CITIZENS FINANCIAL SERVICES INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY STATEMENT

We have made forward-looking statements in this document, and in documents that
we incorporate by reference, that are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of the Company, the Bank, First Citizens Insurance,
Realty or the Company on a consolidated basis. When we use words such as
"believes," "expects," "anticipates," or similar expressions, we are making
forward-looking statements. Forward-looking statements may prove inaccurate.
For a variety of reasons, actual results could differ materially from those
contained in or implied by forward-looking statements:

  • The continuing impact of the COVID-19 pandemic may have an adverse effect on
    our business and operations, our customers, including their ability to make
    timely loan payments, our service providers, and on the economy and financial
    markets more significant that we expect.



  • Interest rates could change more rapidly or more significantly than we expect.



  • The economy could change significantly in an unexpected way, which would cause
    the demand for new loans and the ability of borrowers to repay outstanding
    loans to change in ways that our models do not anticipate.



  • The financial markets could suffer a significant disruption, which may have a
    negative effect on our financial condition and that of our borrowers, and on
    our ability to raise money by issuing new securities.



  • It could take us longer than we anticipate implementing strategic initiatives,
    including expansions, designed to increase revenues or manage expenses, or we
    may be unable to implement those initiatives at all.



  • Acquisitions and dispositions of assets and companies could affect us in ways
    that management has not anticipated.



  • We may become subject to new legal obligations or the resolution of litigation
    may have a negative effect on our financial condition or operating results.



  • We may become subject to new and unanticipated accounting, tax, regulatory or
    compliance practices or requirements. Failure to comply with any one or more
    of these requirements could have an adverse effect on our operations.



  • We could experience greater loan delinquencies than anticipated, adversely
    affecting our earnings and financial condition.



  • We could experience greater losses than expected due to the ever increasing
    volume of information theft and fraudulent scams impacting our customers and
    the banking industry.



  • We could lose the services of some or all of our key personnel, which would
    negatively impact our business because of their business development skills,
    financial expertise, lending experience, technical expertise and market area
    knowledge.



  • The agricultural economy is subject to extreme swings in both the costs of
    resources and the prices received from the sale of products as a result of
    weather, government regulations, international trade agreements and consumer
    tastes, which could negatively impact certain of our customers.



  • Loan concentrations in certain industries could negatively impact our results,
    if financial results or economic conditions deteriorate.



  • Companies providing support services related to the exploration and drilling
    of the natural gas reserves in our market area may be affected by federal,
    state and local laws and regulations such as restrictions on production,
    permitting, changes in taxes and environmental protection, which could
    negatively impact our customers and, as a result, negatively impact our loan
    and deposit volume and loan quality. Additionally, the activities the
    companies providing support services related to the exploration and drilling
    of the natural gas reserves may be dependent on the market price of natural
    gas.  As a result, decreases in the market price of natural gas could also
    negatively impact these companies, our customers.

Additional factors are discussed in this Annual Report on Form 10-K under "Item
1A. Risk Factors." These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Forward-looking statements speak only as of the date they are
made and the Company does not undertake to update forward-looking statements to
reflect circumstances or events that occur after the date of the forward-looking
statements or to reflect the occurrence of unanticipated events. Accordingly,
past results and trends should not be used by investors to anticipate future
results or trends.

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Index

INTRODUCTION

The following is management's discussion and analysis of the significant changes
in financial condition, the results of operations, capital resources and
liquidity presented in the accompanying consolidated financial statements for
the Company. The Company's consolidated financial condition and results of
operations consist almost entirely of the Bank's financial condition and results
of operations. Management's discussion and analysis should be read in
conjunction with the audited consolidated financial statements and related
notes. Except as noted, tabular information is presented in thousands of
dollars.

The Company currently engages in the general business of banking throughout its
service area of Bradford, Tioga, Clinton, Potter and Centre counties in north
central Pennsylvania, Lebanon, Berks, Schuylkill and Lancaster counties in south
central Pennsylvania and Allegany County in southern New York. We also have a
limited branch office in Union county, Pennsylvania, which primarily serves
agricultural customers in the central Pennsylvania market. We maintain our main
office in Mansfield, Pennsylvania. Presently we operate 36 banking facilities,
33 of which operate as bank branches. In addition, we have leased an additional
facility in Williamsport, Pennsylvania that will be opened as a full service
branch in 2023. In Pennsylvania, the Company has full service offices located in
Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett,
Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill
Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy,
Fivepointville, Kennett Square, State College and two branches near the city of
Lebanon, Pennsylvania. In November of 2022, we opened a full service branch in
Ephrata, Pennsylvania. We also have a limited branch office in Winfield,
Pennsylvania. In New York, our office is in Wellsville. As part of the MidCoast
acquisition in 2020, we aquired two branches in Wilmington Delaware, one branch
in Dover Delaware, and a corporate administration building in Wilmington,
Delaware. In November of 2022, we opened a full service branch in Greenville,
Delaware.

Risk identification and management are essential elements for the successful
management of the Company. In the normal course of business, the Company is
subject to various types of risk, including interest rate, credit, liquidity,
reputational and regulatory risk.

Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the direction and frequency of changes in
interest rates. Interest rate risk results from various re-pricing frequencies
and the maturity structure of the financial instruments owned by the Company.
The Company uses its asset/liability and funds management policies to control
and manage interest rate risk.

Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from loans with
customers and the purchasing of securities. The Company's primary credit risk
is in the loan portfolio. The Company manages credit risk by adhering to an
established credit policy and through a disciplined evaluation of the adequacy
of the allowance for loan losses. Also, the investment policy limits the amount
of credit risk that may be taken in the investment portfolio.

Liquidity risk represents the inability to generate or otherwise obtain funds at
reasonable rates to satisfy commitments to borrowers and obligations to
depositors. The Company has established guidelines within its asset/liability
and funds management policy to manage liquidity risk. These guidelines include,
among other things, contingent funding alternatives.

Reputational risk, or the risk to our business, earnings, liquidity, and capital
from negative public opinion, could result from our actual or alleged conduct in
a variety of areas, including legal and regulatory compliance, lending
practices, corporate governance, litigation, ethical issues, or inadequate
protection of customer information, which could include identify theft, or theft
of customer information through third parties. We expend significant resources
to comply with regulatory requirements. Failure to comply could result in
reputational harm or significant legal or remedial costs. Damage to our
reputation could adversely affect our ability to retain and attract new
customers, and adversely impact our earnings and liquidity.

Regulatory risk represents the possibility that a change in law, regulations or
regulatory policy may have a material effect on the business of the Company and
its subsidiary. We cannot predict what legislation might be enacted or what
regulations might be adopted, or if adopted, the effect thereof on our
operations.

Readers should carefully review the risk factors described in other documents
the Company files with the SEC, including the annual reports on Form 10-K, the
quarterly reports on Form 10-Q and any current reports on Form 8-K filed by us.

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