citizens financial services, inc. reports unaudited first quarter 2023 financial results

MANSFIELD, PENNSYLVANIA— April 27, 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 ended March 31, 2023.

Highlights

•	Citizens Financial Services, Inc. has received regulatory approval for the acquisition of HV Bancorp, Inc.(“HVB”), with the transaction expected to close on June 16, 2023.

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Net income was $6.9 million for the three months ended March 31, 2023, which is 1.9% more than the net income for 2022’s comparable period. The increase was due to an increase in net interest income. The effective tax rate for the three months ended March 31, 2023 was 19.0% compared to 17.9% in the comparable period in 2022, with the increase being due an increase in income before the provision of income taxes of $264,000 and certain merger and acquisition expenses not being tax deductible.

•	Net interest income before the provision for credit losses was $18.1 million for the three months ended March 31, 2023, an increase of $1,818,000, or 11.2%, over the same period a year ago.

•	Return on average equity for the three months (annualized) ended March 31, 2023 was 11.49% compared to 12.46% for the three months (annualized) ended March 31, 2022.

•	Return on average tangible equity for the three months (annualized) ended March 31, 2023 was 13.30% compared to 14.70% for the three months (annualized) ended March 31, 2022 (non-GAAP). (1)

•	Return on average assets for the three months (annualized) ended March 31, 2023 was 1.16% compared to 1.26% for the three months (annualized) ended March 31, 2022.

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Non-performing assets increased $1,952,000 since March 31, 2022 and total $10,905,000 as of March 31, 2023, which is $3.4 million higher than the balance at December 31, 2022, and is due to two commercial loan relationships, secured by real estate, being placed on non-accrual status during the first quarter of 2023. As a percent of loans, non-performing assets totaled 0.63%, 0.43% and 0.61% as of March 31, 2023, December 31, 2022 and March 31, 2022.

First Quarter of 2023 Compared to the First Quarter of 2022

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For the three months ended March 31, 2023, net income totaled $6,867,000 which compares to net income of $6,740,000 for the comparable period of 2022, an increase of $127,000 or 1.9%.  Basic earnings per share of $1.73 for the three months ended March 31, 2023 compares to $1.69 for the 2022 comparable period. Annualized return on equity for the three months ended March 31, 2023 and 2022 was 11.49% and 12.46%, while annualized return on assets was 1.16% and 1.26%, respectively.

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Net interest income before the provision for credit losses for the three months ended March 31, 2023 totaled $18,080,000 compared to $16,262,000 for the three months ended March 31, 2022, resulting in an increase of $1,818,000, or 11.2%. Average interest earning assets increased $211.6 million for the three months ended March 31, 2023 compared to the same period last year as a result of growth in investments and organic loan growth funded by borrowings.  Average loans increased $279.0 million, while average investment securities increased $46.8 million. The tax effected net interest margin for the three months ended March 31, 2023 was 3.30% compared to 3.27% for the same period last year. The yield on interest earning assets increased 98 basis points to 4.56%, while the cost of interest bearing liabilities increased 1.25% to 1.65% due to the rise in market interest rates and competitive pressure.

•	Due to limited loan activity in the first quarter of 2023, no provision was recorded for the first quarter of 2023 compared to a provision of $250,000 for the first quarter of 2022.

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Total non-interest income was $2,174,000 for the three months ended March 31, 2023, which is $257,000 less than the comparable period last year.  The primary drivers were an increase in the  loss on equity securities of $173,000 as a result of market performance when comparing 2023 to 2022 and gains on loans sold which decreased $60,000 due to a decrease in refinancing activity with the rise in market rates that occurred throughout 2022 and the first quarter of 2023.

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Total non-interest expenses for the three months ended March 31, 2023 totaled $11,778,000 compared to $10,231,000 for the same period last year, which is an increase of $1,547,000, or 15.1%. Salary and benefit costs increased $764,000 due to an additional 8.4 FTEs and merit increases for 2022 as well as an increase in health insurance costs of $209,000. The increase in ORE expenses of $393,000 is due to gains on the sale of ORE properties that totaled $487,000 in 2022. The gains for 2023’s first quarter total $25,000. Merger and acquisitions costs for the merger with HVB totaled $244,000 and include professional and consulting fees, printing and travel related expenses.

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The provision for income taxes increased $137,000 when comparing the three months ended March 31, 2023 to the same period in 2022 as a result of an increase in income before income tax of $264,000.  The effective tax rate was 19.0% and 17.9% for the three months ended March 31, 2023 and 2022, respectively. It should be noted the certain merger and acquisition expenses are not tax-deductible.

Balance Sheet and Other Information:

•	At March 31, 2023, total assets were $2.34 billion compared to $2.33 billion at December 31, 2022 and $2.18 billion at March 31, 2022. The loan to deposit ratio as of March 31, 2023 was 95.77% compared to 93.54% as of December 31, 2022 and 78.69% as of March 31, 2022.

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Available for sale securities of $443.4 million at March 31, 2023 increased $3.9 million from December 31, 2022 and decreased $18.1 million from March 31, 2022. The yield on the investment portfolio increased from 1.70% to 2.12% on a tax equivalent basis due to securities purchased in 2022 during a higher rate environment. Investment activity has been limited in the first quarter of 2023 as we prepare for the merger with HVB.

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Net loans as of March 31, 2023 totaled $1.71 billion and increased $1.8 million from December 31, 2022, due to a decrease in the allowance for credit losses - loans as a result of implementing the current expected credit losses (CECL) accounting standard, effective January 1, 2023. In comparison to March 31, 2022, loans have grown $247.1 million, or 16.9%.

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The allowance for credit losses - loans totaled $15,250,000 at March 31, 2023 which is a decrease of $3,302,000 from December 31, 2022 and is due to implementing the CECL accounting standard, effective January 1, 2023. Due to limited loan activity during the first quarter of 2023, no provision was recorded. Loan recoveries and charge-offs were $5,000 and $7,000, respectively, for the three months ended March 31, 2023. The allowance as a percent of total loans was 0.88% as of March 31, 2023 and 1.08% as of December 31, 2022.

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Deposits decreased $44.5 million from December 31, 2022, to $1.80 billion at March 31, 2023. With the rise in interest rates, competitive pressure for deposits has increased. Additionally, we have numerous state and political organizations as customers who are utilizing funds during the first quarter of 2023 for various projects and bond payments. We have not lost any major deposit customers during the first quarter of 2023.

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Stockholders’ equity totaled $213.2 million at March 31, 2023, compared to $200.1 million at December 31, 2022, an increase of $13.1 million. Excluding accumulated other comprehensive loss (AOCI), stockholders equity increased $6.7 million and totals $240.0 million. The increase in stockholders equity, excluding AOCI, was attributable to net income for the three months ended March 31, 2023 totaling $6.9 million, offset by cash dividends for the first quarter totaling $1.9 and an increase of $1.8 million attributable to the CECL adjustment made effective January 1, 2023. As a result of changes in market interest rates impacting the fair value of investment securities and swaps, AOCI increased $6.4 million from December 31, 2022.

Dividend Declared

On February 28, 2023, the Board of Directors declared a cash dividend of $0.485 per share, which was paid on March 31, 2023 to shareholders of record at the close of business on March 10, 2023. This quarterly cash dividend is an increase of 3.1% over the regular cash dividend of $0.470 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