MANSFIELD, PENNSYLVANIA—January 30, 2024 – 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, 2023.

Highlights

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During the fourth quarter of 2023, we continued to integrate the assets and employees acquired as part of the acquisition of HV Bancorp, Inc. (“HVB”) into the Company. We continue to be excited by the opportunities these markets and individuals represent for the Company. The acquisition of HVB in the first half of 2023 contributed significant growth to net interest income in the second half of 2023. Merger and acquisitions costs for 2023 total $9.3 million. The provision for credit losses on non-purchase credit deteriorated loans (the “NPC Provision”) was $4.6 million for 2023.

•	Net income was $17.8 million for 2023, which is $11.3 million, or 38.7% lower than 2022’s net income due to the one-time merger and acquisition costs and the NPC Provision.  The effective tax rate for 2023 was 17.2% compared to 18.1% in 2022.

•	Net income was $7.5 million for the three months ended December 31, 2023, which is 4.3% lower than the net income for 2022’s comparable period. The effective tax rate for the three months ended December 31, 2023 was 18.3% compared to 18.8% in the comparable period in 2022.

•	Net interest income before the provision for credit losses was $80.3 million for 2023, an increase of $8.1 million, or 11.3%, over 2022.

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Return on average equity for the three months (annualized) and the year ended December 31, 2023 was 9.93% and 6.52% compared to 13.58% and 12.98% for the three months (annualized) and the year ended December 31, 2022, respectively. If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average equity for the year ended December 31, 2023  and 2022 would have been 10.52% and 13.11%, respectively (1).

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Return on average tangible equity (non-GAAP) for the three months (annualized) and the year ended December 31, 2023 was 14.00% and 8.47% compared to 15.80% and 15.20% for the three months (annualized) and the year ended December 31, 2022, respectively. If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average tangible equity for 2023 and 2022 would have been 13.67% and 15.36%, respectively. (1)

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Return on average assets for the three months (annualized) and the year ended December 31, 2023 was 1.00% and 0.66% compared to 1.34% and 1.29% for the three months (annualized) and the year ended December 31, 2022, respectively. If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average assets for 2023 and 2022 would have been 1.07% and 1.30%, respectively (1).

2023 Compared to 2022

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For 2023, net income totaled $17,811,000 which compares to net income of $29,060,000 for 2022, a decrease of $11,249,000. Basic and diluted earnings per share of $4.06 for 2023 compares to $7.25 for 2022.  Return on equity 2023 and 2022 was 6.52% and 12.98%, while return on assets was 0.66% and 1.29%, respectively. If the death benefits received from life insurance on a former employee, the one-time costs associated with the acquisition and the NPC Provision are excluded, basic earnings per share, the annualized return on average equity and average assets for 2023 would be $6.56, 10.52% and 1.07%, respectively, compared to $7.32, 13.11% and 1.30%, respectively for 2022. (1)

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Net interest income before the provision for credit loss for 2023 totaled $80,260,000 compared to $72,134,000 for 2022, resulting in an increase of $8,126,000, or 11.3%.  Average interest earning assets increased $382.4 million 2023 compared to 2022, primarily due to the HVB acquisition. Average loans increased $410.7 million while average investment securities increased $3.0 million. The yield on interest earning assets increased 1.14% to 5.07%, while the cost of interest-bearing liabilities increased 165 basis points to 2.34% due to the rise in market interest rates and competitive pressure. The tax effected net interest margin for 2023 was 3.21% compared to 3.41% for 2022.

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The provision for credit losses for 2023 was $5,528,000 compared to $1,683,000 for 2022, an increase of $3,845,000.  As a result of the acquisition, the Company recorded a $4.6 million provision for credit losses for loans acquired that did not have any credit deterioration at the time of acquisition. Excluding the impact of the acquisition, the provision would have decreased $746,000 when comparing 2023 to 2022 with the decrease being attributable to lower loan growth in 2023 compared to 2022.

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Total non-interest income was $11,605,000 for 2023, which is $1,867,000 more than the non-interest income of $9,738,000 for 2022. The primary driver was revenues associated with the HVB acquisition, which includes additional service charge revenue, earnings on bank owned life insurance and gains on loans sold. In addition to the earnings on bank owned life insurance obtained as part of the acquisition, the Company received $195,000 of death benefits upon the passing of a former employee.

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Total non-interest expenses for 2023 totaled $64,822,000 compared to $44,694,000 for 2022, which is an increase of $20,128,000, or 45.0%. The primary driver of the increase is the merger and acquisition costs of completing the HVB acquisition that total $9,269,000 for 2023 compared to $292,000 for 2022. Merger and acquisitions costs for the merger with HVB include professional and consulting fees, printing, travel, contract termination payments and severance-related expenses. Salary and benefit costs increased $7,153,000 due to an additional 47.8 FTEs due to the acquisition, merit increases for 2023 as well as an increase in health insurance costs of $1,093,000. The increases in occupancy and furniture and fixtures was due to the acquisition and additional branches as part of it. Due to growth that occurred in 2022 and the acquisition, FDIC insurance expense increased $799,000.

•	The provision for income taxes decreased $2,731,000 when comparing 2023 to 2022 as a result of a decrease in income before income tax of $13,980,000 primarily due to the one-time merger costs.

Three Months Ended December 31, 2023 Compared to December 31, 2022

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For the three months ended December 31, 2023, net income totaled $7,540,000 which compares to net income of $7,875,000 for the comparable period of 2022, a decrease of $335,000.  Basic and diluted earnings per share of $1.60 for the three months ended December 31, 2023 compares to $1.97 for the 2022 comparable period. Annualized return on equity for the three months ended December 31, 2023 and 2022 was 9.93% and 13.58%, while annualized return on assets was 1.00% and 1.34%, respectively. If the one-time costs associated with the acquisition are excluded, basic earnings per share, the annualized return on average equity and average assets for 2022 would have been $2.04, 14.08% and 1.39%, respectively. (1)

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Net interest income before the provision for credit loss for the three months ended December 31, 2023 totaled $21,855,000 compared to $19,297,000 for the three months ended December 31, 2022, resulting in an increase of $2,558,000, or 13.3%. Average interest earning assets increased $556.2 million for the three months ended December 31, 2023 compared to the same period last year as a result of the HVB acquisition.  Average loans increased $572.7 million while average investment securities decreased $19.8 million. The tax effected net interest margin for the three months ended September 30, 2023 was 3.13% compared to 3.46% for the same period last year, which was impacted by the increase in the average cost on interest bearing liabilities of 172 basis points, to 2.89%.

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The provision for credit losses for the three months ended December 31, 2023 was $200,000 compared to $258,000 for the three months ended December 31, 2022, a decrease of $58,000. The decrease in the provision is due to lower loan growth in the fourth quarter of 2023 compared to the same period in 2022.

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Total non-interest income was $3,489,000 for the three months ended December 31, 2023, which is $1,178,000 more than for the comparable period last year.  The primary driver was the impact of the acquisition, which increased service charge revenue, gains on loans sold and earnings on bank owned life insurance. In addition, we recognized a gain on the equity security portfolio in the fourth quarter of 2023 due to market conditions compared to a loss in the comparable period of 2022.

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Total non-interest expenses for the three months ended December 31, 2023 totaled $15,920,000 compared to $11,649,000 for the same period last year, which is an increase of $4,271,000. Salaries and benefits increased $2.5 million due to an increase in headcount of 85 FTEs as a result of the acquisition. The increases in occupancy and furniture and fixtures was due to the acquisition and additional branches as part of it. Due to the acquisition, FDIC insurance expense increased $239,000. Other expenses increased due to increases in the Delaware franchise tax, contributions, appraisal and credit bureau fees, and travel and entertainments costs associated with the southeast Pennsylvania and Delaware markets.

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The provision for income taxes decreased $142,000 when comparing the three months ended December 31, 2023 to the same period in 2022 as a result of a decrease in income before income tax of $477,000.  The effective tax rate was 18.3% and 18.8% for the three months ended December 31, 2023 and 2022, respectively.

Balance Sheet and Other Information:

•	At December 31, 2023, total assets were $2.98 billion, compared to $2.33 billion at December 31, 2022. The loan to deposit ratio as of December 31, 2023 was 96.87% compared to 93.54% as of December 31, 2022.

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Available for sale securities of $417.6 million at December 31, 2023 decreased $21.9 million from December 31, 2022. As part of the HVB acquisition, $79.2 million of available for sale securities were acquired, of which $76.1 million were sold prior to June 30, 2023.  The yield on the investment portfolio increased from 1.90% to 2.20% on a tax equivalent basis.

•	Net loans as of December 31, 2023 totaled $2.23 billion and increased $521.2 million from December 31, 2022 as a result of the acquisition. Excluding the acquisition, loans would have increased $44.0 million during 2023.

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Non-performing loans totaled $12.7 million at December 31, 2023, which is an increase of $5.6 million compared to December 31, 2022. The majority of the increase is attributable to loans acquired as part of the HVB acquisition. At December 31, 2023, $3.2 million of loans acquired as part of the HVB acquisition are considered non-accrual. The remaining increase is attributable to one commercial relationship. Loans past due 30-89 days total $10.5 million as of December 31, 2023 compared to $3.3 million as of December 31, 2023. Of the $7.1 million increase, $6.6 million relate to loans acquired as part of the HVB acquisition.

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The allowance for credit losses - loans totaled $21,153,000 at December 31, 2023 which is an increase of $2,601,000 from December 31, 2022 and is due to the acquisition and the implementation of the CECL accounting standard effective January 1, 2023. The impact of the acquisition was an increase of $6.3 million, of which $4.6 million was in provision with the remaining $1.7 million due to purchase credit deteriorated (“PCD”) loans. The impact of adopting CECL was a decrease of $3.3 million in the allowance for credit losses – loans.  Loan recoveries and charge-offs were $49,000 and $1,329,000, respectively, for 2023. Of the $1,329,000 charge-off, $1,104,000 was related to loans acquired as part of the acquisition that were fully reserved at the time of the acquisition. A majority of the remaining charge-off was also related to a loan acquired as part of the acquisition that filed for bankruptcy subsequent to the acquisition. A provision for credit losses – loans of $901,000 was recorded during 2023. The allowance as a percent of total loans was 0.94% as of December 31, 2023 and 1.08% as of December 31, 2022.

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Deposits increased $477.3 million from December 31, 2022, to $2.32 billion at December 31, 2023, due to the acquisition, which increased deposits by $533.4 million. Excluding the acquisition, deposits decreased $56.1 million. With the rise in market interest rates, competition for deposits has increased. Additionally, we have numerous state and political organizations as customers who utilized funds during the first half of 2023 for various projects and bond payments. At December 31, 2023, the Bank estimates that balances held by customers in excess of the FDIC insurance limit ($250,000 per insured account) totaled $1.09 billion, or 46.7% of the Bank’s total deposits. Included in this balance are balances held through Intrafi, which provides customers with  FDIC insurance coverage by placing customer funds with insured banks within the Intrafi network, as well as deposits collateralized by securities (almost exclusively municipal deposits), which together total $512.8 million, or 22.1% of the Bank’s total deposits, as of December 31, 2023.

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Stockholders’ equity totaled $279.7 million at December 31, 2023, compared to $200.1 million at December 31, 2022, an increase of $79.5 million. The increase was attributable to issuing 693,858 shares with a value of $60.1 million as part of the acquisition and net income for 2023 totaling $17.8 million, offset by net cash dividends for 2023 totaling $8.5 million, net treasury stock activity of $181,000 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, accumulated other comprehensive loss decreased $8.2 million from December 31, 2022.

Dividend Declared

On December 5, 2023, the Board of Directors declared a cash dividend of $0.49 per share, which was paid on December 29, 2023 to shareholders of record at the close of business on December 15, 2023. The quarterly cash dividend is an increase of 3.1% over the regular cash dividend of $0.475 per share declared one year ago, as adjusted for the 1% stock dividend declared in June 2023.

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