citizens financial services, inc. reports unaudited second quarter 2020 financial results

MANSFIELD, PENNSYLVANIA— July 27, 2020 – 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, 2020.

Highlights

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The acquisition of MidCoast Community Bancorp, Inc. was completed in the second quarter of 2020. The acquisition included loans with a fair value of $223.3 million and deposits with a fair value of $208.8 million. Based on the closing price on April 17th, the deal valuation was approximately $26.9 million.  Merger and acquisitions costs for 2020 total $2.2 million through June 30, 2020.

•	Net income for the first six months of 2020 was $9.9 million, which is 6.7% higher than 2019’s net income through June 30, 2019. The effective tax rate for the first six months of 2020 was 16.5% compared to 15.9% in the comparable period in 2019.

•	Net income was $5.3 million for the three months ended June 30, 2020, which is 10.2% higher than the net income for 2019’s comparable period. The effective tax rate for the three months ended June 30, 2020 was 16.5% compared to 16.1% in the comparable period in 2019.

•	Net interest income before the provision for loan losses was $29.2 million for the six months ended June 30, 2020, an increase of $4.9 million, or 20.3%, over the same period a year ago.

•	Return on average equity for the three and six months (annualized) ended June 30, 2020 was 12.28% and 11.90% compared to 13.09% and 12.61% for the three and six months (annualized) ended June 30, 2019.

•	Return on average tangible equity for the three and six months (annualized) ended June 30, 2020 was 14.98% and 14.31% compared to 15.72% and 15.17% for the three and six months (annualized) ended June 30, 2019. (1)

•	Return on average assets for the three and six months (annualized) ended June 30, 2020 was 1.25% and 1.24% compared to 1.34% and 1.28% for the three and six months (annualized) ended June 30, 2019.

Covid 19 pandemic response and loan profile

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The Company participated in the Paycheck Protection Program (PPP) for loans provided under the auspices of the Small Business Administration (SBA). As of June 30, 2020, the Company had outstanding $53.7 million and 570 loans that were issued through the program. The loans earn interest at 1% and will generate fee income of approximately $2.1 million over the life of the loans. A portion of these loans will be forgiven by the SBA depending on the customers usage of the proceeds.

•	Additionally, as support for our communities, we created a payment relief program, which includes the following:

o	Waiver of late fees for March, April and May

o	Interest only payment options for consumers and businesses

o	Deferral of principal payments for consumers and businesses in certain industries

o	Waiver of CD early withdrawal penalties through May 1.

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Under this program, we have provided relief to customers with outstanding balances of $196.2 million on 509 loans , which includes residential and commercial customers. As of June 30, 2020, 134 loans with a balance totaling $55.4 million continue in this program. Customers with balances totaling $23.6 million required a second round of relief, which is included in the $55.4 million as of June 30, 2020.

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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 and restaurants represent a higher level of credit risk. At June 30, 2020, the Company has limited loan concentrations to these industries as follows:

o	Hotels/Motels - $34.8 million or 2.6% of outstanding loans

o	Restaurants - $25.5 million or 1.9% of outstanding loans

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Our agricultural relationships are also being strained by the pandemic as dairy farmers were forced to dump milk, and milk futures have been extremely volatile. Other producers experienced difficulties in getting livestock to market and reduced proceeds from sales as well as difficulty in obtaining supplies. Agricultural lending comprises 26.4% of outstanding balances as of June 30, 2020.

Six Months Ended June 30, 2020 Compared to 2019

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For the six months ended June 30, 2020, net income totaled $9,869,000 which compares to net income of $9,251,000 for the first six months of 2019, an increase of $618,000 or 6.7%.  Basic earnings per share of $2.67 for the first six months of 2020 compares to $2.60 for the first six months last year.  Annualized return on equity for the six months ended June 30, 2020 and 2019 was 11.90% and 12.61%, while annualized return on assets was 1.24% and 1.28%, respectively. If merger and acquisition costs are excluded, the annualized return on average equity and average assets would be 14.03% and 1.47%, respectively.

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Net interest income before the provision for loan loss for the six months ended June 30, 2020 totaled $29,176,000 compared to $24,251,000 for the six months ended June 30, 2019, resulting in an increase of $4,925,000, or 20.3%.  Average interest earning assets increased $123.6 million for the six months ended June 30, 2020 compared to the same period last year, primarily due to the MidCoast acquisition. Average loans increased $113.7 million while average investment securities increased $1.1 million. The yield on interest earning assets increased 1 basis point to 4.59%, while the cost of interest-bearing liabilities decreased 40 basis points to 0.74%. The yield on interest earning assets benefitted approximately $600,000 from 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 moves in response to the COVID-19 pandemic. The tax effected net interest margin for the six months ended June 30, 2020 was 4.01% compared to 3.66% for the same period last year.

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The provision for loan losses for the six months ended June 30, 2020 was $950,000 compared to $750,000 for the six months ended June 30, 2019, an increase of $200,000.  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, which offsets the fact that loans, excluding the acquisition and PPP loans guaranteed by the SBA, decreased during the first half of 2020.

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Total non-interest income was $3,920,000 for the six months ended June 30, 2020, which is $140,000 less than the non-interest income of $4,060,000 for the same period last year. The primary drivers were a decrease of $243,000 in the value of equity securities during the first half of 2020, compared to an increase of $41,000 in the first half of 2019 and a decrease in service charges of $278,000 as a result of our COVID-19 response and reduced customer spending as a result of mandatory stay at home orders. Gains on loans sold increased $264,000 as a result of an increase in the number of loans sold in 2020 compared to 2019 as a result of the low interest environment. Gains of the sale of available for sale securities totaled $117,000 in 2020. There were no sales of available for sale securities in 2019.

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Total non-interest expenses for the six months ended June 30, 2020 totaled $20,334,000 compared to $16,559,000 for the same period last year, which is an increase of $3,775,000, or 22.8%. The primary driver of the increase is the merger and acquisition costs of completing the MidCoast acquisition that total $2,166,000 and the additional salary costs associated with the acquisition.

•	The provision for income taxes increased $192,000 when comparing the six months ended June 30, 2020 to the same period in 2019 as a result of an increase in income before income tax of $810,000.

Three Months Ended June 30, 2020 Compared to June 30, 2019

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For the three months ended June 30, 2020, net income totaled $5,338,000 which compares to net income of $4,846,000 for the comparable period of 2019, an increase of $492,000 or 10.2%.  Basic earnings per share of $1.39 for the three months ended June 30, 2020 compares to $1.36 for the 2019 comparable period. Annualized return on equity for the three months ended June 30, 2020 and 2019 was 12.28% and 13.09%, while annualized return on assets was 1.25% and 1.34%, respectively. If merger and acquisition costs are excluded, the annualized return on average equity and average assets would be 15.56% and 1.58%, respectively.

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Net interest income before the provision for loan loss for the three months ended June 30, 2020 totaled $16,286,000 compared to $12,336,000 for the three months ended June 30, 2019, resulting in an increase of $3,950,000, or 32.0%. Average interest earning assets increased $251.2 million for the three months ended June 30, 2020 compared to the same period last year as a result of the acquisition.  Average loans increased $206.1 million while average investment securities increased $27.4 million. The tax effected net interest margin for the three months ended March 31, 2020 was 4.15% 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 55 basis points, to 0.60%. The tax effected net interest margin benefitted approximately $600,000 from pay-off of a purchase credit impaired loan acquired as part of The First National Bank of Fredericksburg acquisition in 2015.

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The provision for loan losses for the three months ended June 30, 2020 was $550,000, a $200,000 increase to the comparable period in 2019. Organic growth, excluding the PPP program was negative in the second quarter of 2020 compared to positive loan growth in the 2019 comparable period, however, the provision for 2020 was based on the impact the pandemic is having on local and national economies.

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Total non-interest income was $2,069,000 for the three months ended June 30, 2020, which is $42,000 more than for the comparable period last year.  The primary drivers were the gains on the sale of available securities of $117,000 and the increase in gains of loans sold of $196,000. As a result of the pandemic, service charges decreased $260,000 for the three months ended June 30, 2020 when compared to the 2019 period.

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Total non-interest expenses for the three months ended June 30, 2020 totaled $11,413,000 compared to $8,237,000 for the same period last year, which is an increase of $3,176,000, or 38.6%. Merger and acquisition costs totaled $1,790,000 and salaries and benefits increased $891,000 primarily due to additional personnel associated with the acquisition, merit increases and increased health care costs.

•	The provision for income taxes increased $124,000 when comparing the three months ended June 30, 2020 to the same period in 2019 as a result of an increase in income before income tax of $616,000.

Balance Sheet and Other Information:

•	At June 30, 2020, total assets were $1.80 billion, compared to $1.47 billion at December 31, 2019 and $1.45 billion at June 30, 2019.

•	Available for sale securities of $272.4 million at June 30, 2020 increased $31.1 million from December 31, 2019 and $35.6 million from June 30, 2019. The yield on the investment portfolio increased from 2.73% to 2.78% on a tax equivalent basis.

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Net loans as of June 30, 2020 totaled $1.35 billion and increased $247.1 million from December 31, 2019 as a result of the acquisition and PPP program. Excluding the acquisition and the PPP program, loans would have decreased $28.9 million during 2020. The decrease in organic loans was driven by early pay-offs and limited opportunities in the first half of 2020.

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The allowance for loan losses totaled $14,827,000 at June 30, 2020 which is an increase of $982,000 from December 31, 2019.  The increase is due to recording a provision for loan losses of $950,000 and recoveries of $51,000, offset by charge-offs of $19,000. The allowance as a percent of total loans was 1.09% as of June 30, 2020 and 1.24% as of December 31, 2019. Loans acquired in an acquisition are marked to fair value and excluded from the allowance, unless there has been a downgrade in the loan since acquisition.

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Deposits increased $302.2 million from December 31, 2019, to $1.51 billion at June 30, 2020, primarily due to the acquisition, which increased deposits $208.8 million and customers holding more cash due to the pandemic. Brokered CD’s increased $8.8 million.  Non-interest-bearing deposits increased $74.8 million due to the acquisition and PPP program.

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Stockholders’ equity totaled $183.1 million at June 30, 2020, compared to $154.8 million at December 31, 2019, an increase of $28.3 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 the six months ended June 30, 2020 totaling $9.9 million, offset by net cash dividends for the first half of 2020 totaling $3.2 million and net treasury stock activity of $600,000.  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 $3.7 million from December 31, 2019.

Dividend Declared

On June 2, 2020, the Board of Directors declared a cash dividend of $0.455 per share, which was paid on June 26, 2020 to shareholders of record at the close of business on June 12, 2020. The quarterly cash dividend is an increase of 3.3% over the regular cash dividend of $0.436 per share declared one year ago, as adjusted for the 1% stock dividend declared in June 2020. The Board also declared a 1% stock dividend, payable on June 26, 2020 to shareholders of record at the close of business on June 12, 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.

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