Citizens Financial Services(CZFS) - 2023 Q2 - Quarterly Report

Part I FINANCIAL INFORMATION Financial Statements (Unaudited) This chapter presents the company's unaudited consolidated financial statements, including the balance sheet, income statement, and cash flow statement, with detailed notes on accounting policies and key financial items Consolidated Balance Sheet Consolidated Balance Sheet (Thousands of USD) | Indicator | June 30, 2023 (Thousands of USD) | December 31, 2022 (Thousands of USD) | | :--- | :--- | :--- | | Assets: ||| | Total Cash and Bank Deposits | 44,709 | 26,211 | | Available-for-Sale Securities | 434,315 | 439,506 | | Net Loans | 2,141,190 | 1,706,447 | | Goodwill | 84,758 | 31,376 | | Liabilities: ||| | Total Deposits | 2,266,100 | 1,844,208 | | Borrowed Funds | 318,200 | 257,278 | | Stockholders' Equity: ||| | Total Stockholders' Equity | 263,228 | 200,147 | | Total Assets | 2,891,808 | 2,333,393 | | Total Liabilities and Stockholders' Equity | 2,891,808 | 2,333,393 | - As of June 30, 2023, the company's total assets increased to $2.892 billion, a $558 million increase from $2.333 billion on December 31, 2022, primarily due to the HVBC acquisition[7][195] - Net loans significantly increased by $435 million to $2.141 billion, total deposits increased by $422 million to $2.266 billion, and borrowed funds increased by $60.9 million to $318 million, with these changes mainly driven by the HVBC acquisition[7][195] Consolidated Statement of Income (Loss) Consolidated Statement of Income (Loss) (Thousands of USD) | Indicator (Thousands of USD) | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | 26,810 | 19,407 | 51,917 | 37,222 | | Total Interest Expense | 8,889 | 1,678 | 15,916 | 3,231 | | Net Interest Income | 17,921 | 17,729 | 36,001 | 33,991 | | Provision for Credit Losses | 4,853 | 450 | 4,853 | 700 | | Net Interest Income (After Provision for Credit Losses) | 13,068 | 17,279 | 31,148 | 33,291 | | Total Non-interest Income | 2,280 | 2,304 | 4,454 | 4,735 | | Total Non-interest Expense | 20,680 | 11,200 | 32,458 | 21,431 | | Net Income (Loss) | (4,144) | 6,901 | 2,723 | 13,641 | | Basic Earnings (Loss) Per Share | (1.01) | 1.72 | 0.67 | 3.40 | | Diluted Earnings (Loss) Per Share | (1.01) | 1.72 | 0.67 | 3.40 | - Net income for the first half of 2023 was $2.723 million, a year-over-year decrease of 80.0%, primarily due to one-time costs related to the HVBC acquisition. Basic earnings per share were $0.67, down 80.3% year-over-year[9][160] - The second quarter of 2023 saw a net loss of $4.144 million, a $11.045 million decrease from a net income of $6.901 million in the prior-year quarter, mainly impacted by one-time acquisition costs and the provision for credit losses[9][161] Consolidated Statement of Comprehensive Income (Loss) Consolidated Statement of Comprehensive Income (Loss) (Thousands of USD) | Indicator (Thousands of USD) | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) | (4,144) | 6,901 | 2,723 | 13,641 | | Other Comprehensive Income (Loss), Net of Tax | (4,218) | (11,794) | 2,161 | (26,404) | | Comprehensive Income (Loss) | (8,362) | (4,893) | 4,884 | (12,763) | - Comprehensive income for the first half of 2023 was $4.884 million, compared to a comprehensive loss of $12.763 million in the prior-year period, primarily influenced by changes in unrealized gains and losses on available-for-sale securities[11] Consolidated Statement of Changes in Stockholders' Equity Consolidated Statement of Changes in Stockholders' Equity (Thousands of USD) | Indicator (Thousands of USD) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Common Stock Shares | 5,160,754 | 4,427,687 | | Common Stock Amount | 5,161 | 4,428 | | Additional Paid-in Capital | 143,351 | 80,911 | | Retained Earnings | 162,499 | 164,922 | | Accumulated Other Comprehensive Loss | (30,980) | (33,141) | | Treasury Stock | (16,803) | (16,973) | | Total Stockholders' Equity | 263,228 | 200,147 | - As of June 30, 2023, total stockholders' equity was $263.2 million, an increase of $63.081 million (31.5%) from December 31, 2022, mainly due to the issuance of 693,858 shares of common stock valued at $60.1 million for the HVBC acquisition[14][229] - CECL implementation resulted in a $1.766 million increase in retained earnings. In the first half of 2023, the company reported a net income of $2.7 million and paid cash dividends of $3.9 million ($0.961 per share)[14][229] Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows (Thousands of USD) | Cash Flow Activities (Thousands of USD) | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | 2,901 | 15,072 | | Net Cash Provided by (Used in) Investing Activities | 128,692 | (241,367) | | Net Cash Provided by (Used in) Financing Activities | (113,095) | 74,134 | | Net Increase (Decrease) in Cash and Cash Equivalents | 18,498 | (152,161) | | Cash and Cash Equivalents at End of Period | 44,709 | 20,672 | - In the first half of 2023, net cash provided by investing activities was $128.7 million, compared to net cash used of $241.4 million in the prior-year period, primarily influenced by sales of available-for-sale securities and the HVBC acquisition[15] - Net cash used in financing activities was $113.1 million, compared to net cash provided of $74.1 million in the prior-year period, mainly due to a net decrease in deposits and an increase in borrowings[15] Notes to Consolidated Financial Statements Note 1 – Basis of Presentation This note outlines the company's organizational structure, the basis of financial statement preparation (US GAAP and SEC regulations), and details the adoption of new accounting standards in 2023, particularly ASC 326 (CECL) and its impact on retained earnings and credit loss allowances, as well as ASC 326-02 revisions for troubled debt restructurings and historical disclosures - The company adopted ASC 326 (CECL) on January 1, 2023, using the modified retrospective approach, resulting in a cumulative $1.8 million increase in retained earnings (net of tax), with $3.3 million related to loans and a negative $1.1 million related to unfunded commitments[22][23] CECL Adoption Impact on Allowance for Credit Losses (January 1, 2023, Thousands of USD) | Asset Category | Pre-Adoption | Adoption Impact | Reported Amount | | :--- | :--- | :--- | :--- | | Real Estate Loans - Residential | 1,056 | 79 | 1,135 | | Real Estate Loans - Commercial | 10,120 | (3,070) | 7,050 | | Real Estate Loans - Agricultural | 4,589 | (1,145) | 3,444 | | Real Estate Loans - Construction | 801 | (103) | 698 | | Consumer Loans | 135 | 1,040 | 1,175 | | Other Commercial Loans | 1,040 | (328) | 712 | | Other Agricultural Loans | 489 | (219) | 270 | | State and Political Subdivision Loans | 322 | (280) | 42 | | Unallocated | - | 726 | 726 | | Total Allowance for Loan Credit Losses | 18,552 | (3,300) | 15,252 | | Allowance for Off-Balance Sheet Credit Risk | 165 | 1,064 | 1,229 | - The adoption of ASC 326-02 (Troubled Debt Restructurings and Historical Disclosures) updated financial statement disclosures but had no material impact on the company's consolidated financial statements[28] Note 2 – Acquisition of HV Bancorp, Inc. This note details the company's acquisition of HV Bancorp, Inc. on June 16, 2023, for approximately $76.665 million, paid through the issuance of 693,858 common shares and $16.5 million in cash, expanding the company's operations into southeastern Pennsylvania and New Jersey, and resulting in $53.382 million in goodwill - The company completed the acquisition of HV Bancorp, Inc. on June 16, 2023, for a total purchase price of approximately $76.665 million, paid through the issuance of 693,858 shares of common stock (valued at $60.137 million) and $16.5 million in cash[51][53] - The acquisition generated $53.382 million in goodwill, primarily stemming from synergies and economies of scale from the combined operations[53][55] - On the acquisition date, the company recorded a $4.591 million allowance for credit losses for non-PCD (Non-Purchased Credit Deteriorated) loans and recognized a $1.689 million allowance for credit losses for PCD (Purchased Credit Deteriorated) loans[59][60] Note 3 – Revenue Recognition This note, in accordance with ASC 606, disaggregates revenue from contracts with customers, primarily including deposit account service charges, trust fees, brokerage and insurance commissions, and other fees, with most revenue recognized at the point of service or over time Disaggregation of Revenue from Contracts with Customers (Thousands of USD) | Revenue Category | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Deposit Account Service Charges | 1,293 | 1,324 | 2,504 | 2,572 | | Trust Fees | 181 | 184 | 411 | 433 | | Brokerage and Insurance Commissions | 442 | 501 | 956 | 982 | | Other | 118 | 123 | 233 | 262 | | Total | 2,034 | 2,132 | 4,104 | 4,249 | - Deposit account service charges include overdraft fees, statement fees, interchange income, ATM income, and other service charges, generally recognized when services are completed[64][69] - Trust fees are typically recognized monthly as a fixed percentage of assets, while brokerage and insurance commissions are recognized on the trade date[69] Note 4 – Earnings per Share This note provides details on the calculation of the company's basic and diluted earnings per share, listing the weighted average common shares used in the calculation, and the number of restricted shares excluded from diluted EPS due to their antidilutive effect Earnings per Share Data | Indicator | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) Attributable to Common Stock (Thousands of USD) | (4,144) | 6,901 | 2,723 | 13,641 | | Basic Earnings (Loss) Per Share | (1.01) | 1.72 | 0.67 | 3.40 | | Diluted Earnings (Loss) Per Share | (1.01) | 1.72 | 0.67 | 3.40 | | Weighted Average Shares Outstanding for Basic EPS | 4,113,377 | 4,012,611 | 4,059,416 | 4,008,830 | | Weighted Average Shares Outstanding for Diluted EPS | 4,113,377 | 4,012,626 | 4,059,416 | 4,008,934 | - For the second quarter and first half of 2023, 6,078 restricted shares were excluded from the diluted earnings per share calculation due to their antidilutive effect[71] Note 5 – Investments This note details the composition, amortized cost, fair value, and unrealized gains and losses of the company's investment securities, including available-for-sale and equity securities, with the investment portfolio's fair value at $436.2 million as of June 30, 2023, including $44.731 million in unrealized losses, and also discusses credit loss allowance measurement and gains and losses from securities sales in the first half of 2023 Fair Value of Investment Securities (Thousands of USD) | Security Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Available-for-Sale Securities | 434,315 | 439,506 | | Equity Securities | 1,849 | 2,208 | | Total Investment Portfolio | 436,164 | 441,714 | Unrealized Gains and Losses on Available-for-Sale Securities (Thousands of USD) | Indicator | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Amortized Cost | 478,769 | 486,993 | | Gross Unrealized Gains | 277 | 50 | | Gross Unrealized Losses | (44,731) | (47,537) | | Fair Value | 434,315 | 439,506 | - As of June 30, 2023, the company held 348 securities with fair values below cost, totaling $44.731 million in gross unrealized losses. In the first half of 2023, proceeds from available-for-sale securities sales were $86.504 million, resulting in a net loss of $51 thousand[73][81] Note 6 – Loans This note details the company's loan portfolio composition, changes in the allowance for credit losses (ACL), classification and analysis of nonperforming loans (NPLs), and information on loan modifications for borrowers experiencing financial difficulty, noting the adoption of CECL on January 1, 2023, which changed ACL measurement and special treatment for acquired HVBC loans Loan Portfolio Composition (Thousands of USD) | Loan Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Real Estate Loans - Residential | 358,025 | 210,213 | | Real Estate Loans - Commercial | 1,080,513 | 876,569 | | Real Estate Loans - Agricultural | 312,302 | 313,614 | | Construction Loans | 156,927 | 80,691 | | Consumer Loans | 42,701 | 86,650 | | Other Commercial Loans | 120,288 | 63,222 | | Other Agricultural Loans | 30,615 | 34,832 | | State and Political Subdivision Loans | 61,471 | 59,208 | | Total Loans | 2,162,842 | 1,724,999 | | Allowance for Loan Credit Losses | 21,652 | 18,552 | | Net Loans | 2,141,190 | 1,706,447 | Changes in Allowance for Credit Losses (H1 2023, Thousands of USD) | Change Item | Allowance for Loan Credit Losses | Allowance for Off-Balance Sheet Credit Risk | Total | | :--- | :--- | :--- | :--- | | Balance December 31, 2022 | 18,552 | 165 | 18,717 | | Impact of CECL Adoption | (3,300) | 1,064 | (2,236) | | PCD Acquired Loan Credit Loss Allowance | 1,689 | - | 1,689 | | Net Charge-offs | 20 | - | 20 | | Non-PCD Acquired Loan Credit Loss Allowance | 4,591 | - | 4,591 | | Provision for Credit Losses | 100 | 162 | 262 | | Balance June 30, 2023 | 21,652 | 1,391 | 23,043 | Nonperforming Loans (Thousands of USD) | Nonperforming Loan Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Nonaccrual Loans | 13,073 | 6,938 | | Accruing Loans - 90 Days or More Past Due | 139 | 7 | | Total Nonperforming Loans | 13,212 | 6,945 | | Foreclosed Assets Held for Sale | 426 | 543 | | Total Nonperforming Assets | 13,638 | 7,488 | Note 7 – Goodwill and Other Intangible Assets This note discloses the carrying value and accumulated amortization of the company's goodwill and other intangible assets, with goodwill significantly increasing to $84.758 million as of June 30, 2023, primarily due to the HVBC acquisition, while the net book value of other amortizable intangible assets (such as mortgage servicing rights and core deposit intangibles) was $4.071 million Goodwill and Other Intangible Assets (Thousands of USD) | Asset Category | June 30, 2023 Net Book Value | December 31, 2022 Net Book Value | | :--- | :--- | :--- | | Mortgage Servicing Rights (MSRs) | 1,065 | 974 | | Core Deposit Intangible | 3,006 | 298 | | Total Amortizable Intangible Assets | 4,071 | 1,272 | | Goodwill | 84,758 | 31,376 | - As of June 30, 2023, goodwill increased to $84.758 million, a significant increase from $31.376 million on December 31, 2022, primarily attributable to the HVBC acquisition[115] Amortization Expense for Amortizable Intangible Assets (Thousands of USD) | Period | MSRs | Core Deposit Intangible | Total | | :--- | :--- | :--- | :--- | | Q2 2023 (Actual) | 75 | 31 | 106 | | H1 2023 (Actual) | 148 | 62 | 210 | | Q2 2022 (Actual) | 78 | 40 | 118 | | H1 2022 (Actual) | 160 | 80 | 240 | Note 8 – Employee Benefit Plans This note provides detailed information on the company's non-contributory defined benefit pension plan and restricted stock plan, with the pension plan covering employees hired before January 1, 2007, while those hired thereafter are eligible for discretionary 401(k) plan contributions, and the restricted stock plan aims to attract, retain, and incentivize employees, with disclosures on restricted stock grants, vesting, and forfeitures in the first half of 2023 Net Periodic Benefit Cost for Pension Plan (Thousands of USD) | Cost Component | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Service Cost | 77 | 100 | 155 | 178 | | Interest Cost | 110 | 79 | 220 | 138 | | Expected Return on Plan Assets | (197) | (264) | (394) | (467) | | Net Amortization and Deferral | 7 | 12 | 14 | 48 | | Net Periodic Benefit Cost | (3) | (73) | (5) | (103) | Restricted Stock Activity (Shares) | Activity | Q2 2023 | H1 2023 | | :--- | :--- | :--- | | Unvested Shares at Beginning of Period | 6,372 | 6,622 | | Granted | 2,242 | 2,242 | | Forfeited | - | (161) | | Vested | (2,360) | (2,449) | | Unvested Shares at End of Period | 6,254 | 6,254 | - As of June 30, 2023, the total unrecognized compensation cost related to unvested awards was $448 thousand, expected to be recognized over the next three years[122] Note 9 – Accumulated Comprehensive Loss This note details the changes in each component of accumulated other comprehensive income (loss), including unrealized gains and losses on available-for-sale securities, defined benefit pension items, and unrealized losses on interest rate swaps, and discloses amounts reclassified from accumulated other comprehensive loss to the statement of income (loss) Changes in Accumulated Other Comprehensive Income (Loss) (H1 2023, Thousands of USD) | Component | December 31, 2022 Balance | Other Comprehensive Income Before Reclassifications | Reclassification Adjustments | June 30, 2023 Balance | | :--- | :--- | :--- | :--- | :--- | | Unrealized Gains/Losses on Available-for-Sale Securities | (37,514) | 2,356 | 39 | (35,119) | | Defined Benefit Pension Items | (1,056) | - | 11 | (1,045) | | Unrealized Losses on Interest Rate Swaps | 5,429 | 529 | (774) | 5,184 | | Total | (33,141) | 2,885 | (724) | (30,980) | Amounts Reclassified from Accumulated Other Comprehensive Loss (H1 2023, Thousands of USD) | Component | Reclassification Amount | Affected Statement of Income (Loss) Item | | :--- | :--- | :--- | | Unrealized Gains/Losses on Available-for-Sale Securities (Net of Tax) | (39) | Net Gains on Available-for-Sale Securities | | Defined Benefit Pension Items (Net of Tax) | (11) | Other Expenses | | Unrealized Gains on Interest Rate Swaps (Net of Tax) | 774 | Interest Expense | | Total Reclassifications | 724 | | Note 10 – Fair Value Measurements This note explains the company's three-level disclosure framework for fair value measurements and lists assets and liabilities classified by fair value hierarchy as of June 30, 2023, and December 31, 2022, primarily including equity securities, available-for-sale securities, derivative instruments, and separately analyzed loans and other real estate owned held for sale measured on a nonrecurring basis Assets and Liabilities Measured at Fair Value on a Recurring Basis (June 30, 2023, Thousands of USD) | Asset/Liability Category | Level I | Level II | Level III | Total | | :--- | :--- | :--- | :--- | :--- | | Equity Securities | 1,849 | - | - | 1,849 | | Total Available-for-Sale Securities | 149,791 | 284,524 | - | 434,315 | | Loans Held for Sale | - | 14,940 | - | 14,940 | | Derivative Assets | - | 15,866 | 529 | 16,395 | | Derivative Liabilities | - | (9,303) | - | (9,303) | Assets Measured at Fair Value on a Nonrecurring Basis (June 30, 2023, Thousands of USD) | Asset Category | Level I | Level II | Level III | Total | | :--- | :--- | :--- | :--- | :--- | | Individually Analyzed Loans Held for Investment | - | - | 4,026 | 4,026 | | Other Real Estate Owned Held for Sale | - | - | 49 | 49 | - As of June 30, 2023, the company classified $529 thousand of net derivative assets and liabilities (related to IRLCs) as Level 3, with their fair value based on third-party loan prices adjusted for expected funding rates[130] Note 11 – Recent Accounting Pronouncements This note discusses recent Accounting Standards Updates (ASUs), including ASU 2020-04 and ASU 2022-06 (Reference Rate Reform, extending the LIBOR transition sunset date to December 31, 2024), ASU 2022-01 (Derivatives and Hedging, allowing non-prepayable financial assets in portfolio layer method), and ASU 2023-02 (Investments—Equity Method and Joint Ventures, allowing a proportional amortization method for tax credit structures), with the company evaluating their impact but not expecting a material effect on financial statements - ASU 2022-06 extends the reference rate reform (LIBOR transition) sunset date from December 31, 2022, to December 31, 2024, and the company is evaluating the transition path for its loan portfolio, expecting no material impact[140][141] - ASU 2022-01 permits non-prepayable financial assets to be included in the portfolio layer method for fair value hedges, and the company is assessing its impact on financial position or operating results[142] - ASU 2023-02 allows entities to elect a proportional amortization method for equity investments in tax credit structures, and the company expects its adoption will not have a material impact on financial statements[143] Management's Discussion and Analysis of Financial Condition and Results of Operations This chapter provides management's detailed discussion and analysis of the company's financial condition and operating results, covering forward-looking statements, critical accounting policies, business overview, risk management, market competition, trust and investment services, operating performance (including net interest income, provision for credit losses, non-interest income and expense, and provision for income taxes), financial condition (including cash, investments, loans, deposits, borrowings, and stockholders' equity), as well as off-balance sheet activities, liquidity, and interest rate risk management Forward-Looking Statements - The company's filings contain forward-looking statements, and actual results may differ materially due to various significant factors[145] - Key risk factors include interest rate changes, unexpected economic shifts, financial market disruptions, delays in strategic implementation, acquisition and disposition impacts, new legal obligations or litigation, new accounting/tax/regulatory requirements, increased loan delinquencies, information theft and fraud, loss of key personnel, agricultural economic fluctuations, and industry-specific loan concentration risks[146] Critical Accounting Policies - Management considers the measurement of the allowance for credit losses a critical accounting policy, with its methodology changed following the adoption of ASC 326[148] Introduction - The company primarily conducts banking operations in north-central, central, and south-central Pennsylvania, southern New York, and Wilmington and Dover, Delaware[150] - The recent HVBC acquisition further expanded the company's market into southeastern Pennsylvania (including Montgomery, Bucks, and Philadelphia counties) and Burlington County, New Jersey, now operating 47 banking facilities[150] Risk Management - The company faces various risks, including interest rate risk (controlled through asset/liability and funds management policies), credit risk (managed through credit policies and allowance for credit losses), liquidity risk (managed through asset/liability and funds management policies), reputational risk, and regulatory compliance risk[151][152][153][154][155][156] Competition - Banking competition in the company's service areas is intense, not only from commercial banks but also from consumer finance companies, thrift institutions, investment companies, mutual funds, insurance companies, credit unions, agricultural cooperatives, and internet entities[157] - Competition has intensified in the north-central Pennsylvania market, while the central, south-central, and southeastern Pennsylvania and Delaware markets face more deposit and loan competition[157] Trust and Investment Services; Oil and Gas Lease Services - The company's investment and trust services division offers professional trust administration, investment management, estate planning, and securities custody services, and assists clients with oil and gas lease matters[158] Assets Under Management (Thousands of USD) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Trust Department Assets Under Management | 170,000 | 150,000 | | Investment Representative Client Assets | 307,300 | 283,500 | Results of Operations Overview Results of Operations Overview (Thousands of USD, except per share data) | Indicator | H1 2023 | H1 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net Income | 2,723 | 13,641 | (10,918) | (80.0%) | | Basic Earnings Per Share | 0.67 | 3.40 | (2.73) | (80.3%) | | Return on Average Assets (Annualized) | 0.23% | 1.25% | (1.02%) | (81.6%) | | Return on Average Equity (Annualized) | 2.22% | 12.48% | (10.26%) | (82.2%) | - Net income and earnings per share for the first half of 2023 significantly declined, primarily due to one-time costs associated with the HVBC acquisition[160] Results of Operations Overview (Thousands of USD, except per share data) | Indicator | Q2 2023 | Q2 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) | (4,144) | 6,901 | (11,045) | (160.0%) | | Basic Earnings (Loss) Per Share | (1.01) | 1.72 | (2.73) | (158.7%) | | Return on Average Assets (Annualized) | (0.68%) | 1.25% | (1.93%) | (154.4%) | | Return on Average Equity (Annualized) | (6.62%) | 12.49% | (19.11%) | (153.0%) | Net Interest Income Net Interest Income (Thousands of USD) | Period | Net Interest Income | Provision for Credit Losses | Net Interest Income After Provision for Credit Losses | | :--- | :--- | :--- | :--- | | H1 2023 | 36,001 | 4,853 | 31,148 | | H1 2022 | 33,991 | 700 | 33,291 | | Q2 2023 | 17,921 | 4,853 | 13,068 | | Q2 2022 | 17,729 | 450 | 17,279 | - Net interest income for the first half of 2023 was $36.001 million, a year-over-year increase of 5.9%. After the provision for credit losses, net interest income was $31.148 million, a year-over-year decrease of 6.4%[163] - In the first half of 2023, tax-equivalent net interest income increased by $2.079 million to $36.539 million, but the net interest margin decreased from 3.35% to 3.23%, primarily due to higher costs of interest-bearing liabilities[171] Provision for Credit Losses Provision for Credit Losses (Thousands of USD) | Period | Provision for Credit Losses | | :--- | :--- | | H1 2023 | 4,853 | | H1 2022 | 700 | | Q2 2023 | 4,853 | | Q2 2022 | 450 | - The provision for credit losses for the first half of 2023 was $4.853 million, an increase of $4.153 million from the prior-year period, with $4.591 million related to the HVBC acquisition and $162 thousand related to off-balance sheet items[183] - Excluding acquisition-related items, the 2023 provision for credit losses decreased by $600 thousand compared to the prior-year period, mainly due to limited organic loan activity in 2023[183] Non-interest Income Non-interest Income (Thousands of USD) | Income Category | H1 2023 | H1 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Service Charges | 2,504 | 2,572 | (68) | (2.6%) | | Trust Income | 411 | 433 | (22) | (5.1%) | | Brokerage and Insurance Income | 956 | 982 | (26) | (2.6%) | | Gains on Loan Sales | 214 | 146 | 68 | 46.6% | | Net Loss on Equity Securities | (292) | (179) | (113) | 63.1% | | Net Loss on Available-for-Sale Securities | (51) | - | (51) | NA | | Bank Owned Life Insurance Income | 452 | 419 | 33 | 7.9% | | Other | 260 | 362 | (102) | (28.2%) | | Total | 4,454 | 4,735 | (281) | (5.9%) | - Total non-interest income for the first half of 2023 was $4.454 million, a year-over-year decrease of 5.9%. Net loss on equity securities was $292 thousand, and net loss on available-for-sale securities sales was $51 thousand[185] - The increase in gains on loan sales and decrease in "other income" are primarily attributed to the HVBC acquisition and its residential loan model, which focuses on originating and selling residential mortgage loans, including interest rate lock and other derivative activities[187] Non-interest Expense Non-interest Expense (Thousands of USD) | Expense Category | H1 2023 | H1 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Salaries and Employee Benefits | 15,593 | 14,030 | 1,563 | 11.1% | | Occupancy Expense | 1,649 | 1,548 | 101 | 6.5% | | Furniture and Equipment | 313 | 295 | 18 | 6.1% | | Professional Service Fees | 768 | 733 | 35 | 4.8% | | FDIC Insurance | 625 | 280 | 345 | 123.2% | | Pennsylvania Shares Tax | 596 | 678 | (82) | (12.1%) | | Amortization of Intangible Assets | 62 | 80 | (18) | (22.5%) | | Merger and Acquisition Expenses | 8,646 | - | 8,646 | NA | | Software Expenses | 723 | 699 | 24 | 3.4% | | ORE Expenses (Recoveries) | 15 | (247) | 262 | (106.1%) | | Other | 3,468 | 3,335 | 133 | 4.0% | | Total | 32,458 | 21,431 | 11,027 | 51.5% | - Total non-interest expense for the first half of 2023 was $32.458 million, an increase of $11.027 million (51.5%) year-over-year, primarily driven by merger and acquisition expenses related to the HVBC acquisition ($8.646 million) and increased salaries and employee benefits ($1.563 million)[188] - In the second quarter of 2023, other expenses increased due to operational charge-offs from customer account fraud, Delaware franchise fees, and other periodic pension expenses[191] Provision for Income Taxes Provision for (Benefit from) Income Taxes (Thousands of USD) | Period | Provision for (Benefit from) Income Taxes | Income (Loss) Before Income Taxes | Effective Tax Rate | | :--- | :--- | :--- | :--- | | H1 2023 | 421 | 3,144 | 13.4% | | H1 2022 | 2,954 | 16,595 | 17.8% | | Q2 2023 | (1,188) | (5,332) | (22.3%) | | Q2 2022 | 1,482 | 8,383 | 17.7% | - The provision for income taxes for the first half of 2023 was $421 thousand, a year-over-year decrease of 85.7%, primarily due to a significant reduction in pre-tax income caused by one-time costs related to the HVBC acquisition[192] - The company has invested in seven low-income housing project limited partnerships, expecting to recognize a total of $6.6 million in tax credits over the next 13 years[194] Financial Condition Overview - As of June 30, 2023, total assets were $2.89 billion, an increase of $558.4 million from December 31, 2022, primarily attributable to the HVBC acquisition completed on June 16, 2023[195] - Cash and cash equivalents increased to $44.7 million, net loans increased to $2.14 billion, total deposits increased to $2.27 billion, and borrowed funds increased to $318.2 million, with all these changes primarily influenced by the acquisition[195] Cash and Cash Equivalents Cash and Cash Equivalents (Thousands of USD) | Period | Amount | | :--- | :--- | | June 30, 2023 | 44,709 | | December 31, 2022 | 26,211 | - Cash and cash equivalents increased by $18.5 million, primarily due to the HVBC acquisition and cash held as collateral for derivative instruments[196] Investments Investment Portfolio Composition (Thousands of USD) | Security Category | June 30, 2023 Amount | June 30, 2023 Percentage | December 31, 2022 Amount | December 31, 2022 Percentage | | :--- | :--- | :--- | :--- | :--- | | Total Debt Securities | 434,315 | 99.6% | 439,506 | 99.5% | | Equity Securities | 1,849 | 0.4% | 2,208 | 0.5% | | Total | 436,164 | 100.0% | 441,714 | 100.0% | - The investment portfolio decreased by $5.6 million (1.3%) from December 31, 2022, to June 30, 2023, but the HVBC acquisition contributed $79.2 million in available-for-sale securities[198] - For the first half of 2023, the tax-equivalent yield on the investment portfolio (excluding short-term investments) was 2.14%, up from 1.77% in the first half of 2022[198] Loans Held for Sale Loans Held for Sale (Thousands of USD) | Period | Amount | | :--- | :--- | | June 30, 2023 | 14,940 | | December 31, 2022 | 725 | - Loans held for sale increased by $14.2 million to $14.9 million, primarily due to the HVBC acquisition and its focus on residential mortgage loans and related secondary market sales[201] Loans Loan Portfolio Composition (Thousands of USD) | Loan Category | June 30, 2023 Amount | June 30, 2023 Percentage | December 31, 2022 Amount | December 31, 2022 Percentage | | :--- | :--- | :--- | :--- | :--- | | Real Estate - Residential | 358,025 | 16.6% | 210,213 | 12.2% | | Real Estate - Commercial | 1,080,513 | 50.0% | 876,569 | 50.8% | | Real Estate - Agricultural | 312,302 | 14.4% | 313,614 | 18.2% | | Construction Loans | 156,927 | 7.3% | 80,691 | 4.7% | | Consumer Loans | 42,701 | 2.0% | 86,650 | 5.0% | | Other Commercial Loans | 120,288 | 5.6% | 63,222 | 3.7% | | Other Agricultural Loans | 30,615 | 1.4% | 34,832 | 2.0% | | State and Political Subdivision Loans | 61,471 | 2.7% | 59,208 | 3.4% | | Total Loans | 2,162,842 | 100.0% | 1,724,999 | 100.0% | - Total loans increased by $437.8 million (25.4%), primarily due to $477 million in loans from the HVBC acquisition. Excluding the acquisition, organic loans decreased by $40.1 million, mainly due to student loan repayments[202][203] - The company's loan operations have expanded into north-central, central, south-central, and southeastern Pennsylvania, southern New York, and Delaware, with plans to open a new office in Williamsport, Pennsylvania[202] Allowance for Credit Losses - Loans Allowance for Loan Credit Losses (Thousands of USD) | Period | Amount | Percentage of Total Loans | | :--- | :--- | :--- | | June 30, 2023 | 21,652 | 1.00% | | December 31, 2022 | 18,552 | 1.08% | - The adoption of CECL in the first quarter of 2023 resulted in a $3.3 million decrease in the allowance for loan credit losses. The HVBC acquisition led to a $4.591 million provision for non-PCD loans and a $1.689 million provision for PCD loans[206] - Nonperforming loans increased by $6.3 million in 2023, including nonperforming residential, consumer, and other commercial loans from the HVBC acquisition, and two large relationship loans totaling $3.8 million classified as nonaccrual[216] Bank Owned Life Insurance Bank Owned Life Insurance Cash Surrender Value (Thousands of USD) | Period | Amount | | :--- | :--- | | June 30, 2023 | 50,194 | | December 31, 2022 | 39,355 | - The cash surrender value of Bank Owned Life Insurance (BOLI) increased to $50.2 million, with $10.4 million from the HVBC acquisition[219] - In the first half of 2023, BOLI generated $452 thousand in non-interest income[219] Premises and Equipment Premises and Equipment (Thousands of USD) | Period | Amount | | :--- | :--- | | June 30, 2023 | 21,382 | | December 31, 2022 | 17,619 | - Premises and equipment increased by $3.8 million to $21.4 million, with $2.3 million from the HVBC acquisition and an additional $1.6 million for the purchase of a new corporate headquarters and operations facility in Mansfield[221] Other assets Other Assets (Thousands of USD) | Period | Amount | | :--- | :--- | | June 30, 2023 | 43,800 | | December 31, 2022 | 25,802 | - Other assets increased by $18 million to $43.8 million, primarily driven by the HVBC acquisition, which added $14.8 million including leases, restricted stock, and prepaid expenses[222] Deposits Deposit Composition (Thousands of USD) | Deposit Category | June 30, 2023 Amount | June 30, 2023 Percentage | December 31, 2022 Amount | December 31, 2022 Percentage | | :--- | :--- | :--- | :--- | :--- | | Non-interest Bearing Deposits | 553,097 | 24.4% | 396,260 | 21.5% | | NOW Accounts | 633,325 | 27.9% | 512,502 | 27.8% | | Savings Deposits | 335,497 | 14.8% | 321,917 | 17.5% | | Money Market Deposit Accounts | 413,350 | 18.2% | 335,838 | 18.2% | | Time Deposits | 330,831 | 14.7% | 277,691 | 15.0% | | Total Deposits | 2,266,100 | 100.0% | 1,844,208 | 100.0% | - Total deposits increased by $421.9 million since December 31, 2022, with $533.4 million from the HVBC acquisition. Excluding the acquisition, deposits decreased by $111.5 million, mainly due to customers shifting funds to higher-yielding investments and seasonal reductions in municipal deposits[223] - As of June 30, 2023, customer deposits exceeding FDIC insurance limits totaled $986.4 million (43.5% of total deposits), with $577.6 million (25.5%) additionally insured through Intrafi or collateralized by securities[223] Borrowed Funds Borrowed Funds (Thousands of USD) | Period | Amount | | :--- | :--- | | June 30, 2023 | 318,200 | | December 31, 2022 | 257,278 | - Borrowed funds increased by $60.9 million, primarily due to $58.6 million in borrowings from the HVBC acquisition, including $49.8 million in FHLB advances and $8.9 million in subordinated debt[224] - The company has entered into several interest rate swap agreements to convert floating-rate debt to fixed-rate debt to manage interest rate risk. As of June 30, 2023, the fair value of interest rate swaps was $6.562 million[226] Stockholders' Equity Stockholders' Equity (Thousands of USD) | Period | Amount | | :--- | :--- | | June 30, 2023 | 263,228 | | December 31, 2022 | 200,147 | - Total stockholders' equity increased by $63.081 million (31.5%), primarily due to the issuance of 693,858 shares of common stock valued at $60.1 million for the HVBC acquisition[229] - Accumulated other comprehensive loss decreased by $2.2 million, mainly due to an increase in the fair value of the available-for-sale investment portfolio resulting from declining long-term market interest rates[229][230] - As of June 30, 2023, the bank's leverage ratio under the Community Bank Leverage Ratio (CBLR) framework was 9.70%, meeting the "well capitalized" requirement of 9.0%[232] Off-Balance Sheet Activities Off-Balance Sheet Financial Instruments with Risk (Thousands of USD) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Commitments to Extend Credit | 596,120 | 437,449 | | Standby Letters of Credit | 17,760 | 15,972 | | Total | 613,880 | 453,421 | | Allowance for Off-Balance Sheet Credit Risk | 1,390 | 165 | - Contractual amounts of off-balance sheet financial instruments, such as commitments to extend credit and standby letters of credit, totaled $613.9 million as of June 30, 2023, up from $453.4 million on December 31, 2022[233] Liquidity - The company meets its liquidity needs through core deposits, FHLB funding, federal funds lines of credit, brokered time deposits, and maturing investments and loan portfolios[235] - As of June 30, 2023, the bank's maximum borrowing capacity at the FHLB was approximately $881.3 million, with $345.6 million drawn. Additionally, there were $34 million in federal funds lines of credit and $54.5 million in Bank Term Funding Program (BTFP) capacity unused[237] - As of June 30, 2023, Citizens Financial Services, Inc. (on a non-consolidated basis) held approximately $9.2 million in liquid assets[238] Interest Rate and Market Risk Management - The company primarily faces interest rate risk, which is assessed through computer simulation models to evaluate the impact of interest rate changes on net interest income, and is governed by an interest rate risk policy[239][243][244] Interest Rate Shock Analysis on One-Year Expected Net Interest Income (June 30, 2023, Thousands of USD) | Interest Rate Change | Expected One-Year Net Interest Income | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | | -400 Basis Point Shock | 94,994 | 4,895 | 5.43% | | -300 Basis Point Shock | 93,624 | 3,525 | 3.91% | | -200 Basis Point Shock | 92,193 | 2,094 | 2.32% | | -100 Basis Point Shock | 91,568 | 1,469 | 1.63% | | Baseline | 90,099 | - | - | | +100 Basis Point Shock | 87,716 | (2,383) | (2.64%) | | +200 Basis Point Shock | 85,028 | (5,071) | (5.63%) | | +300 Basis Point Shock | 82,707 | (7,392) | (8.20%) | | +400 Basis Point Shock | 80,374 | (9,725) | (10.79%) | Quantitative and Qualitative Disclosures About Market Risk This chapter reiterates the market risks the company faces in its normal business activities, primarily interest rate risk, which is managed by both management and the Board of Directors' committees - The company primarily faces interest rate risk, which arises from fluctuations in market interest rates affecting cash flows, income, expenses, and the value of financial instruments[245] - Interest rate risk is jointly managed by management and the Board of Directors' committees[245] Controls and Procedures This chapter discloses the results of management's evaluation of the effectiveness of disclosure controls and procedures and confirms no significant changes in internal control over financial reporting during the reporting period Disclosure Controls and Procedures - The company's management assessed that, as of the end of the reporting period, its disclosure controls and procedures were effective in ensuring timely recording, processing, summarizing, and reporting of information required for SEC filings under the Securities Exchange Act[246] Changes to Internal Control over Financial Reporting - As of the quarter ended June 30, 2023, there were no significant changes in the company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[247] Part II OTHER INFORMATION Legal Proceedings Management states that the company currently has no known or threatened legal proceedings that would have a material adverse effect on its consolidated financial condition, and all existing litigation is routine and incidental to its ordinary course of business - Management has identified no pending or threatened litigation that could have a material adverse effect on the company's consolidated financial condition[248] Risk Factors This chapter supplements the risk factors already disclosed in the company's annual report, highlighting new risks including insufficient funding sources, the negative impact of recent bank failures on stock prices and deposit confidence, and potential adverse effects of federal debt ceiling issues on securities valuation and future borrowing costs - The company's funding sources may be insufficient to replace maturing deposits and support future growth, potentially leading to reliance on more expensive funding sources and impacting profitability[250] - Recent bank failures could negatively impact the company's stock price and erode deposit confidence in financial institutions; failure to effectively manage liquidity, interest rate risk, and capital levels could materially adversely affect financial condition and operating results[251] - Failure to timely address the federal debt ceiling, a downgrade of the US credit rating, and uncertain credit and financial market conditions could affect the stability of federal government-issued or guaranteed securities, impacting the valuation or liquidity of the company's investment securities portfolio and increasing future borrowing costs[252] Unregistered Sales of Equity Securities and Use of Proceeds This chapter discloses that the company did not repurchase any equity securities in the second quarter of 2023 and reiterates the Board's authorization to repurchase up to 150,000 shares, a plan with no time limit Issuer Purchases of Equity Securities | Period | Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Publicly Announced Plan | Maximum Number of Shares that May Yet Be Purchased Under the Plan | | :--- | :--- | :--- | :--- | :--- | | April 1 to April 30, 2023 | - | $0.00 | - | 116,389 | | May 1 to May 31, 2023 | - | $0.00 | - | 116,389 | | June 1 to June 30, 2023 | - | $0.00 | - | 116,389 | | Total | - | $0.00 | - | 116,389 | - The company did not repurchase any equity securities in the second quarter of 2023[253] - The Board of Directors authorized the repurchase of up to 150,000 shares for a total purchase price not exceeding $12 million, with no time limit on the plan, and 116,389 shares remained available for repurchase as of June 30, 2023[253] Defaults Upon Senior Securities This chapter states that it is not applicable - Not applicable[254] Mine Safety Disclosures This chapter states that it is not applicable - Not applicable[255] Other Information This chapter states that there is no other information - None[256] Exhibits This chapter lists all exhibits filed as part of the report, including articles of incorporation, certification documents, and financial statements in XBRL format - Report exhibits include the company's articles of incorporation, CEO and CFO certification documents, and consolidated financial statements and related notes in XBRL format[256] Signatures This chapter contains the authorized signatures for the company's report filing as required by the Securities Exchange Act, signed by President and Chief Executive Officer Randall E. Black and Chief Financial Officer Stephen J. Guillaume - The report was signed by Randall E. Black, President and Chief Executive Officer, and Stephen J. Guillaume, Chief Financial Officer, on August 9, 2023[263]