CITIZENS FINANCIAL SERVICES, INC. REPORTS UNAUDITED SECOND QUARTER 2023 FINANCIAL RESULTS

MANSFIELD, Pa., July 31, 2023 /PRNewswire/ -- Citizens Financial Services, Inc. (Nasdaq: CZFS), parent company of First Citizens Community Bank, released today its unaudited consolidated financial results for the three and six months ended June 30, 2023.

Highlights

• The acquisition of HV Bancorp, Inc.("HVB") was completed on June 16, 2023. The acquisition included available for sale investments of $79.2 million, loans with a fair value of $486.1 million and deposits with a fair value of $533.4 million. Based on the closing price on June 16, the deal valuation was approximately $76.7 million. Merger and acquisitions costs for 2023 total $8.6 million through June 30, 2023. The provision for credit losses on non-purchase credit deteriorated loans (the "NPC Provision") was $4.6 million.
• Net income for the first six months of 2023 was $2.7 million, which was $10.9 million, or 80.0% less than 2022's net income through June 30, 2022 due to the one-time merger and acquisition costs and the NPC Provision. The effective tax rate for the first six months of 2023 was 13.4% compared to 17.8% in the comparable period in 2022.
• Net loss was $4.1 million for the three months ended June 30, 2023, which was $11.1 million or 160.0% less than the net income for 2022's comparable period. The effective tax rate for the three months ended June 30, 2023 was 22.3% compared to 17.7% in the comparable period in 2022.
• Net interest income before the provision for credit losses was $36.0 million for the six months ended June 30, 2023, an increase of $2.0 million, or 5.9%, over the same period a year ago.
• Return on average equity for the three and six months (annualized) ended June 30, 2023 was (6.62%) and 2.22% compared to 12.49% and 12.48% for the three and six months (annualized) ended June 30, 2022. If the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average equity for the three and six months (annualized) ended June 30, 2023 would have been 10.03% and 10.92%, respectively (1).
• Return on average tangible equity for the three and six months (annualized) ended June 30, 2023 was (7.92%) and 2.62% compared to 14.68% and 14.69% for the three and six months (annualized) ended June 30, 2022. (1) If the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average tangible equity for the three and six months (annualized) ended June 30, 2023 would have been 12.00% and 12.86%. (1)
• Return on average assets for the three and six months (annualized) ended June 30, 2023 was (0.68%) and 0.23% compared to 1.25% for the three and six months (annualized) ended June 30, 2022. If the one-time costs associated with the acquisition and the NPC Provision are excluded, the return on average assets for the three and six months (annualized) ended June 30, 2023 would have been 1.03% and 1.11% (1).

Six Months Ended June 30, 2023 Compared to 2022

• For the six months ended June 30, 2023, net income totaled $2,723,000 which compares to net income of $13,641,000 for the first six months of 2022, a decrease of $10,918,000. Basic earnings per share of $0.67 for the first six months of 2023 compares to $3.40 for the first six months last year. Annualized return on equity for the six months ended June 30, 2023 and 2022 was 2.22% and 12.48%, while annualized return on assets was 0.23% and 1.25%, respectively. If the one time costs associated with the merger and the NPC Provision, are excluded, basic earnings per share, the annualized return on average equity and average assets would be $3.28, 10.92% and 1.11%, respectively. (1)
• Net interest income before the provision for credit loss for the six months ended June 30, 2023 totaled $36,001,000 compared to $33,991,000 for the six months ended June 30, 2022, resulting in an increase of $2,010,000, or 5.9%. Average interest earning assets increased $206.7 million for the six months ended June 30, 2023 compared to the same period last year, primarily due to growth that occurred in the second half of 2022 in the Delaware market as the HVB acquisition was completed late in the quarter ended June 30, 2023. Average loans increased $262.7 million while average investment securities increased $23.7 million. The yield on interest earning assets increased 97 basis points to 4.64%, while the cost of interest-bearing liabilities increased 142 basis points to 1.83% due to the rise in market interest rates and competitive pressure. The tax effected net interest margin for the six months ended June 30, 2023 was 3.23% compared to 3.35% for the same period last year.
• The provision for credit losses for the six months ended June 30, 2023 was $4,853,000 compared to $700,000 for the six months ended June 30, 2022, an increase of $4,253,000. As a result of the acquisition, the Bank recorded a $4.6 million provision for credit losses for loans acquired that did not have any credit deterioration at the time of purchase. Excluding the impact of the acquisition, the provision would have decreased $438,000 when comparing the six month period of 2023 to 2022 with the decrease being attributable to a decrease in loans in 2023.
• Total non-interest income was $4,454,000 for the six months ended June 30, 2023, which is $281,000 less than the non-interest income of $4,735,000 for the same period last year. The primary drivers were a loss of $292,000 in the value of equity securities during the first half of 2023, compared to a loss of $179,000 in the first half of 2022 and a decrease in other income associated with mortgage derivative activity due to the HVB merger of $128,000.
• Total non-interest expenses for the six months ended June 30, 2023 totaled $32,458,000 compared to $21,431,000 for the same period last year, which is an increase of $11,027,000, or 51.5%. The primary driver of the increase is the merger and acquisition costs of completing the HVB acquisition that total $8,646,000. 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 $1,563,000 due to an additional 8.3 FTEs, which was impacted minimally by the acquisition due to it closing on June 16, 2023 and merit increases for 2023 as well as an increase in health insurance costs of $374,000. Due to growth that occurred primarily in 2022, FDIC insurance expense increased $345,000.
• The provision for income taxes decreased $2,533,000 when comparing the six months ended June 30, 2023 to the same period in 2022 as a result of a decrease in income before income tax of $13,451,000 due to the one-time merger costs.

Three Months Ended June 30, 2023 Compared to June 30, 2022

• For the three months ended June 30, 2023, net loss totaled ($4,144,000) which compares to net income of $6,901,000 for the comparable period of 2022, a decrease of $11,045,000. Basic (loss) earnings per share of ($1.01) for the three months ended June 30, 2023 compares to $1.72 for the 2022 comparable period. Annualized return on equity for the three months ended June 30, 2023 and 2022 was (6.62%) and 12.49%, while annualized return on assets was (0.68%) and 1.25%, respectively. If the one time costs associated with the merger and the NPC Provision are excluded, basic earnings per share, the annualized return on average equity and average assets would be $1.58, 10.03% and 1.03%, respectively. (1)
• Net interest income before the provision for credit loss for the three months ended June 30, 2023 totaled $17,921,000 compared to $17,729,000 for the three months ended June 30, 2022, resulting in an increase of $192,000, or 1.1%. Average interest earning assets increased $202.7 million for the three months ended June 30, 2023 compared to the same period last year as a result of growth that occurred in the second half of 2023, and to a lesser extent, the completed acquisition. Average loans increased $247.5 million while average investment securities increased $774,000. The tax effected net interest margin for the three months ended June 30, 2023 was 3.17% compared to 3.43% for the same period last year, which was impacted by the increase in the average cost on interest bearing liabilities of 158 basis points, to 2.00%.
• The provision for credit losses for the three months ended June 30, 2023 was $4,853,000 compared to $450,000 for the three months ended June 30, 2022, an increase of $4,403,000. As a result of the acquisition, the Bank recorded a $4.6 million provision for credit losses for loans acquired that did not have any credit deterioration at the time of purchase. If the impact of the acquisition is excluded, the provision would have decreased $188,000 when comparing the three month period of 2023 to 2022 with the decrease being attributable to a decrease in loans in 2023.
• Total non-interest income was $2,280,000 for the three months ended June 30, 2023, which is $24,000 less than for the comparable period last year. The primary driver was a decrease in brokerage and insurance commissions of $59,000. The decrease in other income was associated changes in the fair value of derivative instruments associated with mortgage activity related to the HVB merger of $86,000, which was offset by an increase in gains on loans sold of $128,000, primarily due to the HVB merger.
• Total non-interest expenses for the three months ended June 30, 2023 totaled $20,680,000 compared to $11,200,000 for the same period last year, which is an increase of $9,480,000. Merger and acquisition costs totaled $8,402,000 and salaries and benefits increased $799,000 primarily due to additional personnel and increased health care costs as noted above.
• The provision for income taxes decreased $2,670,000 when comparing the three months ended June 30, 2023 to the same period in 2022 as a result of a decrease in income before income tax of $13,715,000.

Balance Sheet and Other Information:

• At June 30, 2023, total assets were $2.89 billion, compared to $2.33 billion at December 31, 2022 and $2.21 billion at June 30, 2022.
• Available for sale securities of $434.3 million at June 30, 2023 decreased $5.2 million from December 31, 2022 and $28.6 million from June 30, 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 1.77% to 2.14% on a tax equivalent basis.
• Net loans as of June 30, 2023 totaled $2.14 billion and increased $434.7 million from December 31, 2022 as a result of the acquisition. Excluding the acquisition, loans would have decreased $40.1 million during 2023. The decrease in organic loans was driven by expected paydowns in student loans, which are expected to increase over the second half of 2023.
• The allowance for credit losses - loans totaled $21,652,000 at June 30, 2023 which is an increase of $3,100,000 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 ASC 326 was a decrease of $3.3 million in the allowance for credit losses – loans. Loan recoveries and charge-offs were $31,000 and $11,000, respectively, for the six months ended June 30, 2023. A provision for credit losses – loans of $100,000 was recorded during 2023. The allowance as a percent of total loans was 1.00% as of June 30, 2023 and 1.08% as of December 31, 2022.
• Deposits increased $421.6 million from December 31, 2022, to $2.27 billion at June 30, 2023, due to the acquisition, which increased deposits by $533.4 million. Excluding the acquisition, deposits decreased $111.5 million. With the rise in interest rates, competitive pressure 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 June 30, 2023, the Bank estimates that balances held by customers in excess of the FDIC insurance limit ($250,000 per insured account) totaled $986.4 million, or 43.5% of the Bank's total deposits. Included in this balance are balances held through Intrafi, which provides customers with additional FDIC insurance, as well as deposits collateralized by securities (almost exclusively municipal deposits). The total of these items was $577.6 million, or 25.5% of the Bank's total deposits, as of June 30, 2023.
• Stockholders' equity totaled $263.2 million at June 30, 2023, compared to $200.1 million at December 31, 2022, an increase of $63.0 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 the six months ended June 30, 2023 totaling $2.7 million, offset by net cash dividends for the first half of 2023 totaling $3.9 million, net treasury stock activity of $170,000 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 $2.2 million from December 31, 2022.

Dividend Declared

On May 30, 2023, the Board of Directors declared a cash dividend of $0.485 per share, which was paid on June 30, 2023 to shareholders of record at the close of business on June 9, 2023. The quarterly cash dividend is an increase of 3.0% over the regular cash dividend of $0.466 per share declared one year ago, as adjusted for the 1% stock dividend declared in June 2023, payable on June 30, 2023 to shareholders of record at the close of business on June 9, 2023.

Citizens Financial Services, Inc. has nearly 1,925 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