UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from_____________________ to ___________________

Commission file number 0-13222

CITIZENS FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA		23-2265045
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

15 South Main Street

Mansfield, Pennsylvania 16933

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code: (570) 662‑2121

N/A

(Former Name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☒	Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of outstanding shares of the Registrant’s Common Stock, as of May 4, 2022, was 3,939,376.

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(in thousands except share data)	March 31, 2022			December 31, 2021
ASSETS:
Cash and due from banks:
Noninterest-bearing	$	30,934		$	14,051
Interest-bearing		83,181			158,782
Total cash and cash equivalents		114,115			172,833
Interest bearing time deposits with other banks		10,528			11,026
Equity securities		2,444			2,270
Available-for-sale securities		461,471			412,402
Loans held for sale		644			4,554

Loans (net of allowance for loan losses:
2022, $17,556 and 2021, $17,304)		1,461,139			1,424,229

Premises and equipment		16,852			17,016
Accrued interest receivable		5,414			5,235
Goodwill		31,376			31,376
Bank owned life insurance		38,710			38,503
Other intangibles		1,547			1,627
Other assets		33,647			22,792
TOTAL ASSETS	$	2,177,887		$	2,143,863

LIABILITIES:
Deposits:
Noninterest-bearing	$	366,820		$	358,073
Interest-bearing		1,512,270			1,478,078
Total deposits		1,879,090			1,836,151
Borrowed funds		68,214			73,977
Accrued interest payable		714			711
Other liabilities		27,124			20,532
TOTAL LIABILITIES		1,975,142			1,931,371
STOCKHOLDERS’ EQUITY:
Preferred Stock
$1.00 par value; authorized 3,000,000 shares at March 31, 2022 and December 31, 2021; none issued in 2022 or 2021		-			-
Common Stock
$1.00 par value; authorized 25,000,000 shares at March 31, 2022 and December 31, 2021; issued 4,388,901 at March 31, 2022 and at December 31, 2021		4,389			4,389
Additional paid-in capital		78,396			78,395
Retained earnings		150,876			146,010
Accumulated other comprehensive loss		(14,765	)		(155	)
Treasury stock, at cost: 444,554 shares at March 31, 2022 and 444,481 shares at December 31, 2021		(16,151	)		(16,147	)
TOTAL STOCKHOLDERS’ EQUITY		202,745			212,492
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,177,887		$	2,143,863

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Index

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

	Three Months Ended March 31,
(in thousands, except share and per share data)	2022			2021
INTEREST INCOME:
Interest and fees on loans	$	15,920		$	16,694
Interest-bearing deposits with banks		116			106
Investment securities:
Taxable		1,112			850
Nontaxable		583			544
Dividends		84			101
TOTAL INTEREST INCOME		17,815			18,295
INTEREST EXPENSE:
Deposits		1,275			1,598
Borrowed funds		278			256
TOTAL INTEREST EXPENSE		1,553			1,854
NET INTEREST INCOME		16,262			16,441
Provision for loan losses		250			650
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		16,012			15,791
NON-INTEREST INCOME:
Service charges		1,248			1,106
Trust		249			307
Brokerage and insurance		481			376
Gains on loans sold		105			503
Equity security (losses) gains, net		(45	)		187
Available for sale security gains, net		-			50
Earnings on bank owned life insurance		207			1,315
Other		186			391
TOTAL NON-INTEREST INCOME		2,431			4,235
NON-INTEREST EXPENSES:
Salaries and employee benefits		6,913			6,263
Occupancy		794			783
Furniture and equipment		129			143
Professional fees		339			448
FDIC insurance		135			129
Pennsylvania shares tax		339			339
Amortization of intangibles		40			49
Software expenses		341			313
ORE (income) expenses		(367	)		86
Other		1,568			1,394
TOTAL NON-INTEREST EXPENSES		10,231			9,947
Income before provision for income taxes		8,212			10,079
Provision for income taxes		1,472			1,616
NET INCOME	$	6,740		$	8,463

PER COMMON SHARE DATA:
Net Income - Basic	$	1.71		$	2.14
Net Income - Diluted	$	1.71		$	2.14
Cash Dividends Paid	$	0.475		$	0.460

Number of shares used in computation - basic		3,939,125			3,948,446
Number of shares used in computation - diluted		3,939,182			3,948,446

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Index

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended March 31,
(in thousands)	2022			2021
Net income	$	6,740		$	8,463
Other comprehensive (loss) income:
Change in unrealized (losses) gains on available for sale securities		(20,987	)		(4,094	)
Income tax effect		4,407			859
Change in unrecognized pension cost		36			91
Income tax effect		(8	)		(19	)
Change in unrealized loss on interest rate swaps		2,458			2,047
Income tax effect		(516	)		(430	)
Less: Reclassification adjustment for investment security gains included in net income		-			(50	)
Income tax effect		-			11
Other comprehensive loss, net of tax		(14,610	)		(1,585	)
Comprehensive (loss) income	$	(7,870	)	$	6,878

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Index

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

	Common Stock				Additional						Accumulated Other
(in thousands, except share data)	Shares		Amount		Paid-in Capital			Retained Earnings			Comprehensive Income (Loss)			Treasury Stock			Total
Balance, December 31, 2021		4,388,901	$	4,389	$	78,395		$	146,010		$	(155	)	$	(16,147	)	$	212,492

Comprehensive income:
Net income									6,740									6,740
Net other comprehensive (loss) income												(14,610	)					(14,610	)
Purchase of treasury stock (113 shares)															(7	)		(7	)
Restricted stock, executive and Board of Director awards (79 shares)						(5	)								5			-
Restricted stock vesting						4												4
Forfeited restricted stock (39 shares)						2									(2	)		-
Cash dividends, $0.475 per share									(1,874	)								(1,874	)
Balance, March 31, 2022		4,388,901	$	4,389	$	78,396		$	150,876		$	(14,765	)	$	(16,151	)	$	202,745

Balance, December 31, 2020		4,350,342	$	4,350	$	75,908		$	126,627		$	2,587		$	(15,213	)	$	194,259

Comprehensive income:
Net income									8,463									8,463
Net other comprehensive (loss) income												(1,585	)					(1,585	)
Purchase of treasury stock (9,202 shares)															(513	)		(513	)
Restricted stock, executive, and Board of Director awards (88 shares)						(2	)								-			(2	)
Restricted stock vesting						5												5
Forfeited restricted stock						(3	)								3			-
Cash dividends, $0.46 per share									(1,820	)								(1,820	)
Balance, March 31, 2021		4,350,342	$	4,350	$	75,908		$	133,270		$	1,002		$	(15,723	)	$	198,807

The accompanying notes are an integral part of these unaudited consolidated financial statements

Index

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
(in thousands)	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,740		$	8,463
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		250			650
Depreciation and amortization		262			286
Amortization and accretion of loans and other assets		(588	)		(1,344	)
Amortization and accretion of investment securities		560			503
Deferred income taxes		(115	)		74
Investment securities losses (gains), net		45			(237	)
Earnings on bank owned life insurance		(207	)		(1,315	)
Vesting of restricted stock		4			-
Originations of loans held for sale		(1,386	)		(14,206	)
Proceeds from sales of loans held for sale		5,359			19,253
Realized gains on loans sold		(105	)		(503	)
(Increase) decrease in accrued interest receivable		(179	)		426
Gain on sale of other real estate		(487	)		-
Increase (decrease) in accrued interest payable		3			(104	)
Other, net		1,887			2,019
Net cash provided by operating activities		12,043			13,965
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales		-			5,045
Proceeds from maturity and principal repayments		9,135			17,826
Purchase of securities		(79,970	)		(54,248	)
Purchase of interest bearing time deposits with other banks		(496	)		-
Proceeds from life insurance		-			3,714
Proceeds from matured interest bearing time deposits with other banks		994			249
Proceeds from redemption of regulatory stock		1,217			1,179
Purchase of regulatory stock		(1,004	)		(1,013	)
Net (increase) decrease in loans		(36,470	)		2,461
Purchase of premises and equipment		(58	)		(785	)
Proceeds from sale of other real estate		598			116
Net cash used in investing activities		(106,054	)		(25,456	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		42,939			98,612
Repayments of long-term borrowings		(4,725	)		(2,000	)
Net decrease in short-term borrowed funds		(1,040	)		(667	)
Purchase of treasury and restricted stock		(8	)		(513	)
Dividends paid		(1,874	)		(1,820	)
Net cash provided by financing activities		35,292			93,612
Net (decrease) increase in cash and cash equivalents		(58,719	)		82,121
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		172,833			68,707
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	114,115		$	150,828

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	1,550		$	1,958
Income taxes paid	$	-		$	-
Loans transferred to foreclosed real estate	$	61		$	-
Right of use asset and liability	$	-		$	211

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Index

CITIZENS FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

Citizens Financial Services, Inc. (individually and collectively with its direct and indirect subsidiaries, the “Company”) is a Pennsylvania corporation and its wholly owned subsidiary is CZFS Acquisition Company, LLC. CZFS Acquisition Company, LLC is the holding company of its wholly owned subsidiary, First Citizens Community Bank (the “Bank”), and of the Bank’s wholly owned subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1^st Realty of PA LLC (“Realty”).

The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with U.S. generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. Certain of the prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income or stockholders’ equity. All material inter‑company balances and transactions have been eliminated in consolidation.

In the opinion of management of the Company, the accompanying interim consolidated financial statements at March 31, 2022 and for the periods ended March 31, 2022 and 2021 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and of revenues and expenses for the periods covered by the Consolidated Statement of Income. The financial performance reported for the Company for the three month periods ended March 31, 2022 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as amended.

Note 2 – Revenue Recognition

In accordance with ASC 606, Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold and earnings on bank owned life insurances are not within the scope of ASC 606. The main types of noninterest income within the scope of the standard are as follows:

•

Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.

•

Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction.

Index

•

Gains and losses on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.

•

Brokerage and insurance – Fees includes commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Fees for these services are billed monthly and are recorded as revenue at the end of the month for which the wealth management service has been performed. Other performance obligations (such as the delivery of account statements to customers) are generally considered immaterial to the overall transaction price.

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the three months ended March 31, 2022 and 2021 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

	Three Months Ended
	March 31,
Revenue stream	2022		2021
Service charges on deposit accounts
Overdraft fees	$	307	$	258
Statement fees		56		56
Interchange revenue		723		639
ATM income		89		98
Other service charges		73		55
Total Service Charges		1,248		1,106
Trust		249		307
Brokerage and insurance		481		376
Other		139		109
Total	$	2,117	$	1,898

Index

Note 3 – Earnings per Share

The following table sets forth the computation of earnings per share.

	Three months ended
	March 31,
	2022		2021
Net income applicable to common stock	$	6,740,000	$	8,463,000

Basic earnings per share computation
Weighted average common shares outstanding		3,939,125		3,948,446
Earnings per share - basic	$	1.71	$	2.14

Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share		3,939,125		3,948,446
Add: Dilutive effects of restricted stock		57		-
Weighted average common shares outstanding for dilutive earnings per share		3,939,182		3,948,446
Earnings per share - diluted	$	1.71	$	2.14

For the three months ended March 31, 2022 and 2021, there were 3,358 and 3,289 shares, respectively, related to the restricted stock plan that were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had per share prices ranging from $57.36-$63.19 for the three month period ended March 31, 2022 and per share prices ranging from $57.36-$62.93 for the three month period ended March 31, 2021.

Note 4 – Investments

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at March 31, 2022 and December 31, 2021 were as follows (in thousands):

March 31, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. agency securities	$	77,569	$	328	$	(3,365	)	$	74,532
U.S. treasury securities		153,953		52		(7,315	)		146,690
Obligations of state and political subdivisions		121,631		388		(4,029	)		117,990
Corporate obligations		10,367		4		(323	)		10,048
Mortgage-backed securities in government sponsored entities		118,553		93		(6,435	)		112,211
Total available-for-sale securities	$	482,073	$	865	$	(21,467	)	$	461,471

December 31, 2021
Available-for-sale securities:
U.S. agency securities	$	73,803	$	976	$	(834	)	$	73,945
U.S. treasury securities		116,743		63		(1,459	)		115,347
Obligations of state and political subdivisions		109,367		2,706		(52	)		112,021
Corporate obligations		10,378		39		(84	)		10,333
Mortgage-backed securities in government sponsored entities		101,727		597		(1,568	)		100,756
Total available-for-sale securities	$	412,018	$	4,381	$	(3,997	)	$	412,402

Index

The following table shows the Company’s gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, which individual securities have been in a continuous unrealized loss position, at March 31, 2022 and December 31, 2021 (in thousands). As of March 31, 2022, the Company owned 268 securities whose fair value was less than their cost basis.

	Less than Twelve Months					Twelve Months or Greater					Total
March 31, 2022	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. agency securities	$	36,781	$	(1,989	)	$	11,106	$	(1,376	)	$	47,887	$	(3,365	)
U.S. treasury securities		130,927		(7,187	)		2,036		(128	)		132,963		(7,315	)
Obligations of state and political subdivisions		79,321		(3,786	)		2,674		(243	)		81,995		(4,029	)
Corporate obligations		8,311		(306	)		483		(17	)		8,794		(323	)
Mortgage-backed securities in government sponsored entities		66,940		(4,594	)		18,372		(1,841	)		85,312		(6,435	)
Total securities	$	322,280	$	(17,862	)	$	34,671	$	(3,605	)	$	356,951	$	(21,467	)

December 31, 2021
U.S. agency securities	$	26,754	$	(387	)	$	7,542	$	(447	)	$	34,296	$	(834	)
U.S. treasury securities		106,794		(1,459	)		-		-			106,794		(1,459	)
Obligations of states and political subdivisions		10,744		(26	)		2,899		(26	)		13,643		(52	)
Corporate obligations		6,922		(84	)		-		-			6,922		(84	)
Mortgage-backed securities in government sponsored entities		60,182		(1,305	)		7,975		(263	)		68,157		(1,568	)
Total securities	$	211,396	$	(3,261	)	$	18,416	$	(736	)	$	229,812	$	(3,997	)

As of March 31, 2022 and December 31, 2021, the Company’s investment securities portfolio contained unrealized losses on U.S. Treasuries, agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, obligations of states and political subdivisions, corporate obligations and mortgage backed securities in government sponsored entities. For fixed maturity investments management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in fair value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of market interest rate changes, sector credit rating changes, or issuer-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

Index

There were no sales of available for sale securities during the three months ended March 31, 2022. Proceeds from sales of securities available-for-sale for the three months ended March 31, 2021 were $5,045,000. The gross gains and losses were as follows (in thousands):

	Three Months Ended
	March 31,
	2022		2021
Gross gains on available for sale securities	$	-	$	50
Gross losses on available for sale securities		-		-
Net gains	$	-	$	50

The following table presents the net gains (losses) on the Company’s equity investments recognized in earnings during the three month periods ended March 31, 2022 and 2021, and the portion of unrealized gains for the period that relates to equity investments held at March 31, 2022 and 2021 (in thousands):

	Three Months Ended March 31,
Equity securities	2022			2021
Net (losses) gains recognized in equity securities during the period	$	(45	)	$	187
Less: Net gains realized on the sale of equity securities during the period		-			-
Net unrealized (losses) gains	$	(45	)	$	187

Investment securities with an approximate carrying value of $288.0 million and $295.0 million at March 31, 2022 and December 31, 2021, respectively, were pledged to secure public funds, certain other deposits and borrowing lines.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and fair value of debt securities (excludes equity securities) at March 31, 2022, by contractual maturity, are shown below (in thousands):

	Amortized Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	16,992	$	17,114
Due after one year through five years		155,072		150,062
Due after five years through ten years		134,379		127,440
Due after ten years		175,630		166,855
Total	$	482,073	$	461,471

Note 5 – Loans

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central and south central Pennsylvania, southern New York and Wilmington and Dover, Delaware. Although the Company had a diversified loan portfolio at March 31, 2022 and December 31, 2021, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	201,567	$	602	$	12	$	200,953
Commercial		724,876		8,189		2,109		714,578
Agricultural		305,517		5,288		1,606		298,623
Construction		66,738		-		-		66,738
Consumer		21,460		-		-		21,460
Other commercial loans		69,051		612		-		68,439
Other agricultural loans		39,904		921		-		38,983
State and political subdivision loans		49,582		-		-		49,582
Total		1,478,695		15,612		3,727		1,459,356
Allowance for loan losses		17,556		510		-		17,046
Net loans	$	1,461,139	$	15,102	$	3,727	$	1,442,310

Index

December 31, 2021	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	201,097	$	620	$	14	$	200,463
Commercial		687,338		8,381		2,145		676,812
Agricultural		312,011		5,355		1,643		305,013
Construction		55,036		-		-		55,036
Consumer		25,858		-		-		25,858
Other commercial loans		74,585		186		-		74,399
Other agricultural loans		39,852		991		-		38,861
State and political subdivision loans		45,756		-		-		45,756
Total		1,441,533		15,533		3,802		1,422,198
Allowance for loan losses		17,304		121		-		17,183
Net loans	$	1,424,229	$	15,412	$	3,802	$	1,405,015

During 2022 the Company continued its participation in the Paycheck Protection Program (“PPP”), administered directly by the U.S. Small Business Administration (the “SBA”) through the processing of forgiveness of PPP loans. During 2021, the Company originated $24.3 million of loans. As of March 31, 2022 and December 31, 2021, the Company had outstanding principal balances of $2.8 million and $6.8 million, respectively, of PPP loans that are included in other commercial loans. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. The SBA has issued guidance for forgiveness with a streamlined approach for loans of $150,000 or less.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $150,000 in fees associated with the processing of the loans outstanding as of March 31, 2022. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2. As of March 31, 2022, $109,000 of deferred fees related to the PPP loans remain to be amortized.

The Company evaluated whether loans acquired as part of the MidCoast acquisition were within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired (“PCI”) loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. There were no material increases or decreases in the expected cash flows of these loans between April 17, 2020 (the “acquisition date”) and March 31, 2022. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral. The carrying value of purchased loans acquired with deteriorated credit quality as a result of the MidCoast acquisition was $3,444,000 at March 31, 2022.

Index

Changes in the accretable yield for PCI loans were as follows for the three months ended March 31, 2022 and 2021 (in thousands):

	Three months ended March 31
	2022			2021
Balance at beginning of period	$	370		$	788
Reclassification of non-accretable discount		228			-
Accretion		(203	)		(100	)
Balance at end of period	$	395		$	688

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30 (in thousands):

	March 31, 2022		December 31, 2021
Outstanding balance	$	6,584	$	6,159
Carrying amount		3,727		3,802

The segments of the Company’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equity loans are consumer purpose installment loans or lines of credit with terms of 15 years or less secured by a mortgage which is often a second lien on residential real estate. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential, commercial or agricultural real estate used during the construction phase of residential, commercial or agricultural projects. Consumer loans are typically unsecured or primarily secured by assets other than real estate and overdraft lines of credit are typically secured by customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non-real estate collateral. State and political subdivision loans are loans to state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Index

Management considers other commercial loans, other agricultural loans, state and political subdivision loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer’s results of operations and cash flows or if the loan is modified in a troubled debt restructuring. In addition, certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired. Impaired loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allocation to the allowance for loan losses or a charge-off to the allowance for loan losses.

The following table includes the recorded investment and unpaid principal balances for impaired loan receivables by class, excluding PCI loans, with the associated allowance amount, if applicable (in thousands):

March 31, 2022	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	713	$	482	$	44	$	526	$	6
Home Equity		95		35		41		76		5
Commercial		9,180		7,908		281		8,189		56
Agricultural		5,673		5,100		188		5,288		14
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		1,241		92		520		612		429
Other agricultural loans		1,241		921		-		921		-
Total	$	18,143	$	14,538	$	1,074	$	15,612	$	510

December 31, 2021	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	697	$	495	$	45	$	540	$	6
Home Equity		97		37		43		80		6
Commercial		9,330		8,096		285		8,381		61
Agricultural		5,694		5,167		188		5,355		14
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		813		92		94		186		34
Other agricultural loans		1,274		991		-		991		-
Total	$	17,905	$	14,878	$	655	$	15,533	$	121

The following tables includes the average balance of impaired loan receivables by class and the income recognized on these receivables for the three month periods ended March 31, 2022 and 2021 (in thousands):

	For the Three Months Ended
	March 31, 2022						March 31, 2021
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
Real estate loans:
Mortgages	$	531	$	2	$	-	$	851	$	5	$	-
Home Equity		77		1		-		124		1		-
Commercial		8,260		66		-		9,238		67		7
Agricultural		5,316		28		-		4,590		22		-
Consumer		-		-		-		1		-		-
Other commercial loans		326		1		-		1,121		1		-
Other agricultural loans		953		1		-		1,103		2		-
Total	$	15,463	$	99	$	-	$	17,028	$	98	$	7

Index

Credit Quality Information

For commercial real estate, agricultural real estate, construction, other commercial, other agricultural and state and political subdivision loans, management uses a nine grade internal risk rating system to monitor and assess credit quality. The first five categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

•

Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

•

Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

•

Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial, agricultural and state and political relationships over $500,000 are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to: 1) review a minimum of 50% of the dollar volume of the commercial, agricultural and municipal loan portfolios on an annual basis, 2) review a sample of new loans originated for over $1.0 million in the last year, 3) review a sample of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

Index

The following tables represent credit exposures by internally assigned grades as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	687,595	$	29,919	$	7,362	$	-	$	-	$	724,876
Agricultural		286,986		12,665		5,866		-		-		305,517
Construction		66,738		-		-		-		-		66,738
Other commercial loans		64,635		3,520		860		36		-		69,051
Other agricultural loans		37,989		1,156		759		-		-		39,904
State and political subdivision loans		49,582		-		-		-		-		49,582
Total	$	1,193,525	$	47,260	$	14,847	$	36	$	-	$	1,255,668

December 31, 2021
Real estate loans:
Commercial	$	646,137	$	35,332	$	5,869	$	-	$	-	$	687,338
Agricultural		291,537		15,105		5,369		-		-		312,011
Construction		55,036		-		-		-		-		55,036
Other commercial loans		70,932		3,289		316		48		-		74,585
Other agricultural loans		37,800		1,351		701		-		-		39,852
State and political subdivision loans		45,588		168		-		-		-		45,756
Total	$	1,147,030	$	55,245	$	12,255	$	48	$	-	$	1,214,578

For residential real estate mortgages, home equity and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days and still accruing. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	152,183	$	455	$	12	$	152,650
Home Equity		48,917		-		-		48,917
Consumer		21,460		-		-		21,460
Total	$	222,560	$	455	$	12	$	223,027

December 31, 2021	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	150,320	$	608	$	14	$	150,942
Home Equity		50,122		33		-		50,155
Consumer		25,858		-		-		25,858
Total	$	226,300	$	641	$	14	$	226,955

Aging Analysis of Past Due Loan Receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loan receivables as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		PCI		Total Loan Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	567	$	86	$	207	$	860	$	151,778	$	12	$	152,650	$	12
Home Equity		60		24		-		84		48,833		-		48,917		-
Commercial		97		719		1,940		2,756		720,011		2,109		724,876		-
Agricultural		671		-		1,368		2,039		301,872		1,606		305,517		-
Construction		-		-		-		-		66,738		-		66,738		-
Consumer		186		3		-		189		21,271		-		21,460		-
Other commercial loans		100		313		117		530		68,521		-		69,051		-
Other agricultural loans		-		-		-		-		39,904		-		39,904		-
State and political subdivision loans		-		-		-		-		49,582		-		49,582		-
Total	$	1,681	$	1,145	$	3,632	$	6,458	$	1,468,510	$	3,727	$	1,478,695	$	12

Loans considered non-accrual	$	272	$	457	$	3,620	$	4,349	$	3,461	$	-	$	7,810
Loans still accruing		1,409		688		12		2,109		1,465,049		3,727		1,470,885
Total	$	1,681	$	1,145	$	3,632	$	6,458	$	1,468,510	$	3,727	$	1,478,695

December 31, 2021
Real estate loans:
Mortgages	$	220	$	170	$	209	$	599	$	150,329	$	14	$	150,942	$	13
Home Equity		103		-		33		136		50,019		-		50,155		33
Commercial		127		115		1,969		2,211		682,982		2,145		687,338		-
Agricultural		31		-		1,367		1,398		308,970		1,643		312,011		-
Construction		-		-		-		-		55,036		-		55,036		-
Consumer		163		1		-		164		25,694		-		25,858		-
Other commercial loans		17		10		92		119		74,466		-		74,585		-
Other agricultural loans		10		-		-		10		39,842		-		39,852		-
State and political subdivision loans		-		-		-		-		45,756		-		45,756		-
Total	$	671	$	296	$	3,670	$	4,637	$	1,433,094	$	3,802	$	1,441,533	$	46
Loans considered non-accrual	$	-	$	-	$	3,624	$	3,624	$	3,992	$	-	$	7,616
Loans still accruing		671		296		46		1,013		1,429,102		3,802		1,433,917
Total	$	671	$	296	$	3,670	$	4,637	$	1,433,094	$	3,802	$	1,441,533

Index

Nonaccrual Loans

Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans, or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the loan receivables, excluding PCI loans, on non-accrual status as of March 31, 2022 and December 31, 2021, respectively. The balances are presented by class of loan receivable (in thousands):

	March 31, 2022		December 31, 2021
Real estate loans:
Mortgages	$	443	$	595
Commercial		2,984		2,945
Agricultural		3,083		3,133
Other commercial loans		567		140
Other agricultural loans		733		803
	$	7,810	$	7,616

Index

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to structure more affordable terms before their loan reaches nonaccrual status. These restructured terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest or principal, or both, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company’s investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower’s ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. As of March 31, 2022 and December 31, 2021, included within the allowance for loan losses are reserves of $26,000 that are associated with loans modified as TDRs.

There were no loan modifications that were considered TDRs during the three months ended March 31, 2022. Loan modifications that are considered TDRs completed during the three months ended March 31, 2021 were as follows (dollars in thousands):

	For the Three Months Ended March 31, 2021
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification

Real estate loans:
Commercial		-		2	$	-	$	290	$	-	$	290
Total		-		2	$	-	$	290	$	-	$	290

Index

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism on modified loans occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans.

Allowance for Loan Losses

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2022 and December 31, 2021, respectively (in thousands):

	March 31, 2022						December 31, 2021
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	11	$	1,059	$	1,070	$	12	$	1,135	$	1,147
Commercial		56		8,338		8,394		61		8,038		8,099
Agricultural		14		4,502		4,516		14		4,715		4,729
Construction		-		497		497		-		434		434
Consumer		-		210		210		-		262		262
Other commercial loans		429		951		1,380		34		989		1,023
Other agricultural loans		-		551		551		-		558		558
State and political subdivision loans		-		285		285		-		281		281
Unallocated		-		653		653		-		771		771
Total	$	510	$	17,046	$	17,556	$	121	$	17,183	$	17,304

The following tables roll forward the balance of the ALLL by portfolio segment for the three months ended March 31, 2022 and 2021, respectively (in thousands):

	For the three months ended March 31, 2022
	Balance at December 31, 2021		Charge-offs			Recoveries		Provision			Balance at March 31, 2022
Real estate loans:
Residential	$	1,147	$	-		$	-	$	(77	)	$	1,070
Commercial		8,099		-			-		295			8,394
Agricultural		4,729		-			-		(213	)		4,516
Construction		434		-			-		63			497
Consumer		262		(5	)		5		(52	)		210
Other commercial loans		1,023		-			2		355			1,380
Other agricultural loans		558		-			-		(7	)		551
State and political subdivision loans		281		-			-		4			285
Unallocated		771		-			-		(118	)		653
Total	$	17,304	$	(5	)	$	7	$	250		$	17,556

	For the three months ended March 31, 2021
	Balance at December 31, 2020		Charge-offs			Recoveries		Provision			Balance at March 31, 2021
Real estate loans:
Residential	$	1,174	$	-		$	-	$	(7	)	$	1,167
Commercial		6,216		-			89		378			6,683
Agricultural		4,953		-			-		(36	)		4,917
Construction		122		-			-		29			151
Consumer		321		(4	)		6		(86	)		237
Other commercial loans		1,226		-			4		274			1,504
Other agricultural loans		864		-			-		(75	)		789
State and political subdivision loans		479		-			-		(9	)		470
Unallocated		460		-			-		182			642
Total	$	15,815	$	(4	)	$	99	$	650		$	16,560

Index

The Company allocates the ALLL based on the factors described below, which conform to the Company’s loan classification policy and credit quality measurements. In reviewing risk within the Company’s loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) other commercial and agricultural loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed:

•

Level of and trends in delinquencies and impaired/classified loans

▪

Change in volume and severity of past due loans

▪

Volume and severity of non-accrual loans

▪

Volume and severity of classified, adversely or graded loans;

•

Level of and trends in charge-offs and recoveries;

•

Trends in volume, terms and nature of the loan portfolio;

•

Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices;

•

Changes in the quality of the Company’s loan review system;

•

Experience, ability and depth of lending management and other relevant staff;

•

National, state, regional and local economic trends and business conditions

▪

General economic conditions

▪

Unemployment rates

▪

Inflation rate/ Consumer Price Index

▪

Changes in values of underlying collateral for collateral-dependent loans;

•

Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses;

•

Existence and effect of any credit concentrations, and changes in the level of such concentrations; and

•

Any change in the level of board oversight.

The Company analyzes its loan portfolio at least each quarter to determine the adequacy of its ALLL.

Index

Loans determined to be TDRs are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL.

For the three months ended March 31, 2022, the allowance for all categories was decreased due to a general improvement in economic activity and unemployment and a return to levels experienced prior to the the Covid-19 pandemic.

For the three months ended March 31, 2021, the allowance for commercial real estate and other commercial loans increased due to loans acquired as part of the MidCoast acquisition maturing and then renewed and becoming subject to the Company’s allowance calculation. The factor related to level of past due loans for residential real estate was decreased due to a decrease in past due loans. The factor related to the volume and severity of classified, adversely or graded loans was decreased for other agricultural loans due to a decrease in classified loans.

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of March 31, 2022 and December 31, 2021, included within other assets are $1,131,000 and $1,180,000, respectively, of foreclosed assets. As of March 31, 2022, included within the foreclosed assets are $381,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31, 2022, the Company had initiated formal foreclosure proceedings on $160,000 of consumer residential mortgages, which had not yet been transferred into foreclosed assets.

Note 6 – Goodwill and Other Intangible Assets

The following table provides the gross carrying value and accumulated amortization of intangible assets as of March 31, 2022 and December 31, 2021 (in thousands):

	March 31, 2022							December 31, 2021
	Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
Amortized intangible assets (1):
MSRs	$	2,541	$	(1,408	)	$	1,133	$	2,499	$	(1,326	)	$	1,173
Core deposit intangibles		1,943		(1,529	)		414		1,943		(1,489	)		454
Total amortized intangible assets	$	4,484	$	(2,937	)	$	1,547	$	4,442	$	(2,815	)	$	1,627
Unamortized intangible assets:
Goodwill	$	31,376						$	31,376

(1) Excludes fully amortized intangible assets

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The following table provides the current year and estimated future amortization expense for amortized intangible assets for the next five years (in thousands). We based our projections of amortization expense shown below on existing asset balances at March 31, 2022. Future amortization expense may vary from these projections:

	MSRs		Core deposit intangibles		Total
Three months ended March 31, 2022 (actual)	$	82	$	40	$	122
Three months ended March 31, 2021 (actual)		72		49		121
Estimate for year ending December 31,
Remaining 2022		230		116		346
2023		252		121		373
2024		199		86		285
2025		152		50		202
2026		112		17		129
Thereafter		188		24		212
Total	$	1,133	$	414	$	1,547

Note 7 – Employee Benefit Plans

For additional detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 11 of the Company's Consolidated Financial Statements included in the 2021 Annual Report on Form 10-K.

Noncontributory Defined Benefit Pension Plan

The Bank sponsors a trusteed noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all employees and officers hired prior to January 1, 2007. The Bank’s funding policy is to make annual contributions, if needed, based upon the funding formula developed by the plans’ actuary. Any employee with a hire date of January 1, 2007 or later is not eligible to participate in the Pension Plan.

In lieu of the Pension Plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting certain length of service requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee’s base compensation. The contribution amount, if any, is placed in a separate account within the 401(k) plan and is subject to a vesting requirement.

For employees who are eligible to participate in the Pension Plan, the Pension Plan requires benefits to be paid to eligible employees based primarily upon age and compensation rates during employment. Upon retirement or other termination of employment, employees can elect either an annuity benefit or a lump sum distribution of vested benefits in the Pension Plan.

The following sets forth the components of net periodic benefit costs of the Pension Plan and the line item on the Consolidated Statement of Income where such amounts are included, for the three months ended March 31, 2022 and 2021, respectively (in thousands):

	Three Months Ended March 31,
	2022			2021			Affected line item on the Consolidated Statement of Income
Service cost	$	78		$	110		Salary and Employee Benefits
Interest cost		59			82		Other Expenses
Expected return on plan assets		(203	)		(252	)	Other Expenses
Net amortization and deferral		36			91		Other Expenses
Net periodic benefit cost	$	(30	)	$	31

The Bank does not expect to contribute to the Pension Plan during 2022.

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Restricted Stock Plan

The Company maintains a Restricted Stock Plan (the “Plan”) whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements. Awards granted under the Plan are in the form of the Company’s common stock and are subject to certain vesting requirements including continuous employment or service with the Company. In April of 2016, the Company’s stockholders authorized a total of 150,000 shares of the Company’s common stock to be made available under the Plan. As of March 31, 2022, 119,312 shares remain available to be issued under the Plan. The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation.

The following table details the vesting, awarding and forfeiting of restricted stock during the three months ended March 31, 2022:

	Three months
	Unvested Shares			Weighted Average Market Price
Outstanding, beginning of period		6,954		$	58.51
Granted		79			62.65
Forfeited		(40	)		58.01
Vested		(61	)		57.56
Outstanding, end of period		6,932		$	58.57

Compensation expense related to restricted stock is recognized, based on the market price of the stock at the grant date, over the vesting period. For the three months ended March 31, 2022 and 2021, compensation expense totaled $77,000 and $84,000, respectively. At March 31, 2022, the total compensation cost related to nonvested awards that had not yet been recognized was $406,000, which is expected to be recognized over the next three years.

Note 8 – Accumulated Comprehensive Income

The following tables present the changes in accumulated other comprehensive income by component, net of tax, for the three months ended March 31, 2022 and 2021 (in thousands):

	Three months ended March 31, 2022
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Unrealized gain (loss) on interest rate swap (a)		Total
Balance as of December 31, 2021	$	304		$	(1,968	)	$	1,509	$	(155	)
Other comprehensive income (loss) before reclassifications (net of tax)		(16,580	)		-			1,910		(14,670	)
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		-			28			32		60
Net current period other comprehensive income (loss)		(16,580	)		28			1,942		(14,610	)
Balance as of March 31, 2022	$	(16,276	)	$	(1,940	)	$	3,451	$	(14,765	)

	Three months ended March 31, 2021
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Unrealized gain (loss) on interest rate swap (a)			Total
Balance as of December 31, 2020	$	6,058		$	(3,462	)	$	(9	)	$	2,587
Other comprehensive income (loss) before reclassifications (net of tax)		(3,235	)		-			1,590			(1,645	)
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		(39	)		72			27			60
Net current period other comprehensive income (loss)		(3,274	)		72			1,617			(1,585	)
Balance as of March 31, 2021	$	2,784		$	(3,390	)	$	1,608		$	1,002

(a) Amounts in parentheses indicate debits on the Consolidated Balance Sheet.

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The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 (in thousands):

Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated comprehensive income (loss) (a)						Affected line item in the Consolidated Statement of Income
	Three Months Ended March 31,
	2022			2021
Unrealized gains and losses on available for sale securities
	$	-		$	50		Available for sale securities gains, net
		-			(11	)	Provision for income taxes
	$	-		$	39		Net of tax
Defined benefit pension items
	$	(36	)	$	(91	)	Other expenses
		8			19		Provision for income taxes
	$	(28	)	$	(72	)	Net of tax
Unrealized gain (loss) on interest rate swap
	$	(40	)	$	(34	)	Interest expense
		8			7		Provision for income taxes
	$	(32	)	$	(27	)	Net of tax

Total reclassifications	$	(60	)	$	(60	)

(a) Amounts in parentheses indicate expenses and other amounts indicate income on the Consolidated Statement of Income

Note 9 – Fair Value Measurements

The Company has established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows:

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:

Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:

Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

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Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The fair values of equity securities and securities available for sale are determined by quoted prices in active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities and classified as Level II. The fair values consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The following tables present the assets and liabilities reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of March 31, 2022 and December 31, 2021 by level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

March 31, 2022	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	2,444	$	-		$	-	$	2,444
Available for sale securities:
U.S. Agency securities		-		74,532			-		74,532
U.S. Treasury securities		146,690		-			-		146,690
Obligations of state and political subdivisions		-		117,990			-		117,990
Corporate obligations		-		10,048			-		10,048
Mortgage-backed securities in government sponsored entities		-		112,211			-		112,211
Other Assets
Derivative instruments		-		10,816			-		10,816
Liabilities
Derivative instruments		-		(6,448	)		-		(6,448	)

December 31, 2021	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	2,270	$	-		$	-	$	2,270
Available for sale securities:
U.S. Agency securities		-		73,945			-		73,945
U.S. Treasuries securities		115,347		-			-		115,347
Obligations of state and political subdivisions		-		112,021			-		112,021
Corporate obligations		-		10,333			-		10,333
Mortgage-backed securities in government sponsored entities		-		100,756			-		100,756
Other Assets
Derivative instruments		-		4,011			-		4,011
Liabilities
Derivative instruments		-		(2,101	)		-		(2,101	)

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Assets and Liabilities Required to be Measured and Reported at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021 are included in the table below (in thousands):

March 31, 2022	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	490	$	490
Other real estate owned		-		-		743		743

December 31, 2021	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	459	$	459
Other real estate owned		-		-		552		552

•

Impaired Loans - The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not currently being carried at its fair value. The fair values above excluded estimated selling costs of $67,000 and $47,000 at March 31, 2022 and December 31, 2021, respectively.

•

Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value, less estimated costs to sell, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as a Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing Level III techniques (dollars in thousands).

March 31, 2022	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Impaired Loans	$	490	Appraised Collateral Values	Discount for time since appraisal		0-100	%		15.84	%
				Selling costs		5%-10	%		6.73	%
				Holding period	0 - 12 months			11.42 months

Other real estate owned		743	Appraised Collateral Values	Discount for time since appraisal		19-44	%		35.56	%

December 31, 2021	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Impaired Loans		459	Appraised Collateral Values	Discount for time since appraisal		0-100	%		23.38	%
				Selling costs		8%-10	%		8.27	%
				Holding period	6 - 12 months			11.52 months

Other real estate owned		552	Appraised Collateral Values	Discount for time since appraisal		20-44	%		41.76	%

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Financial Instruments Not Required to be Measured or Reported at Fair Value

The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows (in thousands):

March 31, 2022	Carrying Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	10,528	$	10,528	$	-	$	-	$	10,528
Loans held for sale		644		644		-		-		644
Net loans		1,461,139		1,470,482		-		-		1,470,482

Financial liabilities:
Deposits		1,879,090		1,873,517		1,563,148		-		310,369
Borrowed funds		68,214		65,144		-		-		65,144

December 31, 2021		Carrying Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	11,026	$	11,026	$	-	$	-	$	11,026
Loans held for sale		4,554		4,554		-		-		4,554
Net loans		1,424,229		1,426,698		-		-		1,426,698

Financial liabilities:
Deposits		1,836,151		1,836,179		1,506,535		-		329,644
Borrowed funds		73,977		72,346		-		-		72,346

The carrying amounts for cash and due from banks, bank owned life insurance, regulatory stock, accrued interest receivable and payable approximate fair value and are considered Level I measurements.

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Note 10 – Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. In that regard, we have formed a cross-functional working group. The working group is comprised of individuals from various functional areas including credit, loan origination and finance. We are currently working through our implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other things. We are also in the process of implementing a third-party vendor solution to assist us in the application of the ASU 2016-13. The adoption of the ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

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In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.

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In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.

In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.

Index

In August 2020, the FASB issued ASU 2020-6, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which addresses how an acquirer should recognize and measure revenue contracts acquired in a business combination. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method. ASC 815 currently permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendments in this Update allow non-prepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby allowing consistent accounting for similar hedges. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.

Index

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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 expected future results of operations of Citizens Financial Services, Inc., CZFS Acquisition Company, LLC, First Citizens Community Bank, First Citizens Insurance Agency, Inc., 1^st Realty of PA LLC or the combined Company. When we use words such as “believes,” “expects,” “anticipates,” or similar expressions, we are making forward-looking statements. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements. The Company cautions readers that the following important factors, among others, could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement:

•

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 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 forces of nature like weather and various viruses, government regulations, international trade agreements and consumer tastes, which could negatively impact certain of our customers.

•

Poultry producers and suppliers may experience significant disruption due to the highly pathogenic avian influenza that is spreading in the United States.

•

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

•

A budget impasse in the Commonwealth of Pennsylvania could impact our asset values, liquidity and profitability as a result of either delayed or reduced funding to school districts and municipalities who are customers of the bank.

Index

•

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 that may affect our results are discussed under “Part II – Item 1A – Risk Factors” in this report and in the Company’s 2021 Annual Report on Form 10-K under “Item 1.A/ Risk Factors.” Except as required by applicable law and regulation, we assume no obligation to update or revise any forward-looking statements after the date on which they are made.

Introduction

The following is management's discussion and analysis of the financial condition and results of operations at the dates and for the periods presented in the accompanying consolidated financial statements for the Company. Our 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 preceding financial statements presented under Part I. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results you may expect for the full year.

The Company currently engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Bradford and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New York and with the MidCoast acquisition, the Cities of Wilmington and Dover, Delaware. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 33 banking facilities, 31 of which operate as bank branches. 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, State College, Kennett Square and two branches near the city of Lebanon, Pennsylvania. The limited branch office is located in Winfield, Pennsylvania. In New York, our office is in Wellsville. In Delaware, we have two branches in Wilmington and one in Dover. We have received approval to open a branch in Ephrata, Pennsylvania, which we expect to happen in the second half of 2022.

Covid-19 Pandemic Response and Loan Profile

In response to the Covid-19 pandemic, the Company maintained a payment relief program that included the following:

•

Interest only payment options for consumers and businesses for 60-90 days.

•

Deferral of principal payments for consumers and businesses in certain

industries for 60-120 days

During 2022, we have not modified any loans under this program. Additionally, in accordance with government regulations, we have paused certain foreclosure actions in accordance with state mandates. We also continue to participate in the in the Paycheck Protection Program for loans provided under the auspices of the Small Business Administration (SBA). As of March 31, 2022, we had outstanding 23 loans with balances totaling $2.8 million that earn interest at 1% per annum and are expected to generate fee revenue of approximately $109,000 over the next 15 months. A portion of these loans may be forgiven by the SBA depending on the customers usage of the proceeds.

Index

Risk Management

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 market 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 policy 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, including fraudulent activity outside the Company’s control. 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 and compliance risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company. We cannot predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.

Competition

The banking industry in the Bank’s service areas continue to be extremely competitive, both among commercial banks and with other financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions, agricultural cooperatives and intenet entities for loans and deposits. Competition in our north central Pennsylvania market has increased as a result of other financial institutions looking to expand into new markets. With larger population centers in our central and south central markets, as well as in our Delaware market, we experience more competition to gather deposits and to make loans. Mortgage banking firms, financial companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms and even government agencies provide additional competition for loans, deposits and other financial services. Fintech and blockchain entities offering crypto services are also increasing competition for the Company’s financial services. The Bank is generally competitive with all competing financial institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.

Trust and Investment Services; Oil and Gas Lease Services

Index

Our Investment and Trust Services Division offers professional trust administration, investment management services, estate planning and administration, and custody of securities. In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the Consolidated Balance Sheets since such items are not assets of the Company. Revenues and fees of the Trust Department are reflected in trust income in the Consolidated Statement of Income. As of March 31, 2022 and December 31, 2021, the Trust Department had $156.2 million and $154.8 million of assets under management, respectively.

Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc. The assets associated with these products are not included in the Consolidated Balance Sheets since such items are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank’s Investment Representatives decreased from $282.1 million at December 31, 2021 to $280.6 million at March 31, 2022. Fee income from the sale of these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central and south central Pennsylvania markets.

Results of Operations

Overview of the Income Statement

The Company had net income of $6,740,000 for the first three months of 2022 compared to $8,463,000 for last year’s comparable period, a decrease of $1,723,000, or 20.4%. Basic earnings per share for the first three months of 2022 were $1.71, compared to $2.14 for last year’s comparable period, representing a 20.1% decrease. Annualized return on assets and return on equity for the three months of 2022 were 1.26% and 12.46%, respectively, compared with 1.77% and 17.25% for last year’s comparable period.

Net Interest Income

Net interest income, the most significant component of the Company’s earnings, is the amount by which interest income generated from interest-earning assets exceeds interest expense paid on interest-bearing liabilities.

Net interest income for the first three months of 2022 was $16,262,000, a decrease of $179,000, or 1.1%, compared to the same period in 2021 and was due to a decrease in amortization income on PPP forgiven loans of $676,000. For the three months of 2022 the provision for loan losses was $250,000, a decrease of $400,000 over the comparable period in 2021. Consequently, net interest income after the provision for loan losses was $16,012,000 in the first three months of 2022 compared to $15,791,000 during the first three months of 2021.

The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and interest rate spread created for the three months ended March 31, 2022 and 2021 on a tax equivalent basis (dollars in thousands):

Index

	Analysis of Average Balances and Interest Rates Three Months Ended
	March 31, 2022							March 31, 2021
	Average Balance (1)		Interest		Average Rate			Average Balance (1)		Interest		Average Rate
(dollars in thousands)		$	$			%			$	$			%
ASSETS
Short-term investments:
Interest-bearing deposits at banks		123,379		46		0.15			94,523		19		0.08
Total short-term investments		123,379		46		0.15			94,523		19		0.08
Interest bearing time deposits at banks		10,957		70		2.59			13,730		87		2.57
Investment securities:
Taxable		339,097		1,196		1.41			200,492		951		1.90
Tax-exempt (3)		115,020		738		2.57			100,422		689		2.74
Total investment securities		454,117		1,934		1.70			300,914		1,640		2.18
Loans (2)(3)(4):
Residential mortgage loans		200,838		2,331		4.71			203,941		2,553		5.08
Construction		61,518		607		4.00			38,314		410		4.34
Commercial Loans		767,830		8,582		4.53			713,900		9,063		5.15
Agricultural Loans		350,784		3,749		4.33			358,565		3,830		4.33
Loans to state & political subdivisions		46,984		367		3.17			62,516		598		3.87
Other loans		27,193		349		5.20			26,605		348		5.30
Loans, net of discount		1,455,147		15,985		4.46			1,403,841		16,802		4.85
Total interest-earning assets		2,043,600		18,035		3.58			1,813,008		18,548		4.15
Cash and due from banks		6,393							6,377
Bank premises and equipment		16,976							17,003
Other assets		79,371							80,953
Total non-interest earning assets		102,740							104,333
Total assets		2,146,340							1,917,341
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts		501,502		319		0.26			422,135		320		0.31
Savings accounts		317,176		74		0.09			268,252		89		0.13
Money market accounts		346,073		223		0.26			238,788		176		0.30
Certificates of deposit		322,867		659		0.83			380,791		1,013		1.08
Total interest-bearing deposits		1,487,618		1,275		0.35			1,309,966		1,598		0.49
Other borrowed funds		68,295		278		1.65			86,226		256		1.20
Total interest-bearing liabilities		1,555,913		1,553		0.40			1,396,192		1,854		0.54
Demand deposits		356,444							306,377
Other liabilities		17,569							18,582
Total non-interest-bearing liabilities		374,013							324,959
Stockholders' equity		216,414							196,190
Total liabilities & stockholders' equity		2,146,340							1,917,341
Net interest income				16,482							16,694
Net interest spread (5)						3.17	%						3.61	%
Net interest income as a percentage
of average interest-earning assets						3.27	%						3.73	%
Ratio of interest-earning assets
to interest-bearing liabilities						131	%						130	%

(1)	Averages are based on daily averages.

(2)	Includes loan origination and commitment fees.

(3)	Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 21%.

(4)	Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.

(5)	Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

Index

Tax exempt revenue is shown on a tax-equivalent basis (non-Gaap) for proper comparison using a federal statutory income tax rate of 21% for the three months ended March 31, 2022 and 2021. For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company’s Federal statutory rate during the corresponding period. The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended March 31, 2022 and 2021 (in thousands):

	For the Three Months
	Ended March 31,
	2022		2021
Interest and dividend income from investment securities
and interest bearing deposits at banks (non-tax adjusted)	$	1,895	$	1,601
Tax equivalent adjustment		155		145
Interest and dividend income from investment securities
and interest bearing deposits at banks (tax equivalent basis)	$	2,050	$	1,746

Interest and fees on loans (non-tax adjusted)	$	15,920	$	16,694
Tax equivalent adjustment		65		108
Interest and fees on loans (tax equivalent basis)	$	15,985	$	16,802

Total interest income	$	17,815	$	18,295
Total interest expense		1,553		1,854
Net interest income		16,262		16,441
Total tax equivalent adjustment		220		253
Net interest income (tax equivalent basis)	$	16,482	$	16,694

The following table shows the tax-equivalent effect of changes in volume and rate on interest income and expense (in thousands):

	Three months ended March 31, 2022 vs 2021 (1)
	Change in Volume			Change in Rate			Total Change
Interest Income:
Short-term investments:
Interest-bearing deposits at banks	$	7		$	20		$	27
Interest bearing time deposits at banks		(18	)		1			(17	)
Investment securities:
Taxable		390			(145	)		245
Tax-exempt		88			(39	)		49
Total investments		478			(184	)		294
Loans:
Residential mortgage loans		(38	)		(184	)		(222	)
Construction		226			(29	)		197
Commercial Loans		825			(1,306	)		(481	)
Agricultural Loans		(83	)		2			(81	)
Loans to state & political subdivisions		(134	)		(97	)		(231	)
Other loans		6			(5	)		1
Total loans, net of discount		802			(1,619	)		(817	)
Total Interest Income		1,269			(1,782	)		(513	)
Interest Expense:
Interest-bearing deposits:
NOW accounts		56			(57	)		(1	)
Savings accounts		24			(39	)		(15	)
Money Market accounts		65			(18	)		47
Certificates of deposit		(141	)		(213	)		(354	)
Total interest-bearing deposits		4			(327	)		(323	)
Other borrowed funds		(28	)		50			22
Total interest expense		(24	)		(277	)		(301	)
Net interest income	$	1,293		$	(1,505	)	$	(212	)

(1) The portion of the total change attributable to both volume and rate changes, which can not be separated, has been allocated proportionally to the change due to volume and the change due to rate prior to allocation.

Index

Tax equivalent net interest income decreased from $16,694,000 for the three month period ended March 31, 2021 to $16,482,000 for the three month period ended March 31, 2022, a decrease of $212,000, which was largely due to a $676,000 decrease in amortization of PPP fees between the comparable periods. The tax equivalent net interest margin decreased from 3.73% for the first three months of 2021 to 3.27% for the comparable period in 2022. The decrease is primarily caused by the decrease in the yield of interest-earning assets due to the low market interest rate environment in response to the pandemic as well as the decrease in the amortization of PPP fees.

Total tax equivalent interest income for the 2022 three month period decreased $513,000 as compared to the 2021 three month period. This decrease was a result of a decrease of $1,782,000 due to a change in rate as the average yield on interest earning assets decreased 57 basis points from 4.15% to 3.58%. The decrease was offset by an increase of $1,269,000 due to the change volume as average interest-bearing assets increased $230.6 million.

Tax equivalent investment income for the three months ended March 31, 2022 increased $294,000 over the same period last year. The primary cause of the increase was an increase in the average balance of investment securities of $153.3 million.

•

The yield on taxable securities decreased 49 basis points from 1.90% to 1.41% as a result of purchases made in a lower rate environment in 2021. This resulted in a decrease in investment income of $184,000. The average balance of taxable securities increased $138.6 million due to purchases made as a result of substantial deposit growth, which resulted in an increase in investment income of $478,000.

•

The average balance of tax-exempt securities increased by $14.6 million, which resulted in an increase in investment income of $88,000. The yield on tax-exempt securities decreased 17 basis points from 2.74% to 2.57%, which corresponds to a decrease in interest income of $39,000. The yield decrease was attributable to higher yielding securities being called and maturing and being replaced by securities that were purchased in a lower rate environment. For a discussion of the Company’s current investment strategy, see the “Financial Condition – Investments”.

Total loan interest income decreased $817,000 for the three months ended March 31, 2022 compared to the same period last year, as a result of a decrease in amortization of fees on PPP loans.

•

Interest income on residential mortgage loans decreased $222,000. The change due to rate was a decrease of $184,000 as the average yield on residential mortgages decreased from 5.08% to 4.71% as a result of the lower rate environment due to the COVID-19 pandemic.

•

The average balance of construction loans increased $23.2 million as a result of projects in our south central Pennsylvania market, as well as the Delaware market. This resulted in an increase of $226,000 on total interest income due to volume.

•

The average balance of commercial loans increased $53.9 million from a year ago. The growth was primarily attributable to growth in Delaware. This had a positive impact of $825,000 on total interest income due to volume. The yield decreased 62 basis points to 4.53% due to the lower rate environment caused by the pandemic as well as the reduced amortization income on PPP loans and competition for loan growth, which decreased loan interest income $1,306,000.

Index

•

Interest income on agricultural loans decreased $81,000 from 2021 to 2022. The decrease in the average balance of agricultural loans of $7.8 million resulted in a decrease in interest income due to volume of $83,000.

•

The average balance of state and political subdivision loans decreased $15.5 million from a year ago as a result of pay-offs during 2021 and 2022. This resulted in a decrease of $134,000 on total interest income due to volume.

Total interest expense decreased $301,000 for the three months ended March 31, 2022 compared with the comparative period last year as a result of a decrease in the cost of interest-bearing liabilities. Interest expense decreased $277,000 due to rate as a result of a decrease in the average rate paid on interest-bearing liabilities from 0.54% to 0.40%. The decrease was driven by the Federal Reserve interest rate cuts in the first quarter of 2020, which remained in place until March of 2022.

•

The average balance of interest bearing deposits increased $177.7 million from March 31, 2021 to March 31, 2022. The primary cause of the increase was general deposit growth across all markets, a portion of which was funded through government stimulus in response to the pandemic and growth in municipal deposits through new customers and expansion of existing relationships. We experienced increases of $79.4 million in NOW accounts, $48.9 million in savings accounts, $107.3 million in money market accounts. The cumulative effect of these volume changes was an increase in interest expense of $145,000. Certificates of deposits decreased $57.9 million due to the low rate environment, which resulted in a decrease in interest expense due to volume of $141,000 related to certificates of deposits. (see also “Financial Condition – Deposits”). The average rate paid on interest bearing deposits was 0.35% for the first three months of 2022 and 0.49% for the comparable period in 2021. This resulted in a decrease in interest expense of $327,000. The decrease was due to the Federal Reserve cutting interest rates during the first quarter of 2020, which remained there throughout 2021 the first part of 2022.

•

The average balance of other borrowed funds decreased $17.9 million from a year ago due to maturities in 2021 and 2022 that were not replaced due to the liquidity obtained from deposit growth. This resulted in a decrease in interest expense of $28,000. There was an increase in the average rate paid on other borrowed funds from 1.20% to 1.65% due to the issuance of subordinated debt in the second quarter of 2021 resulting in an increase in interest expense of $50,000.

Provision for Loan Losses

For the three month period ended March 31, 2022, we recorded a provision for loan losses of $250,000, which represents a decrease of $400,000 from the $650,000 provision recorded in the corresponding three months of last year. The provision was lower in 2022 due the improved economic outlook compared to 2021 that was impacted more by the Covid 19 pandemic. (see “Financial Condition – Allowance for Loan Losses and Credit Quality Risk”).

Non-interest Income

The following table shows the breakdown of non-interest income for the three months ended March 31, 2022 and 2021 (dollars in thousands):

	Three months ended March 31,					Change
	2022			2021		Amount			%
Service charges	$	1,248		$	1,106	$	142			12.8
Trust		249			307		(58	)		(18.9	)
Brokerage and insurance		481			376		105			27.9
Gains on loans sold		105			503		(398	)		(79.1	)
Equity security (losses) gains, net		(45	)		187		(232	)		(124.1	)
Available for sale security gains, net		-			50		(50	)		(100.0	)
Earnings on bank owned life insurance		207			1,315		(1,108	)		(84.3	)
Other		186			391		(205	)		(52.4	)
Total	$	2,431		$	4,235	$	(1,804	)		(42.6	)

Index

Non-interest income for the three months ended March 31, 2022 totaled $2,431,000, a decrease of $1,804,000 when compared to the same period in 2021. During the first three months of 2022, net equity security losses amounted to $45,000 as a result of market losses associated with general stock market losses compared with a $187,000 gain in the comparable 2021 period associated with market conditions for that period. There were no sales of available during the first three months of 2022. During the first three months of 2021, there were $50,000 of gains from the sale of available for sale securities.

The decrease in Trust revenues is due to lower estate settlement fees in 2022 compared to 2021. The decrease in earnings on bank owned life insurance is due to two former employees of the Company passing during the first quarter of 2021, which generated a death benefit payable to the Company of $1,155,000. The increase in service charges is due to increased customer account usage of their debit cards. The decrease in other income is due to fees on derivative transactions to certain customers, which generated fee income of $226,000 in 2021. The decrease in gains on loans sold is attributable to a reduced level of loan sales as rates on the secondary market have increased, which has resulted in a significant decrease in refinancings of mortgages.

Non-interest Expense

The following tables reflect the breakdown of non-interest expense for the three months ended March 31, 2022 and 2021 (dollars in thousands):

	Three months ended March 31,					Change
	2022			2021		Amount			%
Salaries and employee benefits	$	6,913		$	6,263	$	650			10.4
Occupancy		794			783		11			1.4
Furniture and equipment		129			143		(14	)		(9.8	)
Professional fees		339			448		(109	)		(24.3	)
FDIC insurance		135			129		6			4.7
Pennsylvania shares tax		339			339		-			-
Amortization of intangibles		40			49		(9	)		(18.4	)
Software expenses		341			313		28			8.9
ORE (recovery) expenses		(367	)		86		(453	)		(526.7	)
Other		1,568			1,394		174			12.5
Total	$	10,231		$	9,947	$	284			2.9

Non-interest expenses increased $284,000 for the three months ended March 31, 2022 compared to the same period in 2021. Salaries and employee benefits increased $650,000 or 10.4%. The increase was due to merit increases effective at the beginning of 2022, additional headcount, primarily in the Delaware market and an increase in deferred compensation costs due to a reversal of deferred compensation that occurred in 2021 as a result of a former executive passing.

The decrease in professional fees was due to lower legal fees in 2022 compared to the 2021 period. The decrease in ORE expenses was due to the sales of OREO properties in 2022 for a gain of $487,000. The increase in other expenses is additional marketing expenses, primarily in the Delaware market, charge-offs associated with fraudulent customer account activity and data processing costs.

Provision for Income Taxes

Index

The provision for income taxes was $1,472,000 for the three month period ended March 31, 2022 compared to $1,616,000 for the same period in 2021. The decrease is primarily attributable to the decrease in income before the provision for income taxes of $1,867,000 for the comparable periods. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate. Our effective tax rate was 17.9% and 16.0% for the first three months of 2022 and 2021, respectively, compared to the statutory rate of 21%. The increase in the effective tax rate is due to life insurance earnings being exempt from federal income taxes.

We are invested in five limited partnerships that have established low-income housing projects in our market areas with our most recent investment in the third quarter of 2021. We anticipate recognizing an aggregate of $3.0 million of tax credits over the next 10 years, with an additional $105,000 anticipated to be recognized during 2022.

Financial Condition

Total assets were $2.18 billion at March 31, 2022, an increase of $34.0 million from $2.14 billion at December 31, 2021, which is primarily due to deposit growth in the first quarter. Cash and cash equivalents decreased $58.7 million to $114.1 million. Available for sale securities increased $49.1 million and net loans increased $36.9 million to $1.46 billion at March 31, 2022. Total deposits increased $42.9 million to $1.88 billion since year-end 2021, while borrowed funds decreased $5.8 million to $68.2 million.

Cash and Cash Equivalents

Cash and cash equivalents totaled $114.1 million at March 31, 2022 compared to $172.8 million at December 31, 2021, a decrease of $58.7 million. The decrease was attributable to investment purchases and organic loan growth. Management actively measures and evaluates the Company’s liquidity position through our Asset–Liability Committee and believes the Company’s liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources including the Bank’s core deposits, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.

Investments

The following table shows the composition of the investment portfolio (including debt and equity securities) as of March 31, 2022 and December 31, 2021 (dollars in thousands):

	March 31, 2022				December 31, 2021
	Amount		%		Amount		%
Debt securities:
U. S. Agency securities	$	74,532		16.1	$	73,945		17.8
U. S. Treasury notes		146,690		31.6		115,347		27.8
Obligations of state & political subdivisions		117,990		25.4		112,021		27.0
Corporate obligations		10,048		2.2		10,333		2.5
Mortgage-backed securities in government sponsored entities		112,211		24.2		100,756		24.3
Equity securities		2,444		0.5		2,270		0.6
Total	$	463,915		100.0	$	414,672		100.0

	March 31, 2022/ December 31, 2021 Change
	Amount			%
Debt securities:
U. S. Agency securities	$	587			0.8
U. S. Treasury notes		31,343			27.2
Obligations of state & political subdivisions		5,969			5.3
Corporate obligations		(285	)		(2.8	)
Mortgage-backed securities in government sponsored entities		11,455			11.4
Equity securities		174			7.7
Total	$	49,243			11.9

Index

Our investment portfolio increased by $49.2 million, or 11.9%, from December 31, 2021 to March 31, 2022. During 2022, we purchased $3.8 million of U.S. agency obligations, $39.7 million of U.S. treasury securities, $13.4 million state and political securities and $22.8 million of mortgage backed securities, which was offset by $5.8 million of principal repayments and $3.3 million of calls and maturities that occurred during the first three months of 2022. As a result of increases in market interest rates, the unrealized loss on available for sale investment portfolio increased $21.0 million. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the three month period ended March 31, 2022 yielded 1.70%, compared to 2.18% in the comparable period in 2021, on a tax equivalent basis.

The investment strategy for 2022 has been to utilize excess cash, cashflows from the investment portfolio and deposit inflows to purchase U.S. treasury securities, due to a limited spread between US treasuries and agencies, mortgage backed securities issued by government sponsored entities and obligations of state and political securities. The increase in the investment portfolio was in response to the deposit inflows that occurred in 2022 and the first three months of 2022. We continually monitor interest rate trading ranges and seek to time investment security purchases when rates are in the top third of the trading range. The Bank believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, including a rising rate environment, while providing sufficient cashflows to meet liquidity needs.

Management continues to monitor the earnings performance and the liquidity of the investment portfolio on a regular basis. Through active balance sheet management and analysis of the investment portfolio, the Company believes it maintains sufficient liquidity to satisfy depositor withdrawal requirements and various credit needs of its customers.

Loans

The following table shows the composition of the loan portfolio as of March 31, 2022 and December 31, 2021 (dollars in thousands):

	March 31, 2022				December 31, 2021
	Amount		%		Amount		%
Real estate:
Residential	$	201,567		13.6	$	201,097		14.0
Commercial		724,876		49.0		687,338		47.7
Agricultural		305,517		20.7		312,011		21.6
Construction		66,738		4.5		55,036		3.8
Consumer		21,460		1.5		25,858		1.8
Other commercial loans		69,051		4.7		74,585		5.2
Other agricultural loans		39,904		2.7		39,852		2.8
State & political subdivision loans		49,582		3.3		45,756		3.1
Total loans		1,478,695		100.0		1,441,533		100.0
Less allowance for loan losses		17,556				17,304
Net loans	$	1,461,139			$	1,424,229

	March 31, 2022/ December 31, 2021 Change
	Amount			%
Real estate:
Residential	$	470			0.2
Commercial		37,538			5.5
Agricultural		(6,494	)		(2.1	)
Construction		11,702			21.3
Consumer		(4,398	)		(17.0	)
Other commercial loans		(5,534	)		(7.4	)
Other agricultural loans		52			0.1
State & political subdivision loans		3,826			8.4
Total loans	$	37,162			2.6

Index

The Bank’s lending efforts have historically been focused in north central Pennsylvania and southern New York. With the acquisition of FNB and the opening of offices in Lancaster County, this focus has grown to include Lebanon, Schuylkill, Berks and Lancaster County markets of south central, Pennsylvania. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities in central Pennsylvania. In December 2017, we completed a branch acquisition in State College, which provides us with opportunities in Centre County, Pennsylvania and other areas of central Pennsylvania. In April 2020, we completed the MidCoast acquisition, which expanded our markets into the State of Delaware with activity centered around the cities of Wilmington and Dover, Delaware. In November of 2020, we opened a branch in Kennett Square, Pennsylvania, to further serve customers obtained as part of the MidCoast acquisition, as well as to expand operations into Chester County, Pennsylvania. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships our lending teams have with their customers and our lenders expertise in certain areas, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank’s website. The Bank offers a variety of loans although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors. As of March 31, 2022, the Company had one industry specific loan concentration to the dairy industry, totaling $123.9 million or 8.4% of total loans compared to $127.4 million or 8.8% of total loans at December 31, 2021.

During the first three months of 2022, the primary driver of growth was the Delaware markets, which saw significant activity in commercial real estate loan and construction loan activity. Agricultural loans decreased $6.5 million primarily due to paydowns on lines of credit. The decrease in other commercial loans is due to forgiveness of PPP loans. Loans issued as part of the PPP program totaled $2.8 million as of March 31, 2022 compared to $6.8 million as of December 31, 2021 for a change of $4.0 million. The decrease in consumer loans is due to a decrease in student loans, which is expected to pick up over the remainder of 2022. Commercial and agricultural loan demand is subject to significant competitive pressures, the yield curve, and overall national, regional and local economic conditions.

While the Bank lends to companies that service companies that explore for natural gas in our market area, the Bank has not originated any loans to companies performing the actual drilling and exploration activities. Loans made by the Bank are to service industry customers which include trucking companies, stone quarries and other support businesses, favoring customers that have had a relationship with the Bank prior to supporting the exploration for natural gas. We also have originated loans to businesses and individuals for restaurants, hotels and apartment rentals that have been developed and expanded to meet the housing and living needs of the gas industry workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities have been originated in accordance with specific policies and procedures for lending to these entities, which include more stringent loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.

For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income.

In response to the Covid-19 pandemic, the Company implemented programs to assist our customers. These included allowing customers to make interest only payments for up to 60 days and allowing certain customers in specific industries like hospitality to defer both principal and interest payments for up to 120 days. Customers are eligible to request additional modifications.

Index

Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable future loan losses inherent in the loan portfolio. The provision for loan losses is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for loan losses was $17,556,000 or 1.19% of total loans as of March 31, 2022 as compared to $17,304,000 or 1.20% of loans as of December 31, 2021. The $252,000 increase is a result of a $250,000 provision for loan losses less net recoveries of $2,000. During 2022, net charge-offs were low with no significant charge-offs occurring. The following table shows the distribution of the allowance for loan losses and the percentage of loans compared to total loans by loan category (dollars in thousands) as of March 31, 2022 and December 31, 2021 (in thousands):

	March 31,				December 31
	2022				2021
	Amount		%		Amount		%
Real estate loans:
Residential	$	1,070		13.6	$	1,147		14.0
Commercial		8,394		49.0		8,099		47.7
Agricultural		4,516		20.7		4,729		21.6
Construction		497		4.5		434		3.8
Consumer		210		1.5		262		1.8
Other commercial loans		1,380		4.7		1,023		5.2
Other agricultural loans		551		2.7		558		2.8
State & political subdivision loans		285		3.3		281		3.1
Unallocated		653		N/A		771		N/A
Total allowance for loan losses	$	17,556		100.0	$	17,304		100.0

The following table provides information related to credit loss experience and loan quality for the three months ended March 31, 2022 and the year ended December 31, 2021.

March 31, 2022	Credit Loss Expense (Benefit)			Net (charge-offs) Recoveries			Average Loans		Ratio of net (charge-offs) recoveries to Average loans			Allowance to total loans			Non-accrual loans as a percent of loans			Allowance to total non-accrual loans
Real estate:
Residential	$	(77	)		-		$	200,838		0.00	%		0.53	%		0.22	%		241.53	%
Commercial		295			-			696,969		0.00	%		1.16	%		0.41	%		281.30	%
Agricultural		(213	)		-			313,477		0.00	%		1.48	%		1.01	%		146.48	%
Construction		63			-			61,518		0.00	%		0.74	%		0.00	%	NA
Consumer		(52	)		-			27,193		0.00	%		0.98	%		0.00	%	NA
Other commercial loans		355			2			70,861		0.00	%		2.00	%		0.82	%		243.39	%
Other agricultural loans		(7	)		-			37,307		0.00	%		1.38	%		1.84	%		75.17	%
State & political subdivision loans		4			-			46,984		0.00	%		0.57	%		0.00	%	NA
Unallocated		(118	)		-			-	NA			NA			NA			NA
Total	$	250		$	2		$	1,455,147		0.00	%		1.19	%		0.53	%		224.79	%

December 31, 2021
Real estate:
Residential	$	(27	)		-		$	203,062		0.00	%		0.57	%		0.30	%		192.77	%
Commercial		1,848			35			639,161		0.01	%		1.18	%		0.43	%		275.01	%
Agricultural		(224	)		-			312,770		0.00	%		1.52	%		1.00	%		150.94	%
Construction		312			-			56,315		0.00	%		0.79	%		0.00	%	NA
Consumer		(53	)		(6	)		24,125		(0.02	)%		1.01	%		0.00	%	NA
Other commercial loans		(113	)		(90	)		99,839		(0.09	)%		1.37	%		0.19	%		730.71	%
Other agricultural loans		(306	)		-			37,181		0.00	%		1.40	%		2.01	%		69.49	%
State & political subdivision loans		(198	)		-			52,804		0.00	%		0.61	%		0.00	%	NA
Unallocated		311			-			-	NA			NA			NA			NA
Total	$	1,550		$	(61	)	$	1,425,257		0.00	%		1.20	%		0.53	%		227.21	%

Index

The Company believes it utilizes a disciplined and thorough loan review process based upon its internal loan policy approved by the Company’s Board of Directors. The purpose of the review is to assess loan quality, analyze delinquencies, identify problem loans, evaluate potential charge-offs and recoveries, and assess general overall economic conditions in the markets served. An external independent loan review is performed on our commercial portfolio at least semi-annually for the Company. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) new loans originated for over $1.0 million in the last year, 3) review a sample of borrowers with commitments greater than or equal to $1.0 million, 4) selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate. As part of this review, our underwriting process and loan grading system is evaluated.

Management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate as of March 31, 2022. However, future adjustments could be required if circumstances differ substantially from assumptions and estimates used in making the initial determination. A prolonged downturn in the economy, changes in the economies of various segments of our agricultural and commercial portfolios, high unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, loan loss provisions and reduction in income. Additionally, bank regulatory agencies periodically examine the Bank’s allowance for loan losses. The banking agencies could require the recognition of additions to the allowance for loan losses based upon their judgment of information available to them at the time of their examination.

On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports. Based on data surrounding the collection process of each identified loan, the loan may be added or deleted from the monthly watch list. The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may choose to include. Watch list loans are continually monitored going forward until satisfactory conditions exist that allow management to upgrade and remove the loan from the watchlist. In certain cases, loans may be placed on non-accrual status or charged-off based upon management’s evaluation of the borrower’s ability to pay. All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans, other commercial loans and other agricultural loans, on non-accrual are evaluated quarterly for impairment.

See also “Note 5 – Loans and Related Allowance for Loan Losses” to the consolidated financial statements.

As a result of previous loss experiences and other risk factors utilized in determining the allowance, the Bank’s allocation of the allowance does not directly correspond to the actual balances of the loan portfolio. While commercial and agricultural real estate loans total 69.7% of the loan portfolio at March 31, 2022, 73.5% of the allowance is assigned to these portions of the loan portfolio as these loans have more inherent risks than residential real estate or loans to state and political subdivisions. Residential real estate loans comprise 13.6% of the loan portfolio as of March 31, 2022 and 6.1% of the allowance is assigned to this segment as generally there are less inherent risks then commercial and agricultural loans.

The following table is a summary of our non-performing assets as of March 31, 2022 and December 31, 2021.

	March 31,		December 31,
(dollars in thousands)	2022		2021
Non-performing loans:
Non-accruing loans	$	7,810	$	7,616
Accrual loans - 90 days or more past due		12		46
Total non-performing loans		7,822		7,662
Foreclosed assets held for sale		1,131		1,180
Total non-performing assets	$	8,953	$	8,842

Index

The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2021 to March 31, 2022 in non-performing loans (in thousands). Non-performing loans include those accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.

	March 31, 2022								December 31, 2021
			Non-Performing Loans								Non-Performing Loans
	30 - 89 Days Past Due Accruing		90 Days Past Due Accruing		Non- accrual		Total Non- Performing		30 - 89 Days Past Due Accruing		90 Days Past Due Accruing		Non- accrual		Total Non- Performing
Real estate:
Residential	$	657	$	12	$	443	$	455	$	492	$	13	$	595	$	608
Commercial		1,114		-		2,984		2,984		243		33		2,945		2,978
Agricultural		137		-		3,083		3,083		31		-		3,133		3,133
Construction		-		-		-		-		-		-		-		-
Consumer		189		-		-		-		163		-		-		-
Other commercial loans		-		-		567		567		28		-		140		140
Other agricultural loans		-		-		733		733		10		-		803		803
Total nonperforming loans	$	2,097	$	12	$	7,810	$	7,822	$	967	$	46	$	7,616	$	7,662

	Change in Non-Performing Loans March 31, 2022 /December 31, 2021
	Amount			%
Real estate:
Residential	$	(153	)		(25.2	)
Commercial		6			0.2
Agricultural		(50	)		(1.6	)
Construction		-			-
Consumer		-			-
Other commercial loans		427			305.0
Other agricultural loans		(70	)		(8.7	)
Total nonperforming loans	$	160			2.1

The Company worked with customers directly affected by the COVID-19 pandemic. The Company offered assistance in accordance with regulator guidelines. As a result of the COVID-19 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience increases in non-performing loans and further increases in its required allowance for loan losses and record additional provision expense. It is possible that the Company's asset quality measures could worsen at future measurement periods if the effects of the COVID-19 pandemic are prolonged.

Index

For the three months ended March 31, 2022, we recorded a provision for loan losses of $250,000 which compares to $650,000 for the same period in 2021, a decrease of $450,000. The decrease is primarily attributable to the impact that the COVID-19 pandemic had in 2021 on the national and local economies compared to 2022. Non-performing loans increased $160,000 from December 31, 2021 to March 31, 2022 with the increase being primarily due to one customer. At March 31, 2022, approximately 59.3% of the Bank’s non-performing loans are associated with the following three customer relationships:

•

A commercial loan relationship with $1.3 million outstanding, and additional letters of credit of $1.2 million available, secured by undeveloped land, stone quarries and equipment, was on non-accrual status as of March 31, 2022. The Company services the natural gas industry, as well as local municipalities. As a result, the reduced exploration for natural gas in north central Pennsylvania has significantly impacted the cash flows of the customer, who provides excavation services and stone for pad construction related to these activities. During 2020, the Company had the underlying equipment collateral appraised and in the first quarter of 2022, the Company had the quarry appraised. The appraisals indicated a decrease in collateral values compared to the appraisal ordered for the loan origination, however, the loan was still considered well secured on a loan to value basis at December 31, 2022. In 2021 and 2022, the customer has liquidated some excess equipment and the funds have been utilized to pay down a portion of the loans. Management determined that no specific reserve was required as of March 31, 2022.

•

An agricultural loan customer with a total loan relationship of $2.1 million, secured by real estate, equipment and cattle, was on non-accrual status as of March 31, 2022. The customer declared bankruptcy during the fourth quarter of 2018 and developed a workout plan that was approved by the bankruptcy court in the fourth quarter of 2019 and resulted in monthly payments resuming in late 2019 that continues into 2022. Included within these loans to this customer are $787,000 of loans which are subject to Farm Service Agency guarantees. Depressed milk prices and the pandemic have created cash flow difficulties for this customer. Absent a sizable and sustained increase in milk prices, which is not assured, we will need to rely upon the collateral for repayment of interest and principal. During 2020, the Company had the underlying collateral appraised. Management determined that no specific reserve was required as of March 31, 2022.

•

An agricultural loan customer with a total loan relationship of $1.2 million, secured by real estate was on non-accrual status as of March 31, 2022. The COVID-19 pandemic has escalated the cash flow difficulties this customer was experiencing. We expect that we will need to rely upon the collateral for repayment of interest and principal. Management reviewed the collateral and determined that no specific reserve was required as of March 31, 2022.

Management believes that the allowance for loan losses at March 31, 2022 was adequate at that date, which was based on the following factors:

•

Three loan relationships comprise 59.3% of the non-performing loan balance, which did not require any specific reserves as of March 31, 2022.

•

The Company has a history of low charge-offs, which were 0.00% of average loans for 2022 and 2021.

Bank Owned Life Insurance

The Company holds bank owned life insurance policies to offset future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits. As of March 31, 2022, and December 31, 2021, the cash surrender value of the life insurance was $38.7 million and $38.5 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $207,000 and $1,315,000 for the three month periods ended March 31, 2022 and 2021, respectively. During the first quarter of 2021, the Company received proceeds of $3,714,000, which included death benefits of $1,155,000 on two former employees of the Company. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers’ credit ratings.

Index

The Company policies that were purchased directly from insurance companies are structured so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The net amount at risk is the total death benefit payable less the cash surrender value of the policy as of the date of death. The policies acquired as part of the acquisition of FNB provide a fixed split-dollar benefit for the beneficiary’s estate, which is dependent on several factors including whether the covered individual was a former Director of First National Bank of Fredericksburg (“FNB”) or a former employee of FNB and their salary level. As of March 31, 2022, and December 31, 2021, included in other liabilities on the Consolidated Balance Sheet was a liability of $687,000 and $696,000, respectively, for the obligation under the split-dollar benefit agreements.

Premises and Equipment

Premises and equipment decreased $164,000 to $16.9 million as of March 31, 2022 from December 31, 2021 as a result of a depreciation.

Deposits

The following table shows the composition of deposits as of March 31, 2022 and December 31, 2021 (dollars in thousands):

	March 31, 2022				December 31, 2021
	Amount		%		Amount		%
Non-interest-bearing deposits	$	366,820		19.5	$	358,073		19.5
NOW accounts		509,036		27.1		485,292		26.4
Savings deposits		321,701		17.1		313,048		17.0
Money market deposit accounts		365,591		19.5		350,122		19.1
Certificates of deposit		315,942		16.8		329,616		18.0
Total	$	1,879,090		100.0	$	1,836,151		100.0

	March 31, 2022/ December 31, 2021 Change
	Amount			%
Non-interest-bearing deposits	$	8,747			2.4
NOW accounts		23,744			4.9
Savings deposits		8,653			2.8
Money market deposit accounts		15,469			4.4
Certificates of deposit		(13,674	)		(4.1	)
Total	$	42,939			2.3

Deposits increased $42.9 million since December 31, 2021. The Company experienced deposit growth across all markets and product types. Through the first three months of 2022, customers continued to transfer certificates of deposits primarily into money market and NOW accounts. There were no brokered certificates of deposits as of March 31, 2022 or December 31, 2021.

Index

Borrowed Funds

Borrowed funds were $68.2 million and $74.0 million as of March 31, 2022 and December 31, 2021, respectively. The decrease in borrowed funds was due maturities that occurred in the first quarter of 2022 that were not replaced. During 2022, $4.7 million of long term borrowings from the Federal Home Loan Bank of Pittsburgh matured and were not replaced and repurchase agreements decreased $1.0 million. As of March 31, 2022, long-term advances total $27.5 million, short-term advances total $25.0 million and repurchase agreements total $15.8 million.

In April 2020, the Bank entered into two interest rate swap agreements to convert floating-rate debt to fixed rate debt on notional amounts of $15.0 million and $10.0 million. The interest rate swap instruments involve an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amounts. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on April 1, 2020 and expire on April 1, 2025 and April 1, 2027. In April 2020, the Company entered into an interest rate swap agreement to convert floating-rate debt to fixed rate debt on a notional amounts of $7.5 million. The interest rate swap instrument involves an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on April 13, 2020 and expire on June 17, 2027. In May of 2020, the Bank entered into three two year forward interest rate swaps that will convert floating rate debt to fixed rate debt on notional amounts of $6.0 million each. The interest rate swap instruments involves an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on May 14, 2020 and expire on May 14, 2027, 2029 and 2032. The fair value of the interest rate swaps at March 31, 2022 was $4,367,000 and is included within other assets on the consolidated balance sheets.

The Company’s current strategy for borrowings is to consider terms and structures to manage interest rate risk and liquidity in a rising rate environment. The Company's daily cash requirements or short-term investments are primarily met by using the financial instruments available through the Federal Home Loan Bank of Pittsburgh.

Stockholders’ Equity

We evaluate stockholders’ equity in relation to total assets and the risks associated with those assets. The greater the capital resource, the more likely a corporation will meet its cash obligations and absorb unforeseen losses. For these reasons, capital adequacy has been, and will continue to be, of paramount importance to the Company. As such, the Company has implemented policies and procedures to ensure that it has adequate capital levels. As part of this process, we routinely stress test our capital levels and identify potential risk and alternative sources of additional capital should the need arise.

Total stockholders’ equity was $202.7 million at March 31, 2022 compared to $212.5 million at December 31, 2021, a decrease of $9,747,000, or (4.6%). Excluding accumulated other comprehensive (loss) income, stockholders’ equity increased $4.9 million, or 2.3%. The Company purchased 113 shares of treasury stock at a weighted average cost of $62.00 per share. For the three months of 2022, the Company had net income of $6.7 million and declared cash dividends of $1.9 million, or $0.475 per share, representing a cash dividend payout ratio of 27.8%.

All of the Company’s debt investment securities are classified as available-for-sale, making this portion of the Company’s balance sheet more sensitive to the changing market value of investments. As a result of changes in the interest rate environment, the defined benefit plan obligations and the interest rate swaps entered into during 2020, accumulated other comprehensive income decreased approximately $14.6 million from December 31, 2021.

Index

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. Following the passage of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in response to the COVID-19 pandemic, the federal banking regulators revised the CBLR framework as follows: (i) beginning in the second quarter of 2020, a qualifying community bank need only have a leverage ratio of at least 8%, subject to the other qualifying requirements, and (ii) if a qualifying community bank’s leverage ratio falls below 8%, then it will have two calendar quarters to maintain a leverage ratio of 7% or greater. These revisions under the CARES Act are effective April 23, 2020 and terminated on December 31, 2020. Following such termination there is a grace period for returning to the 9% CBLR threshold. The CBLR was set at 8.5% for 2021, and 9% thereafter. The grace period is also adjusted to account for the graduating increase. As a result, in 2021, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 7.5%. Thereafter, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply. At March 31, 2022, the Bank leverage ratio under the CBLR framework was 8.83%. This ratio allows the Bank to fall within the grace period of the CBLR, and the Bank will have two calendar quarters to meet the 9.0% requirement to be considered “well-capitalized”.

Off-Balance Sheet Activities

Some financial instruments, such as loan commitments, credit lines, and letters of credit, are issued to meet customer financing needs but are not recorded on the Company’s balance sheet. The contractual amount of financial instruments with off-balance sheet risk was as follows at March 31, 2022 and December 31, 2021 (in thousands):

	March 31, 2022		December 31, 2021
Commitments to extend credit	$	381,461	$	275,998
Standby letters of credit		15,923		17,083
	$	397,384	$	293,081

We also offer limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing. Overdraft charges as a result of ATM withdrawals and one time point of sale (non-recurring) transactions require prior approval of the customer. The non-contractual amount of financial instruments with off-balance sheet risk at March 31, 2022 and December 31, 2021 was $12,203,000 and $12,230,000, respectively. The Company reserves the right to discontinue this service without prior notice.

Liquidity

Index

Liquidity is a measure of the Company's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. To maintain proper liquidity, we use funds management policies, which include liquidity target ratios, along with our investment policies to assure we can meet our financial obligations to depositors, credit customers and stockholders. Liquidity is needed to meet depositors' withdrawal demands, extend credit to meet borrowers' needs, provide funds for normal operating expenses and cash dividends, and to fund other capital expenditures.

Cash generated by operating activities, investing activities and financing activities influences liquidity management. Our Company's historical activity in this area can be seen in the Consolidated Statement of Cash Flows. The most important source of funds is core deposits. Repayment of principal on outstanding loans and cash flows created from the investment portfolio are also factors in liquidity management. Other sources of funding include brokered certificates of deposit and the sale of loans or investments, if needed.

The Company's use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is presented. Other uses of funds include purchasing stock from the Federal Home Loan Bank (FHLB) of Pittsburgh, as well as capital expenditures. Capital expenditures (including software purchases), during the first three months of 2022 were $59,000 compared to $785,000 during the same time period in 2021.

Short-term debt from the FHLB supplements the Bank’s availability of funds. The Bank achieves liquidity primarily from temporary or short‑term investments in the Federal Reserve and the FHLB. The Bank had a maximum borrowing capacity at the FHLB of approximately $777.4 million, inclusive of any outstanding amounts, as a source of liquidity at March 31, 2022. The Bank also had two federal funds lines with third party providers in the total amount of $34.0 million as of March 31, 2022, which are unsecured and undrawn upon. We also have a borrower in custody line with the Federal Reserve Bank of approximately $1.2 million, which also is not drawn upon as of March 31, 2022. The Company continues to evaluate its liquidity needs and as necessary finds additional sources.

Citizens Financial Services, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Citizens Financial Services, Inc. is responsible for paying any dividends declared to its shareholders. Citizens Financial also has repurchased shares of its common stock. Citizens Financial Services, Inc.’s primary source of income is dividends received from the Bank. Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. In particular, the Bank may not, as a state-chartered bank which is a member of the Federal Reserve System, declare a dividend without approval of the Federal Reserve, unless the dividend to be declared by the Bank’s Board of Directors does not exceed the total of: (i) the Bank’s net profits for the current year to date, plus (ii) its retained net profits for the preceding two current years, less any required transfers to surplus. The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends, because banks which are not classified as well capitalized or adequately capitalized may not pay dividends and no dividend may be paid which would make the Bank undercapitalized after the dividend. At March 31, 2022, Citizens Financial Services, Inc. (on an unconsolidated basis) had liquid assets of $14.9 million.

Interest Rate and Market Risk Management

The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities.

Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, because we have no trading portfolio, we are not subject to trading risk. Currently, the Company has equity securities that represent only 0.11% of its total assets and, therefore, equity risk is not significant.

Index

The primary components of interest-sensitive assets include adjustable-rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of interest-sensitive liabilities include maturing certificates of deposit, IRA certificates of deposit and short-term borrowings. Savings deposits, NOW accounts and money market investor accounts are considered core deposits and are not short-term interest sensitive (except for the top-tier money market investor accounts, typically help by local governments, which are paid current market interest rates).

Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on our Company's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis.

The Company currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management and asset liability management processes that we believe will effectively identify, measure, and monitor the Company’s risk exposure. In this analysis, the Company examines the results of movements in interest rates with additional assumptions made concerning prepayment speeds on mortgage loans and mortgage securities. Shock scenarios, which assume a parallel shift in interest rates and is instantaneous, typically have the greatest impact on net interest income. The following is a rate shock analysis and the impact on net interest income as of March 31, 2022 (dollars in thousands):

Changes in Rates	Prospective One-Year Net Interest Income		Change In Prospective Net Interest Income			% Change In Prospective Net Interest Income
-100 Shock		63,662		(1,633	)		(2.50	)
Base		65,295		-			-
100 Shock		65,411		116			0.18
+200 Shock		65,835		540			0.83
+300 Shock		65,964		669			1.02
+400 Shock		66,067		772			1.18

The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage backed securities, call activity of other investment securities, and deposit selection, re-pricing and maturity structure. Because of these assumptions, actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change on net interest income. Additionally, the changes above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. It should be noted that the changes in net interest income noted above are in line with Company policy for interest rate risk.

Item 3-Quantitative and Qualitative Disclosure about Market Risk

In the normal course of conducting business activities, the Company is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments and was discussed previously in this Form 10-Q. Management and a committee of the Board of Directors manage interest rate risk (see also “Interest Rate and Market Risk Management”).

Index

Item 4-Control and Procedures

(a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes to Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

PART II ‑ OTHER INFORMATION

Item 1 ‑ Legal Proceedings

Management is not aware of any pending or threatened litigation that would have a material adverse effect on the consolidated financial position of the Company. Any pending proceedings are ordinary, routine litigation incidental to the business of the Company and its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company and its subsidiary by government authorities.

Item 1A – Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1.A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition or future results. At March 31, 2022, the risk factors of the Company have not changed materially from those reported in our 2021 Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares (or units Purchased)		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans of Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)

1/1/22 to 1/31/22		-	$	0.00		-		135,089
2/1/22 to 2/28/22		88	$	62.00		88		135,001
3/1/22 to 3/31/22		25	$	62.00		25		134,976
Total		113				113

(1)

On April 21, 2020, the Company announced that the Board of Directors authorized the Company to repurchase up to an additional 150,000 shares at an aggregate purchase price not to exceed $12.0 million over a period of 36 months. The repurchases will be conducted through open-market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors. No time limit was placed on the duration of the share repurchase program. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.

Index

Item 3 ‑ Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosure

Not applicable.

Item 5 ‑ Other Information

None

Item 6 ‑ Exhibits

(a) The following documents are filed as a part of this report:

3.1		Restated Articles of Incorporation of Citizens Financial Services, Inc. ⁽¹⁾

3.2		Articles of Amendment of Restated Articles of Incorporation of Citizens Financial Services, Inc. ⁽²⁾

3.3		Bylaws of Citizens Financial Services, Inc.⁽³⁾

4.1		Form of Common Stock Certificate. ⁽⁴⁾

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) The Consolidated Balance Sheet (unaudited), (ii) the Consolidated Statement of Income (unaudited), (iii) the Consolidated Statement of Comprehensive Income (unaudited), (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows (unaudited) and (vi) related notes (unaudited).

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

⁽¹⁾ Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended June 30, 2018, as filed with the Commission on August 9, 2018.

⁽²⁾ Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on April 26, 2021.

⁽³⁾ Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on December 17, 2020.

⁽⁴⁾ Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the Commission on March 14, 2006.

Index

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Citizens Financial Services, Inc. (Registrant)

May 9, 2022	/s/ Randall E. Black
	By: Randall E. Black
	President and Chief Executive Officer
	(Principal Executive Officer)

May 9, 2022	/s/ Stephen J. Guillaume
	By: Stephen J. Guillaume
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheet as of March 31, 2022 and December 31, 2021	1
	Consolidated Statement of Income for the Three months Ended March 31, 2022 and 2021	2
	Consolidated Statement of Comprehensive Income for the Three months ended March 31, 2022 and 2021	3
	Consolidated Statement of Changes in Stockholders’ Equity for the Three months ended March 31, 2022 and 2021	4
	Consolidated Statement of Cash Flows for the Three months ended March 31, 2022 and 2021	5
	Notes to Consolidated Financial Statements	6-30
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31-50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	52

Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
	Signatures	54