citizens financial services, inc. reports unaudited third quarter 2022 financial results

MANSFIELD, PENNSYLVANIA— October 24, 2022 – Citizens Financial Services, Inc. (Nasdaq: CZFS), parent company of First Citizens Community Bank, released today its unaudited consolidated financial results for the three and nine months ended September 30, 2022.

Highlights

•	Citizens Financial Services, Inc. and HV Bancorp, Inc. sign definitive agreement for Citizens Financial Services, Inc. to acquire HV Bancorp, Inc. The transaction is expected to close in the first half of 2023.

•	Two new branches are scheduled to open in November of 2022 in Ephrata, Pennsylvania and Greenville, Delaware.

•	Net loan growth for the quarter was $141.9 million and for year-to-date was $295.4 million or 27.7% on an annualized basis.

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Net income was $21.2 million for the nine months ended September 30, 2022, which is 4.5% less than the net income for 2021’s comparable period. 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 the nine months ended September 30, 2022 was 17.9% compared to 17.3% in the comparable period in 2021, with the increase being due to life insurance proceeds being exempt from taxable income.

•	Net income was $7.5 million for the three months ended September 30, 2022, which is 6.8% higher than the net income for 2021’s comparable period. The effective tax rate for the three months ended September 30, 2022 was 18.0% compared to 18.3% in the comparable period in 2021.

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Net interest income before the provision for loan losses was $52.8 million for the nine months ended September 30, 2022, an increase of $3.6 million, or 7.3%, over the same period a year ago. Amortization associated with Paycheck Protection Program (“PPP”) loans was $1,384,000 less in 2022 than 2021.

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Non-performing assets decreased $2,130,000 since September 30, 2021 and totaled $8,088,000 as of September 30, 2022, which is $754,000 less than the balance at December 31, 2021. As a percent of loans, non-performing assets totaled 0.47%, 0.61% and 0.71% as of September 30, 2022, December 31, 2021 and September 30, 2021, respectively.

•	Return on average equity for the three and nine months (annualized) ended September 30, 2022 was 13.34% and 12.77% compared to 13.65% and 14.66% for the three and nine months (annualized) ended September 30, 2021.

•	Return on average tangible equity for the three and nine months (annualized) ended September 30, 2022 was 15.60% and 15.00% compared to 16.25% and 17.53% for the three and nine months (annualized) ended September 30, 2021 (non-GAAP). (1)

•	Return on average assets for the three and nine months (annualized) ended September 30, 2022 was 1.31% and 1.27% compared to 1.40% and 1.49% for the three and nine months (annualized) ended September 30, 2021.

•	If the life insurance proceeds on a former employees are excluded, the return on average equity and average assets would have been 13.90% and 1.41%, respectively, for nine months (annualized) ended June 30, 2021 (non-GAAP). (1)

Nine Months Ended September 30, 2022 Compared to 2021

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For the nine months ended September 30, 2022, net income totaled $21,185,000 which compares to net income of $22,174,000 for the first nine months of 2021, a decrease of $989,000 or 4.5%.  Basic earnings per share of $5.34 for the first nine months of 2022 compares to $5.56 for the first nine months last year.  Annualized return on equity for the nine months ended September 30, 2022 and 2021 was 12.77% and 14.66%, while annualized return on assets was 1.27% and 1.49%, respectively, with ratios in 2021 benefitting from life insurance proceeds on two former employees. 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 $5.20 compared to $5.34 for the first nine months of 2022 (non-GAAP) (1).

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Net interest income before the provision for loan loss for the nine months ended September 30, 2022 totaled $52,837,000 compared to $49,243,000 for the nine months ended September 30, 2021, resulting in an increase of $3,594,000, or 7.3%. Amortization on PPP loans decreased $1,384,000 during 2022 compared to 2021. Average interest earning assets increased $233.8 million for the nine months ended September 30, 2022 compared to the same period last year, as a result of growth in investment securities and organic loan growth funded by deposit growth and borrowings.  Average loans increased $134.4 million, while average investment securities increased $146.8 million. The yield on interest earning assets decreased 16 basis points to 3.78%, while the cost of interest-bearing liabilities remained steady at 0.51%. The decrease in amortization on PPP loans accounts for 13 basis points of the decrease in margin and the yield on interest earning assets. A large component of the remaining decrease is due to the percentage of interest earning assets in investments in 2022 that were purchased during a lower interest rate environment.

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The provision for loan losses for the nine months ended September 30, 2022 was $1,425,000, a $125,000 decrease to the comparable period in 2021. The decrease in the provision is attributable to the improved credit metrics of the loan portfolio in comparison to September 30, 2021 and less impact from the COVID-19 pandemic on the economy, both of which helped offset the impact of the organic loan growth experienced.

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Total non-interest income was $7,427,000 for the nine months ended September 30, 2022, which is $2,366,000 less than the non-interest income of $9,793,000 for the same period last year. The primary drivers were the earnings of bank owned life insurance, which decreased $1,008,000 as the result of the passing of two former employees in 2021, gains on loans sold which decreased $868,000 due to a decrease in refinancing activity with the rise in market interest rates that occurred during 2022, a loss on equity securities of $486,000 as a result of market performance when comparing 2022 to 2021. Other income decreased $572,000 due to fee income on derivative transactions for customers recorded in 2021.

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Total non-interest expenses for the nine months ended September 30, 2022 totaled $33,045,000 compared to $30,667,000 for the same period last year, which is an increase of $2,378,000. Salary and benefit costs increased $1,652,000 due to an addition 13.2 FTEs and merit increases for 2022. Additionally, salary and benefit costs for 2021 benefitted from a $422,000 reduction in deferred compensation due to the passing of a former executive in the first quarter of 2021.   The decrease in ORE expenses of $508,000 is due to gains on the sale of ORE properties that totaled $481,000, compared to minimal gains in 2021. Other expenses increased due charge-offs associated with fraudulent account activity, marketing expenses and the Delaware franchise tax.

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The provision for income taxes decreased $36,000 when comparing the nine months ended September 30, 2022 to the same period in 2021 as a result of a decrease in income before income tax of $1,025,000. The effective tax rate was 17.9% and 17.3% for the nine months ended September 30, 2022 and 2021, respectively. The earnings on bank owned life insurance are exempt from Federal income tax and accounts for the difference in tax rates between 2021 and 2022.

Third Quarter of 2022 Compared to the Third Quarter of 2021

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For the three months ended September 30, 2022, net income totaled $7,544,000 which compares to net income of $7,064,000 for the comparable period of 2021, an increase of $480,000 or 6.8%.  Basic earnings per share of $1.90 for the three months ended September 30, 2022 compares to $1.77 for the 2021 comparable period. Annualized return on equity for the three months ended September 30, 2022 and 2021 was 13.34% and 13.65%, while annualized return on assets was 1.31% and 1.40%, respectively.

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Net interest income before the provision for loan losses for the three months ended September 30, 2022 totaled $18,846,000 compared to $16,590,000 for the three months ended September 30, 2021, resulting in an increase of $2,256,000. Average interest earning assets increased $282.0 million for the three months ended September 30, 2022 compared to the same period last year as a result of the  organic loan and deposit growth.  Average loans increased $241.7 million while average investment securities increased $143.0 million and average interest bearing cash holdings decreased $97.1 million. The tax effected net interest margin for the three months ended September 30, 2022 was 3.44% compared to 3.47% for the same period last year.

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The provision for loan losses for the three months ended September 30, 2022 was $725,000, a $325,000 increase to the comparable period in 2021. The increase in the provision is attributable to the organic loan growth that occurred in the third quarter of 2022 compared to organic loan growth in 2021.

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Total non-interest income was $2,692,000 for the three months ended September 30, 2022, which is $160,000 less than the comparable period last year.  The primary drivers were gains on loans sold which decreased $200,000 due to a decrease in refinancing activity with the rise in market interest rates that occurred in 2022, and a loss on equity and available for sale securities of $91,000 and $168,000, respectively, as a result of market performance when comparing 2022 to 2021. Service charges increased $299,000 for the three months ended September 30, 2022 compared to the same period in 2021 due to additional debit card usage and a new contract associated with interchange processing.

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Total non-interest expenses for the three months ended September 30, 2022 totaled $11,614,000 compared to $10,400,000 for the same period last year, which is an increase of $1,214,000, or 11.7%. Salary and benefit costs increased $365,000 due to an addition of 14.9 FTEs and merit increases for 2022. The increase in other expenses was due to charge-offs associated with fraudulent account activity, marketing expenses and the Delaware franchise tax.

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The provision for income taxes increased $77,000 when comparing the three months ended September 30, 2022 to the same period in 2021 as a result of an increase in income before income tax of $557,000.  The effective tax rate was 18.0% and 18.3% for the three months ended September 30, 2022 and 2021, respectively.

Balance Sheet and Other Information:

•	At September 30, 2022, total assets were $2.35 billion compared to $2.14 billion at December 31, 2021 and $2.05 billion at September 30, 2021. The loan to deposit ratio as of September 30, 2022 was 93.00% compared to 78.51% as of December 31, 2021 and 82.88% as of September 30, 2021.

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Available for sale securities of $445.2 million at September 30, 2022 increased $32.8 million from December 31, 2021 and $48.2 million from September 30, 2021. The yield on the investment portfolio decreased from 2.05% for the nine months ended September 30, 2021 to 1.83% for the nine months ended September 30, 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 helped to stabilize investment yields.

•	Net loans as of September 30, 2022 totaled $1.72 billion and increased $295.4 million from December 31, 2021, which is 27.7% on an annualized basis. In comparison to September 30, 2021, net loans have grown $296.4 million, or 20.6%.

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The allowance for loan losses totaled $18,291,000 at September 30, 2022 which is an increase of $987,000 from December 31, 2021.  The increase is due to recording a provision for loan losses of $1,425,000 and recoveries of $27,000, offset by charge-offs of $465,000. The allowance as a percent of total loans was 1.05% as of September 30, 2022 and 1.20% as of December 31, 2021.

•	Deposits increased $32.6 million from December 31, 2021, to $1.87 billion at September 30, 2022, primarily due to customers holding more cash and new customer relationships in the Delaware market.

•	Borrowings increased $184.9 million from December 31, 2021 to $258.9 million at September 30, 2022 to fund organic loan growth.

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Stockholders’ equity totaled $191.4 million at September 30, 2022, compared to $212.5 million at December 31, 2021, a decrease of $21.1 million. Excluding accumulated other comprehensive loss (AOCI), stockholders equity increased $14.6 million and totals $227.3 million. The increase in stockholders equity, excluding AOCI, was attributable to net income for the nine months ended September 30, 2022 totaling $21.2 million, offset by cash dividends for the first three quarters of 2022 totaling $5.7 million and net treasury stock activity of $818,000.  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 $40.0 million from December 31, 2021.

Dividend Declared

On September 6, 2022, the Board of Directors declared a cash dividend of $0.480 per share, which was paid on September 30, 2022 to shareholders of record at the close of business on September 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.