $1,124,000 when comparing the six months ended June 30, 2021 to the same period in 2020 as a result of an increase in income before income tax of $6,365,000. The effective tax rate was 16.9% and 16.4% for the six months ended June 30, 2021 and 2020, respectively. It should be noted the earnings on bank owned life insurance are exempt from Federal income tax.

Second Quarter of 2021 Compared to the Second Quarter of 2020

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For the three months ended June 30, 2021, net income totaled $6,647,000 which compares to net income of $5,338,000 for the comparable period of 2020, an increase of $1,309,000 or 24.5%.  Basic earnings per share of $1.69 for the three months ended June 30, 2021 compares to $1.37 for the 2020 comparable period. Annualized return on equity for the three months ended June 30, 2021 and 2020 was 13.19% and 12.28%, while annualized return on assets was 1.32% and 1.25%, respectively.

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Net interest income before the provision for loan losses for the three months ended June 30, 2021 totaled $16,212,000 compared to $16,286,000 for the three months ended June 30, 2020, resulting in a decrease of $74,000. Average interest earning assets increased $301.5 million for the three months ended June 30, 2021 compared to the same period last year as a result of the  organic loan and deposit growth.  Average loans increased $117.5 million while average investment securities increased $92.2 million and average interest bearing cash holdings increased $93.1 million. The tax effected net interest margin for the three months ended June 30, 2021 was 3.46% compared to 4.15% for the same period last year, which was impacted by the decrease in the average yield on interest earning assets of 77 basis points to 3.85% of which 15 basis points was due to the $600,000 recognized on the payoff of the purchase impaired loan.

•	The provision for loan losses for the three months ended June 30, 2021 was $500,000, a $50,000 decrease to the comparable period in 2020. The decrease in the provision is attributable to the impact the COVID-19 pandemic had on the local and national economy in the second quarter of 2020.

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Total non-interest income was $2,706,000 for the three months ended June 30, 2021, which is $637,000 more than the comparable period last year.  The primary drivers were service charges of $249,000 as a result of waiving fees in the second quarter of 2020 in response to the pandemic and brokerage and insurance commissions, which increased $157,000 due to growth in our south central Pennsylvania market. Other income increased due to $254,000 due to fee income on derivative transactions for customers.

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Total non-interest expenses for the three months ended June 30, 2021 totaled $10,320,000 compared to $11,413,000 for the same period last year, which is a decrease of $1,093,000, or 9.6%. The primary driver of the decrease was the merger and acquisition costs of completing the MidCoast acquisition that totaled $1,803,000 in 2020. Salary and employee benefit costs increased $586,000 due to the additional salary and benefit costs of employees added as a result of the MidCoast acquisition, as well as merit increases for employees.

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The provision for income taxes increased $397,000 when comparing the three months ended June 30, 2021 to the same period in 2020 as a result of an increase in income before income tax of $1,706,000.  The effective tax rate was 17.9% and 16.5% for the three months ended June 30, 2021 and 2020, respectively.

Balance Sheet and Other Information:

•	At June 30, 2021, total assets were $2.00 billion compared to $1.89 billion at December 31, 2020 and $1.80 billion at June 30, 2020. The loan to deposit ratio as of June 30, 2021 was 84.11% compared to 88.45% as of December 31, 2020 and 90.11% as of June 30, 2020.

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Available for sale securities of $369.0 million at June 30, 2021 increased $73.8 million from December 31, 2020 and $96.6 million from June 30, 2020. The yield on the investment portfolio decreased from 2.78% to 2.07% on a tax equivalent basis due to securities purchased at a discount that were called in the first quarter of 2020 and purchases made in a lower rate environment in the second half of 2020 and the first half of 2021.

•	Net loans as of June 30, 2021 totaled $1.40 billion and increased $8.7 million from December 31, 2020 as a result of organic growth in the Delaware market offset by PPP forgiveness and a decrease in student loan balances.

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The allowance for loan losses totaled $16,931,000 at June 30, 2021 which is an increase of $1,116,000 from December 31, 2020.  The increase is due to recording a provision for loan losses of $1,150,000 and recoveries of $108,000, offset by charge-offs of $142,000. The allowance as a percent of total loans was 1.20% as of June 30, 2021 and 1.13% as of December 31, 2020.

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Deposits increased $93.5 million from December 31, 2020, to $1.68 billion at June 30, 2021, primarily due to customers holding more cash due to the pandemic and government stimulus funds provided to customers. Brokered CD’s decreased $23.8 million.  Non-interest-bearing deposits increased $35.7 million due to the PPP program and additional cash holdings by customers.

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Stockholders’ equity totaled $204.4 million at June 30, 2021, compared to $194.3 million at December 31, 2020, an increase of $10.2 million. The increase was attributable to net income for the six months ended June 30, 2021 totaling $15.1 million, offset by cash dividends totaling $3.7 million and net treasury stock activity of $493,000.  As a result of changes in interest rates impacting the fair value of investment securities and derivative instruments, accumulated other comprehensive income, decreased $1.0 million from December 31, 2020.

Dividend Declared

On June 1, 2021, the Board of Directors declared a cash dividend of $0.465 per share, which was paid on June 25, 2021 to shareholders of record at the close of business on June 11, 2021. This quarterly cash dividend is an increase of 3.20% over the regular cash dividend of $0.446 per share declared one year ago, as adjusted for the 1% stock dividend declared in June 2021.  The Board declared a 1% stock dividend, payable on June 25, 2021 to shareholders of record at the close of business on June 11, 2021.

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.

(1)	See reconciliation of GAAP and non-gaap measures at the end of the press release

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