citizens financial services, inc. reports unaudited full year and  fourth quarter 2022 financial results

MANSFIELD, PENNSYLVANIA— January 30, 2023 – Citizens Financial Services, Inc. (Nasdaq: CZFS), parent company of First Citizens Community Bank, released today its unaudited consolidated financial results for the three months and year ended December 31, 2022.

Highlights

•	Two new branches were opened in November of 2022 in Ephrata, Pennsylvania and Greenville, Delaware and we look forward to serving our customers in these new markets. We have also received approval to open a new branch in Williamsport, Pennsylvania, which is expected in the second quarter of 2023.

•	Citizens Financial Services, Inc. continues to work on plans to integrate HV Bancorp, Inc.(“HVB”) into the Company, with the transaction expected to close in the second quarter of 2023.

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Net income was $29.1 million for 2022, which is 0.2% lower than 2021’s net income.  The decrease was due to life insurance proceeds received in the first quarter of 2021 due to the passing of two former employees and decreased gains on loans sold due to the rise in mortgage rates in 2022. The effective tax rate for 2022 was 18.1% compared to 17.6% in 2021, with the increase being due to life insurance proceeds being exempt from taxable income.

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Net income was $7.9 million for the three months ended December 31, 2022, which is 13.4% higher than the net income for 2021’s comparable period. The effective tax rate for the three months ended December 31, 2022 was 18.8% compared to 18.3% in the comparable period in 2021 due to certain merger expenses not being tax deductible.

•	Net loan growth for the year was $282.2 million or 19.8%.

•	Non-performing assets decreased $1,354,000 since December 31, 2021 and totaled $7,488,000 as of December 31, 2022. As a percent of loans, non-performing assets totaled 0.43% and 0.61% as of December 31, 2022 and December 31, 2021, respectively.

•	Return on average equity for the three months (annualized) and the year ended December 31, 2022 was 13.58% and 12.98% compared to 13.11% and 14.26% for the three months (annualized) and the year ended December 31, 2021, respectively.

•	Return on average tangible equity (non-GAAP) for the three months (annualized) and the year ended December 31, 2022 was 15.80% and 15.20% compared to 15.53% and 17.01% for the three months (annualized) and the year ended December 31, 2021, respectively. (1)

•	Return on average assets for the three months (annualized) and the year ended December 31, 2022 was 1.34% and 1.29% compared to 1.34% and 1.45% for the three months (annualized) and the year ended December 31, 2021, respectively.

•	If the life insurance proceeds on former employees are excluded, the return on average equity and average assets would have been 13.69% and 1.40%, respectively, for 2021 (non-GAAP). (1)

2022 Compared to 2021

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For 2022, net income totaled $29,060,000 which compares to net income of $29,118,000 for 2021, a decrease of $58,000 or 0.2%.  Basic earnings per share of $7.32 for 2022 compares to $7.31 for 2021.  Return on equity for 2022 and 2021 was 12.98% and 14.26%, while return on assets was 1.29% and 1.45%, respectively. If the life insurance proceeds associated with the passing of the former employees in 2021 are excluded, basic earnings per share in 2021 would have been $7.02 compared to $7.32 for 2022, while return on equity would have been 13.69% and return on assets 1.40% (non-GAAP) (1). The remaining changes in the ratios from 2021 to 2022 is due to growth that occurred in both assets and equity in 2022 compared to 2021.

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Net interest income before the provision for loan loss for 2022 totaled $72,134,000 compared to $66,112,000 for 2021, resulting in an increase of $6,022,000, or 9.1%. Amortization on PPP loans decreased $2,061,000 during 2022 compared to 2021. Average interest earning assets increased $244.4 million for 2022 compared to 2021, as a result of growth in investment securities and organic loan growth funded by borrowings.  Average loans increased $168.6 million, while average investment securities increased $136.2 million. Net interest margin for 2022 was 3.41%,  which is 11 basis points less than 2021. The yield on interest earning assets increased 4 basis points to 3.93%, while the cost of interest-bearing liabilities increased 20 basis points driven by increases in the fourth quarter of 2022. The majority of the decrease in margin is attributable to the decrease in amortization on PPP loans of $2.1 million, which accounts for 11 basis points of change in margin.

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The provision for loan losses for 2022 was $1,683,000, a $133,000 increase from 2021. The increase in the provision is attributable to the loan growth experienced in 2022 compared to 2021 offset by improved credit metrics of the loan portfolio and less impact from the COVID-19 pandemic on the economy.

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Total non-interest income was $9,738,000 for 2022, which is $2,567,000 less than the non-interest income of $12,305,000 for last year. The primary drivers were the earnings of bank owned life insurance, which decreased $976,000 as the result of the passing of two former employees in 2021, gains on loans sold which decreased $1,025,000 due to a decrease in refinancing activity with the rise in market interest rates that occurred during 2022, a loss on equity securities of $247,000, compared to a gain of $339,000 in 2021, as a result of market performance when comparing 2022 to 2021. Other income decreased $553,000 due to fee income on derivative transactions for customers recorded in 2021.

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Total non-interest expenses for 2022 totaled $44,694,000 compared to $41,550,000 for 2021, which is an increase of $3,144,000. Salary and benefit costs increased $1,935,000 due to an additional 14.7 full time equivalent employees (FTEs) and merit increases for 2022. Additionally, salary and benefit costs for 2021 benefitted from a $400,000 reduction in deferred compensation due to the passing of a former executive in the first quarter of 2021.   The decrease in ORE expenses of $422,000 is due to gains on the sale of ORE properties that totaled $427,000, compared to a minimal loss in 2021. The increase in professional fees is driven by $250,000 of  merger related expenses due to the HVB merger that is expected to close in 2023. Other expenses increased due charge-offs associated with fraudulent account activity, marketing expenses and the Delaware franchise tax.

•	The provision for income taxes increased $236,000 when comparing 2022 to 2021 as a result of a death proceeds being excluded from taxable income and certain merger related expenses not being tax deductible. The effective tax rate was 18.1% and 17.5% for 2022 and 2021, respectively.

Fourth Quarter of 2022 Compared to the Fourth Quarter of 2021

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For the three months ended December 31, 2022, net income totaled $7,875,000 which compares to net income of $6,944,000 for the comparable period of 2021, an increase of $931,000 or 13.4%.  Basic earnings per share of $1.99 for the three months ended December 31, 2022 compares to $1.74 for the 2021 comparable period. Annualized return on equity for the three months ended December 31, 2022 and 2021 was 13.58% and 13.11%, while annualized return on assets was 1.34% for both periods.

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Net interest income before the provision for loan losses for the three months ended December 31, 2022 totaled $19,297,000 compared to $16,869,000 for the three months ended December 31, 2021, resulting in an increase of $2,428,000. Average interest earning assets increased $275.7 million for the three months ended December 31, 2022 compared to the same period last year as a result of the  organic loan growth.  Average loans increased $270.8 million while average investment securities increased $104.6 million and average interest bearing cash holdings decreased $94.5 million. The tax effected net interest margin for the three months ended December 31, 2022 was 3.46% compared to 3.44% for the same period last year.

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The provision for loan losses for the three months ended December 31, 2022 was $258,000 compared to no provision for loan losses for the comparable period in 2021. The increase in the provision is attributable to the organic commercial loan growth experienced in the fourth quarter of 2022 compared to organic loan growth in 2021’s fourth quarter.

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Total non-interest income was $2,311,000 for the three months ended December 31, 2022, which is $201,000 less than the comparable period last year.  The primary drivers were gains on loans sold which decreased $157,000 due to a decrease in refinancing activity with the rise in market interest rates that occurred in 2022, and a loss on equity securities of $49,000, compared to a gain of $51,000 in the comparable period in 2021, as a result of market performance when comparing 2022 to 2021.

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Total non-interest expenses for the three months ended December 31, 2022 totaled $11,649,000 compared to $10,883,000 for the same period last year, which is an increase of $766,000, or 7.0%. Salary and benefit costs increased $283,000 due to an addition of 20.8 FTEs and merit increases for 2022. The increase in professional fees is driver by $100,000 of merger related expenses due to the HVB merger that is expected to close in 2023. The increase in FDIC insurance expense is due to asset growth experienced by the Bank in the third and fourth quarters resulting in a higher assessment.

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The provision for income taxes increased $272,000 when comparing the three months ended December 31, 2022 to the same period in 2021 as a result of an increase in income before income tax of $1,203,000.  The effective tax rate was 18.8% and 18.3% for the three months ended December 31, 2022 and 2021, respectively.

Balance Sheet and Other Information:

•	At December 31, 2022, total assets were $2.33 billion compared to $2.14 billion at December 31, 2021. The loan to deposit ratio as of December 31, 2022 was 93.54% compared to 78.51% as of December 31, 2021.

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Available for sale securities of $439.5 million at December 31, 2022 increased $27.1 million from December 31, 2021. The yield on the investment portfolio decreased from 1.96% for 2021 to 1.90% for 2022 on a tax equivalent basis due to the amount of securities purchased in 2020 and 2021, which was a low rate environment due to the pandemic. Purchases made in 2022 have been at higher rates than those made in 2020 and 2021 and have increased investment yields. Investment yields for the fourth quarter of 2022 were 2.08% compared to 1.73% for the fourth quarter of 2021.

•	Net loans as of December 31, 2022 totaled $1.71 billion and increased $282.2 million from December 31, 2021, which is 19.8% and was primarily driven by growth in the Delaware market.

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The allowance for loan losses totaled $18,552,000 at December 31, 2022 which is an increase of $1,248,000 from December 31, 2021.  The increase is due to recording a provision for loan losses of $1,683,000 and recoveries of $37,000, offset by charge-offs of $472,000, which were primarily due to one loan relationship. The allowance as a percent of total loans was 1.08% as of December 31, 2022 and 1.20% as of December 31, 2021.

•	Deposits increased $8.1 million from December 31, 2021, to $1.84 billion at December 31, 2022, primarily due brokered deposits issued in the fourth quarter of 2022. Competitive pressure for deposits increased significantly in the fourth quarter of 2022.

•	Borrowings increased $183.3 million from December 31, 2021 to $257.3 million at December 31, 2022 to fund organic loan growth.

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Stockholders’ equity totaled $200.1 million at December 31, 2022, compared to $212.5 million at December 31, 2021, a decrease of $12.3 million. Excluding accumulated other comprehensive loss (AOCI), stockholders equity increased $20.6 million to $233.3 million (non-GAAP). (1) The increase in stockholders equity, excluding AOCI, was attributable to net income for 2022 totaling $29.1 million, offset by cash dividends for 2022 totaling $7.6 million and net treasury stock activity of $826,000.  As a result of increases in market interest rates decreasing the fair value of investment securities, the unrealized loss on available for sale investment securities, net of tax, increased $37.8 million from December 31, 2021.

Dividend Declared

On December 6, 2022, the Board of Directors declared a cash dividend of $0.480 per share, which was paid on December 30, 2022 to shareholders of record at the close of business on December 16, 2022. This quarterly cash dividend is an increase of 3.13% over the regular cash dividend of $0.465 per share declared one year ago, as adjusted for the 1% stock dividend declared in June 2022.

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.