Citizens Financial Services(CZFS) - 2022 Q4 - Annual Report

PART I ITEM 1 – BUSINESS Citizens Financial Services, Inc. operates as a bank holding company for First Citizens Community Bank, offering diverse banking services and pursuing the acquisition of HV Bancorp, Inc - The Company is a bank holding company for First Citizens Community Bank, offering full-service banking activities and services to individual, business, governmental, and institutional customers[12][18] - The Company is in the process of acquiring HV Bancorp, Inc. (HVBC) and its subsidiary Huntingdon Valley Bank (HVB), with the merger expected to be completed in the first half of 2023. The transaction involves a mix of cash and stock consideration for HVBC shareholders[13][14][15] - As of December 31, 2022, the Company had 328 employees (312 full-time equivalent), with approximately 76% being women. Employee development, competitive salaries, and benefits are key to retention[22][23] - The Bank's market areas are diversified, including manufacturing, trade, services, agriculture, and natural resource production (gas and timber), making it dependent on economic conditions in north central, central, and south central Pennsylvania, southern New York, and parts of Delaware[19][20] - The Company and Bank are subject to extensive regulation by the Pennsylvania Department of Banking (PDB) and the Board of Governors of the Federal Reserve System (FRB), covering business scope, investments, deposits, loans, mergers, and branching[26][27] Bank Capital Ratios (December 31, 2022) | Capital Ratio | Bank's Ratio | Well-Capitalized Threshold | Adequately Capitalized Threshold | | :--------------------------------- | :----------- | :------------------------- | :----------------------------- | | Total Capital (to Risk Weighted Assets) | 12.01% | 10.00% | 8.00% | | Tier 1 Capital (to Risk Weighted Assets) | 11.00% | 8.00% | 6.00% | | Common Equity Tier 1 Capital (to Risk Weighted Assets) | 11.00% | 6.50% | 4.50% | | Tier 1 Capital (to Average Assets) | 8.77% | 5.00% | 4.00% | ITEM 1A – RISK FACTORS The Company faces diverse material risks from economic impacts, interest rate fluctuations, lending activities, regulations, competition, and operational vulnerabilities - The COVID-19 pandemic continues to pose risks, including potential declines in demand for products/services, increased loan delinquencies, reduced collateral values, and higher loan losses[67][69][73] - Changes in interest rates, particularly rising rates, could adversely affect net interest margin by increasing funding costs faster than asset yields. This also impacts the fair value of investment securities, potentially decreasing shareholders' equity[70][71] - A significant portion of the loan portfolio is concentrated in commercial real estate (50.8%), agricultural real estate (18.2%), and construction loans (4.7%) as of December 31, 2022, which inherently carry greater risks of non-payment and loss compared to residential mortgages[78] - The Company is subject to extensive regulation, and future legislative or regulatory changes could increase operating costs, harm its competitive position, or limit its ability to pay dividends[87][88] - Operational risks include reliance on key management and personnel, potential adverse findings from banking agency examinations, and vulnerabilities in technology systems to breaches and cyberattacks[91][92][93] - The discontinuation of LIBOR and transition to alternative benchmark rates could adversely affect financial instruments, risk exposures, and require renegotiation of transactions, leading to potential market volatility and increased costs[98][100] ITEM 1B – UNRESOLVED STAFF COMMENTS The Company has no unresolved staff comments to report - No unresolved staff comments are applicable to the Company[104] ITEM 2 – PROPERTIES The Company's headquarters are in Mansfield, Pennsylvania, with 24 owned and 13 leased banking facilities, valued at $16.7 million net book value - The Company and Bank headquarters are at 15 South Main Street, Mansfield, Pennsylvania[105] - The Bank owns 24 banking facilities and leases 13 others[105] Net Book Value of Owned Banking Facilities and Leasehold Improvements | Year | Amount (in thousands) | | :--- | :-------------------- | | 2022 | $16,734 | ITEM 3 – LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings beyond routine matters in the ordinary course of business - The Company is not involved in any material legal proceedings other than routine legal proceedings in the ordinary course of business[107] ITEM 4 – MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[108] PART II ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock is listed on Nasdaq, has consistently paid dividends, and repurchased 3 shares in Q4 2022, with 1,838 stockholders of record - The Company's common stock is listed on the Nasdaq Stock Market under the symbol "CZFS" since June 3, 2022[110] - The Company has paid dividends since April 30, 1984, and expects to continue comparable cash dividends, subject to earnings, financial condition, and legal restrictions[110] Common Stock Dividends Declared Per Share | Year | Q1 | Q2 | Q3 | Q4 | | :--- | :---- | :---- | :---- | :---- | | 2022 | $0.475 | $0.475 | $0.480 | $0.480 | | 2021 | $0.465 | $0.465 | $0.470 | $0.470 | Stock Repurchases (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :----------------- | :--------------------- | :--------------------------- | | 10/1/22 to 10/31/22 | - | $0.00 | | 11/1/22 to 11/30/22 | 3 | $68.23 | | 12/1/22 to 12/31/22 | - | $0.00 | | Total | 3 | $68.23 | - As of March 1, 2023, there were 1,838 stockholders of record[111] ITEM 6 – RESERVED This item is reserved and contains no information ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes the Company's financial performance for 2022, highlighting a slight net income decrease despite loan growth, and discusses financial position, liquidity, and risk management - Net income for 2022 was $29,060,000, a slight decrease of 0.2% from $29,118,000 in 2021. Basic and diluted EPS were $7.32 in 2022, up from $7.31 in 2021[130] - Tax equivalent net interest income increased by $6,102,000 (9.1%) in 2022 to $73,137,000, driven by a $10,220,000 increase in total interest income, partially offset by a $4,118,000 increase in interest expense[139] - The provision for loan losses increased by $133,000 (8.6%) in 2022 to $1,683,000, primarily due to organic loan growth, offset by an improved economic outlook compared to 2021[155] - Non-interest income decreased by $2,567,000 (20.9%) in 2022, mainly due to net equity security losses, lower gains on loans sold, and decreased earnings on bank-owned life insurance[159][160] - Non-interest expenses increased by $3,144,000 (7.6%) in 2022, driven by higher salaries and employee benefits, increased occupancy costs from new branches, and professional fees related to the HVB merger[165][166] Key Financial Data (2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | % Change | | :---------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Total assets | $2,333,393 | $2,143,863 | $189,530 | 8.8% | | Total loans, net | $1,706,447 | $1,424,229 | $282,218 | 19.8% | | Total deposits | $1,844,208 | $1,836,151 | $8,057 | 0.4% | | Total borrowings | $257,278 | $73,977 | $183,301 | 247.7% | | Total stockholders' equity | $200,147 | $212,492 | $(12,345) | (5.8)% | ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section refers to market risk disclosures within Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate and Market Risk Management" - Quantitative and qualitative disclosures about market risk are included under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate and Market Risk Management"[265] ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item presents the Company's audited consolidated financial statements and extensive notes, detailing financial position, income, cash flows, and key accounting policies Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :---------------------- | :----------- | :----------- | | Total Assets | $2,333,393 | $2,143,863 | | Total Loans (net) | $1,706,447 | $1,424,229 | | Total Deposits | $1,844,208 | $1,836,151 | | Total Borrowed Funds | $257,278 | $73,977 | | Total Stockholders' Equity | $200,147 | $212,492 | Consolidated Statement of Income Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :---------------------- | :----------- | :----------- | :----------- | | Total Interest and Dividend Income | $83,357 | $73,217 | $70,296 | | Total Interest Expense | $11,223 | $7,105 | $8,105 | | Net Interest Income | $72,134 | $66,112 | $62,191 | | Provision for Loan Losses | $1,683 | $1,550 | $2,400 | | Total Non-Interest Income | $9,738 | $12,305 | $11,422 | | Total Non-Interest Expenses | $44,694 | $41,550 | $40,847 | | Net Income | $29,060 | $29,118 | $25,103 | | Basic EPS | $7.32 | $7.31 | $6.46 | - The Company's allowance for loan losses was $18,552,000 (1.08% of total loans) at December 31, 2022, an increase from $17,304,000 (1.20% of total loans) at December 31, 2021, reflecting organic loan growth and improved economic outlook[195][396] - Total deposits increased by $8.1 million (0.4%) in 2022, reaching $1.84 billion, with non-interest-bearing deposits comprising 21.5% of the total. This growth was slower than 2021 due to customers seeking higher rates amid rising market interest rates[220] - Borrowed funds significantly increased by $183.3 million in 2022 to $257.3 million, primarily from short-term FHLB advances, to fund loan growth[225] ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company reports no changes in or disagreements with accountants on accounting and financial disclosure matters - There are no changes in or disagreements with accountants on accounting and financial disclosure[524] ITEM 9A – CONTROLS AND PROCEDURES Management concluded the Company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material weaknesses or significant changes - The Company's disclosure controls and procedures were evaluated and deemed effective as of December 31, 2022[525] - Management's assessment of internal control over financial reporting as of December 31, 2022, identified no material weaknesses, concluding the controls were effective[507][508] - No changes in internal control over financial reporting occurred during the three months ended December 31, 2022, that materially affected or are reasonably likely to materially affect these controls[526] ITEM 9B – OTHER INFORMATION This item reports that there is no other information required to be disclosed - No other information is required to be disclosed under this item[527] ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This disclosure is not applicable to the Company - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[528] PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information on directors, executive officers, Section 16(a) compliance, Code of Ethics, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information on directors, executive officers, Section 16(a) compliance, and corporate governance is incorporated by reference from the 2023 Proxy Statement[530][531][532][534] - The Company has adopted a Code of Ethics applicable to directors, officers, and employees, available on its website[533] ITEM 11 – EXECUTIVE COMPENSATION Details on executive and director compensation, including the Compensation Discussion and Analysis, are incorporated by reference from the Company's 2023 Proxy Statement - Information regarding executive and director compensation is incorporated by reference from the 2023 Proxy Statement[535] ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS Security ownership information for beneficial owners and management is incorporated by reference from the 2023 Proxy Statement, with 116,058 shares available under the equity compensation plan - Security ownership information for beneficial owners and management is incorporated by reference from the 2023 Proxy Statement[537] - The Company knows of no arrangements that may result in a change in control[536] Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | | :--------------------------------------------- | :------------------------------------------------------------------------ | :------------------------------------------------------------------------ | :------------------------------------------------------------------------------------------------------------------------------------------ | | Equity compensation plans approved by security holders | n/a | n/a | 116,058 | | Equity compensation plans not approved by security holders | n/a | n/a | n/a | | Total | n/a | n/a | 119,391 | ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information on certain relationships, related transactions, and director independence is incorporated by reference from the Company's 2023 Proxy Statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the 2023 Proxy Statement[539][540] ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning principal accountant fees and services is incorporated by reference from the "Audit – Related Matters" section of the Company's 2023 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the "Audit – Related Matters" section in the 2023 Proxy Statement[541] PART IV ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists the financial statements and various exhibits filed with the report, many incorporated by reference from previous SEC filings - The report includes the Consolidated Balance Sheet, Statement of Income, Statement of Comprehensive Income, Statement of Changes in Stockholders' Equity, and Statement of Cash Flows for the years ended December 31, 2022, 2021, and 2020, along with related notes[544][546] - Various exhibits, including corporate governance documents, employment agreements, and compensation plans, are filed with the report, with many incorporated by reference from prior SEC filings[546] ITEM 16 – FORM 10-K SUMMARY This item indicates that a Form 10-K summary is not applicable for this report - A Form 10-K summary is not applicable[557] SIGNATURES This section contains the required signatures for the Form 10-K report, certifying its accuracy and completeness as of March 9, 2023 - The report is signed by Randall E. Black, Chief Executive Officer and President, and Stephen J. Guillaume, Chief Financial Officer, along with the Board of Directors, on March 9, 2023[562][563]