UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from _____________to________________
Commission
file No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
| None | None | None |
Indicate
by check mark whether the registrant (1) has filed all reports required 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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | 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 ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:
Common stock, $1.25 par value, shares outstanding as of November 8, 2024.
Muncy Columbia Financial Corporation
Index to Quarterly Report on Form 10-Q
2
PART I Financial Information
Item 1. Financial Statements
Muncy Columbia Financial Corporation
Consolidated Balance Sheets
| (In Thousands, Except Share and Per Share Data) (Unaudited) | September 30, 2024 | December 31, 2023 | ||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits in other banks | ||||||||
| Total cash and cash equivalents | ||||||||
| Interest-bearing time deposits | ||||||||
| Available-for-sale debt securities, at fair value | ||||||||
| Marketable equity securities, at fair value | ||||||||
| Restricted investment in bank stocks, at cost | ||||||||
| Loans held for sale | ||||||||
| Loans receivable | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Loans, net | ||||||||
| Premises and equipment, net | ||||||||
| Foreclosed assets held for sale | ||||||||
| Accrued interest receivable | ||||||||
| Bank-owned life insurance | ||||||||
| Investment in limited partnerships | ||||||||
| Deferred tax asset, net | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES | ||||||||
| Interest-bearing deposits | $ | $ | ||||||
| Noninterest-bearing deposits | ||||||||
| Total deposits | ||||||||
| Short-term borrowings | ||||||||
| Long-term borrowings | ||||||||
| Accrued interest payable | ||||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
Common stock, par value $ per share; shares authorized; issued and outstanding at September 30, 2024; issued and outstanding at December 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost; shares at September 30, 2024 and December 31, 2023 | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to the unaudited consolidated financial statements.
3
Muncy Columbia Financial Corporation
Consolidated Statements of Income
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (In Thousands, Except Share and Per Share Data) (Unaudited) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| INTEREST AND DIVIDEND INCOME | ||||||||||||||||
| Interest and fees on loans: | ||||||||||||||||
| Taxable | $ | $ | $ | $ | ||||||||||||
| Tax-exempt | ||||||||||||||||
| Interest and dividends on investment securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax-exempt | ||||||||||||||||
| Dividend and other interest income | ||||||||||||||||
| Federal funds sold | ||||||||||||||||
| Deposits in other banks | ||||||||||||||||
| TOTAL INTEREST AND DIVIDEND INCOME | ||||||||||||||||
| INTEREST EXPENSE | ||||||||||||||||
| Deposits | ||||||||||||||||
| Short-term borrowings | ||||||||||||||||
| Long-term borrowings | ||||||||||||||||
| TOTAL INTEREST EXPENSE | ||||||||||||||||
| NET INTEREST INCOME | ||||||||||||||||
| Provision (credit) for credit losses - loans | ( | ) | ( | ) | ||||||||||||
| Provision (credit) for credit losses - off balance sheet credit exposures | ( | ) | ||||||||||||||
| TOTAL PROVISION (CREDIT) FOR CREDIT LOSSES | ( | ) | ( | ) | ||||||||||||
| NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR CREDIT LOSSES | ||||||||||||||||
| NON-INTEREST INCOME | ||||||||||||||||
| Service charges and fees | ||||||||||||||||
| Gain on sale of loans | ||||||||||||||||
| Earnings on bank-owned life insurance | ||||||||||||||||
| Brokerage | ||||||||||||||||
| Trust | ||||||||||||||||
| Gains (losses) on marketable equity securities | ( | ) | ( | ) | ||||||||||||
| Realized losses on available-for-sale debt securities, net | ( | ) | ||||||||||||||
| Interchange fees | ||||||||||||||||
| Other non-interest income | ||||||||||||||||
| TOTAL NON-INTEREST INCOME | ||||||||||||||||
| NON-INTEREST EXPENSE | ||||||||||||||||
| Salaries and employee benefits | ||||||||||||||||
| Occupancy | ||||||||||||||||
| Furniture and equipment | ||||||||||||||||
| Pennsylvania shares tax | ( | ) | ||||||||||||||
| Professional fees | ||||||||||||||||
| Director’s fees | ||||||||||||||||
| Federal deposit insurance | ||||||||||||||||
| Data processing and telecommunications | ||||||||||||||||
| Automated teller machine and interchange | ||||||||||||||||
| Merger-related expenses | ||||||||||||||||
| Amortization of intangibles | ||||||||||||||||
| Other non-interest expense | ||||||||||||||||
| TOTAL NON-INTEREST EXPENSE | ||||||||||||||||
| INCOME BEFORE INCOME TAX PROVISION | ||||||||||||||||
| INCOME TAX PROVISION | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| EARNINGS PER SHARE - BASIC AND DILUTED | $ | $ | $ | $ | ||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
4
Muncy Columbia Financial Corporation
Consolidated Statements of Comprehensive Income (Loss)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (In Thousands) (Unaudited) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Unrealized holding gains (losses) on available-for-sale debt securities | ( | ) | ( | ) | ||||||||||||
| Tax effect | ( | ) | ( | ) | ||||||||||||
| Net realized losses included in net income | ||||||||||||||||
| Tax effect | ( | ) | ||||||||||||||
| Other comprehensive income (loss), net | ( | ) | ( | ) | ||||||||||||
| Comprehensive income (loss) | $ | $ | ( | ) | $ | $ | ||||||||||
See accompanying notes to the unaudited consolidated financial statements.
5
Muncy Columbia Financial Corporation
Consolidated Statements of Changes in Stockholders’ Equity
| Accumulated | ||||||||||||||||||||||||||||
| Common | Additional | Other | Total | |||||||||||||||||||||||||
| (In Thousands Except Share and Per Share Data) | Stock | Paid-In | Retained | Comprehensive | Treasury | Stockholders’ | ||||||||||||||||||||||
| (Unaudited) | Shares | Amount | Capital | Earnings | Loss | Stock | Equity | |||||||||||||||||||||
| For the three months ended: | ||||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Other comprehensive income | — | |||||||||||||||||||||||||||
| Common stock issuance under employee stock purchase plan | ||||||||||||||||||||||||||||
| Recognition of employee stock purchase plan expense | — | |||||||||||||||||||||||||||
| Cash dividends ($ per share) | — | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Other comprehensive loss | — | ( |
) | ( |
) | |||||||||||||||||||||||
| Common stock issuance under employee stock purchase plan | ||||||||||||||||||||||||||||
| Recognition of employee stock purchase plan expense | — | |||||||||||||||||||||||||||
| Cash dividends ($ per share) | — | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| For the nine months ended: | ||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Other comprehensive income | — | |||||||||||||||||||||||||||
| Common stock issuance under employee stock purchase plan | ||||||||||||||||||||||||||||
| Recognition of employee stock purchase plan expense | — | |||||||||||||||||||||||||||
| Cash dividends ($ per share) | — | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Other comprehensive loss | — | ( |
) | ( |
) | |||||||||||||||||||||||
| Common stock issuance under employee stock purchase plan | ||||||||||||||||||||||||||||
| Recognition of employee stock purchase plan expense | — | |||||||||||||||||||||||||||
| Cash dividends ($ per share) | — | ( |
) | ( |
) | |||||||||||||||||||||||
| Cumulative effect of adoption of ASU 2016-13 | — | |||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
6
Muncy Columbia Financial Corporation
Consolidated Statements of Cash Flows
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| (In Thousands) (Unaudited) | 2024 | 2023 | ||||||
| OPERATING ACTIVITIES | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision (credit) for credit losses | ( | ) | ||||||
| Depreciation and amortization of premises and equipment | ||||||||
| Accretion of loans, net | ( | ) | ||||||
| Amortization of deposits, net | ||||||||
| (Gains) losses on marketable equity securities | ( | ) | ||||||
| Realized losses on available-for-sale debt securities, net | ||||||||
| (Accretion) amortization of investment securities, net | ( | ) | ||||||
| Losses on sale of foreclosed assets held for sale, net | ||||||||
| Deferred income taxes | ||||||||
| Gain on sale of loans | ( | ) | ( | ) | ||||
| Proceeds from sale of mortgage loans | ||||||||
| Originations of mortgage loans held for resale | ( | ) | ( | ) | ||||
| Amortization of intangibles | ||||||||
| Amortization of investment in limited partnerships | ||||||||
| Decrease (increase) in accrued interest receivable | ( | ) | ||||||
| Earnings on bank-owned life insurance | ( | ) | ( | ) | ||||
| (Decrease) increase in accrued interest payable | ( | ) | ||||||
| Other, net | ||||||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Available-for-sale debt securities: | ||||||||
| Purchases | ( | ) | ||||||
| Proceeds from sales | ||||||||
| Proceeds from paydowns, calls and maturities | ||||||||
| Proceeds from maturities of interest-bearing time deposits | ||||||||
| Purchase of bank-owned life insurance | ( | ) | ( | ) | ||||
| Proceeds from redemption of restricted investment in bank stocks | ||||||||
| Purchase of restricted investment in bank stocks | ( | ) | ( | ) | ||||
| Net increase in loans | ( | ) | ( | ) | ||||
| Proceeds from sale of foreclosed assets held for sale | ||||||||
| Purchase of investment in limited partnership | ( | ) | ||||||
| Acquisition of intangibles | ( | ) | ||||||
| Acquisition of premises and equipment | ( | ) | ( | ) | ||||
| Net cash provided by (used for) investing activities | ( | ) | ||||||
| FINANCING ACTIVITIES | ||||||||
| Net increase (decrease) in deposits | ( | ) | ||||||
| Net (decrease) increase in short-term borrowings | ( | ) | ||||||
| Proceeds from long-term borrowings | ||||||||
| Repayment of long-term borrowings | ( | ) | ( | ) | ||||
| Proceeds from issuance of common stock | ||||||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Net cash (used for) provided by financing activities | ( | ) | ||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | ||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | ||||||||
| Loans transferred to foreclosed assets held for sale | ||||||||
| Loans held for sale transferred to loans | ||||||||
See accompanying notes to the unaudited consolidated financial statements.
7
MUNCY COLUMBIA FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Muncy Columbia Financial Corporation (the “Corporation”) and its wholly-owned subsidiary, Journey Bank (the “Bank”). All significant inter-company balances and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION
The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 2023, is unaudited. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Prior period amounts have been reclassified when necessary to conform to the current period’s presentation. Such reclassifications did not have an impact on the operating results or financial position of the Corporation. Operating results for the three and nine months ended September 30, 2024, are not necessarily indicative of the results for the year ending December 31, 2024.
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s audited financial statements, included in the Annual Report filed on Form 10-K as of and for the year ended December 31, 2023.
RECENTLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING PRONOUNCEMENTS
In December 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU No. 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024. The ASU may be adopted on a prospective or retrospective basis and early adoption is permitted. The Corporation is currently evaluating the impact the new guidance will have on related disclosures related to income taxes.
In November 2024, the FASB issued ASU 2024-03, Income Statement – Comprehensive Income – Expense Disaggregation Disclosures, which requires disclosure, in the notes to financial statements, of specified information about certain costs and expenses. ASU No. 2024-03 is effective for public business entities for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027. Early adoption is permitted. The Corporation is currently evaluating the impact the new guidance will have on relevant disclosures.
2. BUSINESS COMBINATION
On November 11, 2023, the Corporation completed its merger with Muncy Bank Financial, Inc. (“MBF”). MBF was a Pennsylvania corporation that conducted its business primarily through its wholly owned subsidiary The Muncy Bank & Trust Company, which operated from a main office in Muncy, Pennsylvania, and had nine additional branches throughout Northcentral Pennsylvania. The MBF merger has contributed significantly to growth in the size of the Corporation’s balance sheet and in net interest income and non-interest expenses.
In
connection with the transaction, the Corporation recorded goodwill of $
8
3. SECURITIES
The amortized cost, related estimated fair value, and unrealized gains and losses of available-for-sale debt securities were as follows at September 30, 2024 and December 31, 2023:
| September 30, 2024 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| (In Thousands) | Cost | Gains | Losses | Value | ||||||||||||
| Obligation of U.S.Government Corporations and Agencies: | ||||||||||||||||
| Mortgage-backed | $ | $ | $ | ( | ) | $ | ||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Obligations of state and political subdivisions | ( | ) | ||||||||||||||
| Other debt securites | ||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2023 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| (In Thousands) | Cost | Gains | Losses | Value | ||||||||||||
| Obligation of U.S.Government Corporations and Agencies: | ||||||||||||||||
| Mortgage-backed | $ | $ | $ | ( | ) | $ | ||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Obligations of state and political subdivisions | ( | ) | ||||||||||||||
| Other debt securites | ||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | ( | ) | $ | ||||||||||
Securities
available-for-sale with an aggregate fair value of $
The amortized cost and estimated fair value of investment securities, by expected maturity, are shown below at September 30, 2024. Expected maturities on debt securities will differ from contractual maturities, because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Amortized | ||||||||
| (In Thousands) | Cost | Fair Value | ||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year to five years | ||||||||
| Due after five years to ten years | ||||||||
| Due after ten years | ||||||||
| Sub-total | ||||||||
| Mortgage-backed securities | ||||||||
| Collateralized mortgage obligations | ||||||||
| Total debt securities | $ | $ | ||||||
9
The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.
The following table presents the gross proceeds received, and gross realized gains and losses, on sales of available-for-sale debt securities for the three and nine months ended September 30, 2024 and 2023. Gains and losses realized on sales of available-for-sale debt securities are included in non-interest income in the consolidated statements of income.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (In Thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Gross proceeds received on sales | $ | $ | $ | $ | ||||||||||||
| Gross realized gains | ||||||||||||||||
| Gross realized losses | ( | ) | ||||||||||||||
The following summary shows the gross unrealized losses and fair value, aggregated by investment category of those individual securities for which an allowance for credit losses has not been recorded that have been in a continuous unrealized loss position for less than or more than 12 months as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | ||||||||||||||||||||||||
| Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| (In Thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
| Obligations of U.S. Government Corporations and Agencies: | ||||||||||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||||||||||
| Obligations of state and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||
| Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| (In Thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
| Obligations of U.S. Government Corporations and Agencies: | ||||||||||||||||||||||||
| Mortgage-backed | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||||||||||
| Obligations of state and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
At
September 30, 2024, the Corporation had a total of
At
September 30, 2024, the Corporation had a total of
At September 30, 2024, unrealized losses on debt securities have not been recognized into income because the issuers bonds are of high credit quality (rated BBB or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.
As of September 30, 2024 and December 31, 2023, no allowance for credit loss (“ACL”) was required for debt securities. The Bank does not have the intent to sell and does not believe it will be more likely than not to be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
As of September 30, 2024, all debt securities were rated above investment grade. Based on the payment status, rating and management’s evaluation of these securities, no ACL was required for the debt securities as of September 30, 2024. As of September 30, 2024, the underlying issuers continue to make timely principal and interest payments on the securities.
10
Equity
securities with a readily determinable fair value are stated at fair value with realized and unrealized gains and losses reported
in income. At September 30, 2024 and December 31, 2023, the Corporation had $
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| (In Thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Net gains (losses) recognized during the period on marketable equity securities | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Less: Net gains (losses) recognized during the period on marketable equity securities sold during the period | ||||||||||||||||
| Unrealized gains (losses) recognized during the period on marketable equity securities still held at the reporting date | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans
that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their
outstanding unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized
as an adjustment to yield (interest income) over the life of the loan. Deferred fees and costs amounted to $
The segments of the Corporation’s loan portfolio are disaggregated into classes that allow management to monitor risk and performance. The loan classes used are consistent with the internal reports evaluated by the Corporation’s management and Board of Directors to monitor risk and performance within the various segments of its loan portfolio.
Major classifications of loans at September 30, 2024 and December 31, 2023 consisted of:
| (In Thousands) | September 30, 2024 | December 31, 2023 | ||||||
| Commercial and industrial | $ | $ | ||||||
| Commercial real estate: | ||||||||
| Commercial mortgages | ||||||||
| Student housing | ||||||||
| Residential real estate: | ||||||||
| Rental 1-4 family | ||||||||
| 1-4 family residential mortgages | ||||||||
| Consumer and other | ||||||||
| Gross loans | $ | $ | ||||||
Allowance for Credit Losses and Recorded Investment in Financial Receivables
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Corporation has aligned our segmentation to internal loan reports. The Corporation has identified the following portfolio segments:
| ● | Commercial and Industrial |
| ● | Commercial Real Estate |
| ● | Residential Real Estate |
| ● | Consumer and other |
11
The following table presents the activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2024 and 2023:
| For the Three Months Ended September 30, 2024 | ||||||||||||||||||||||||
| Commercial | Residential | |||||||||||||||||||||||
| Commercial and | Real | Real | Consumer | |||||||||||||||||||||
| (In Thousands) | Industrial | Estate | Estate | and Other | Unallocated | Total | ||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision (credit) charged to operations | ( | ) | ( | ) | ||||||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | — | ( | ) | — | ||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the Three Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Commercial | Residential | |||||||||||||||||||||||
| Commercial and | Real | Real | Consumer | |||||||||||||||||||||
| (In Thousands) | Industrial | Estate | Estate | and Other | Unallocated | Total | ||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Credit) provision charged to operations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||
| Commercial | Residential | |||||||||||||||||||||||
| Commercial and | Real | Real | Consumer | |||||||||||||||||||||
| (In Thousands) | Industrial | Estate | Estate | and Other | Unallocated | Total | ||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Credit) provision charged to operations | ( | ) | ||||||||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Commercial | Residential | |||||||||||||||||||||||
| Commercial and | Real | Real | Consumer | |||||||||||||||||||||
| (In Thousands) | Industrial | Estate | Estate | and Other | Unallocated | Total | ||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Impact of adopting ASC 326 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| (Credit) provision charged to operations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The
Corporation recorded a $
Total
non-performing assets amounted to $
12
Historical credit loss experience is the basis for the estimation of expected credit losses. The Corporation applies historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management can apply qualitative adjustments to reflect the current conditions and reasonable and supportive forecasts not already captured in the historical loss information at the balance sheet date.
In accordance with Accounting Standards Codification (“ASC”) 326, the Corporation will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. Loans will not be included in both collective and individual analysis. The individual analysis will establish a specific reserve for loans in scope.
Specific reserves are established based on the following three acceptable methods for measuring the ACL:1) the present value of expected future cash flows discounted at the loan’s original interest rate; 2) the loan’s observable market price; 3) the fair value of the collateral when the loan is collateral dependent. The method is selected on a loan-by-loan basis with the evaluation of the need and amount of a specific allocation of the allowance being made on a quarterly basis.
The need for an updated appraisal on collateral dependent loans is determined on a case-by-case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for credit losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s Chief Credit Officer to support the value of the property.
When receiving an appraisal associated with an existing real estate collateral dependent transaction, the Bank’s Chief Credit Officer must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:
| ● | the passage of time; |
| ● | the volatility of the local market; |
| ● | the availability of financing; |
| ● | natural disasters; |
| ● | the inventory of competing properties; |
| ● | new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank; |
| ● | changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or |
| ● | environmental contamination. |
The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Chief Credit Officer determines that a reasonable value cannot be derived based on the available information, a new appraisal is ordered. The determination of the need for a new appraisal rests with the Chief Credit Officer and not the originating account officer.
The following table summarizes the loan portfolio and allowance for credit losses as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | ||||||||||||||||||||
| Commercial | Residential | |||||||||||||||||||
| Commercial and | Real | Real | Consumer | |||||||||||||||||
| (In Thousands) | Industrial | Estate | Estate | and Other | Total | |||||||||||||||
| Loans: | ||||||||||||||||||||
| Individually evaluated | $ | $ | $ | $ | $ | |||||||||||||||
| Collectively evaluated | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | |||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||
| Individually evaluated | $ | $ | $ | $ | $ | |||||||||||||||
| Collectively evaluated | ||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | $ | |||||||||||||||
13
| December 31, 2023 | ||||||||||||||||||||
| Commercial | Residential | |||||||||||||||||||
| Commercial and | Real | Real | Consumer | |||||||||||||||||
| (In Thousands) | Industrial | Estate | Estate | and Other | Total | |||||||||||||||
| Loans: | ||||||||||||||||||||
| Individually evaluated | $ | $ | $ | $ | $ | |||||||||||||||
| Collectively evaluated | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | |||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||
| Individually evaluated | $ | $ | $ | $ | $ | |||||||||||||||
| Collectively evaluated | ||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | $ | |||||||||||||||
As
of September 30, 2024 and December 31, 2023, the amortized cost basis of individually evaluated loans that were deemed to be collateral
dependent was $
Age Analysis of Past-Due Loans Receivable
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past-due status as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | ||||||||||||||||||||||||
| 30-59 | 60-89 | |||||||||||||||||||||||
| Days | Days | 90+ Days | Total | Total | ||||||||||||||||||||
| (In Thousands) | Current | Past Due | Past Due | Past Due | Past Due | Loans | ||||||||||||||||||
| Commercial and Industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||
| 30-59 | 60-89 | |||||||||||||||||||||||
| Days | Days | 90+ Days | Total | Total | ||||||||||||||||||||
| (In Thousands) | Current | Past Due | Past Due | Past Due | Past Due | Loans | ||||||||||||||||||
| Commercial and Industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
14
Non-performing Loans
The following tables present the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing interest as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | ||||||||||||||||||||
| Nonaccrual | Nonaccrual | Loans Past | ||||||||||||||||||
| with no | with | Total | Due over 90 Days | Total | ||||||||||||||||
| (In Thousands) | ACL | ACL | Nonaccrual | Still Accruing | Nonperforming | |||||||||||||||
| Commercial and Industrial | $ | $ | $ | $ | $ | |||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| Nonaccrual | Nonaccrual | Loans Past | ||||||||||||||||||
| with no | with | Total | Due over 90 Days | Total | ||||||||||||||||
| (In Thousands) | ACL | ACL | Nonaccrual | Still Accruing | Nonperforming | |||||||||||||||
| Commercial and Industrial | $ | $ | $ | $ | $ | |||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
Credit Quality Indicators
The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually to classify the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial real estate, commercial construction, and commercial and industrial loans. This analysis is performed on a quarterly basis. The Bank uses the following definitions for risk ratings:
Pass. Loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
15
Based on the most recent analysis performed, the following table presents the recorded investment in non-homogenous loans by internal risk rating system as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | ||||||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Period | Amortized | |||||||||||||||||||||||||||||||
| (In Thousands) | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Cost Basis | Total | ||||||||||||||||||||||||
| Commercial and Industrial | ||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total | $ | 33,705 | $ | 68,323 | $ | 79,594 | $ | 77,522 | $ | 30,119 | $ | 131,808 | $ | 32,821 | $ | 453,892 | ||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
16
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Period | Amortized | |||||||||||||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | Total | ||||||||||||||||||||||||
| Commercial and Industrial | ||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
17
The Bank monitors the credit risk profile by payment activity for residential real estate, consumer, and other loan classes. Loans past due 90 days or more and loans on nonaccrual status are considered non-performing. Non-performing loans are reviewed quarterly. The following table presents the amortized cost in residential real estate, and consumer and other loans based on payment activity as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | ||||||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Period | Amortized | |||||||||||||||||||||||||||||||
| (In Thousands) | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Cost Basis | Total | ||||||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Consumer and Other | ||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| Revolving | ||||||||||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Period | Amortized | |||||||||||||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | Total | ||||||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Consumer and Other | ||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
18
Modifications to Borrowers Experiencing Financial Difficulty
Occasionally, the Bank may consider modifying loans to borrowers in financial distress by providing term extension, other-than-significant payment delay or interest rate reduction. In some cases, the Bank provides multiple types of concessions on one loan. Typically, one type of concession, such as an interest rate reduction, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as term extension, may be granted.
For the three and nine months ended September 30, 2024 and 2023, the Bank did not grant any loan modifications to borrowers experiencing financial difficulty.
The
carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession were $70,000
and $0 at September 30, 2024 and December 31, 2023, respectively. The recorded investment of consumer mortgage loans secured by
residential real properties for which formal foreclosure proceedings were in process were $
Concentrations of Credit Risk
Most of the Corporation’s lending activity occurs within the Bank’s primary market area which encompasses Clinton, Columbia, Lycoming, Montour and Eastern Northumberland counties in Northcentral Pennsylvania. The majority of the Corporation’s loan portfolio consists of commercial and consumer real estate loans. As of September 30, 2024 and December 31, 2023, there were no concentrations of loans related to any single industry in excess of 10% of total loans.
5. DEPOSITS
Major classifications of deposits at September 30, 2024 and December 31, 2023 consisted of:
| (In Thousands) | September 30, 2024 | December 31, 2023 | ||||||
| Demand deposits | $ | $ | ||||||
| Interest-bearing demand deposits | ||||||||
| Savings | ||||||||
| Money market | ||||||||
| Time deposits | ||||||||
| Total deposits | $ | $ | ||||||
Time
deposits of $250,000 or more amounted to $
6. BORROWED FUNDS
Short-term
borrowings include repurchase agreements with customers and advances from the FHLB. As of September 30, 2024, the Bank was approved
by the FHLB for borrowings of up to $
| September 30, 2024 | ||||||||||||
| Maximum | Weighted | |||||||||||
| Ending | Month End | Average Rate | ||||||||||
| (In Thousands) | Balance | Balance | At Period End | |||||||||
| Securities sold under agreements to repurchase | $ | $ | % | |||||||||
| Other short-term borrowings | % | |||||||||||
| Total | $ | $ | % | |||||||||
19
| December 31, 2023 | ||||||||||||
| Maximum | Weighted | |||||||||||
| Ending | Month End | Average Rate | ||||||||||
| (In Thousands) | Balance | Balance | At Period End | |||||||||
| Securities sold under agreements to repurchase | $ | $ | % | |||||||||
| Other short-term borrowings | % | |||||||||||
| Total | $ | $ | % | |||||||||
The Corporation utilizes securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.
The remaining contractual maturity of repurchase agreements in the Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 is presented in the following tables:
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and | Greater than 90 | |||||||||||||||||||
| (In Thousands) | Continuous | Up to 30 Days | 30-90 Days | Days | Total | |||||||||||||||
| September 30, 2024 | ||||||||||||||||||||
| Securities sold under agreements to repurchase: | ||||||||||||||||||||
| Obligation of U.S. Government Corporations | ||||||||||||||||||||
| and Agencies: | ||||||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | $ | |||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Obligation of state and political subdivisions | ||||||||||||||||||||
| Total borrowings | $ | $ | $ | $ | $ | |||||||||||||||
| Gross amount of recognized liabilities for repurchase agreements | $ | |||||||||||||||||||
| Amounts related to agreements not included in offsetting disclosure above | $ | — | ||||||||||||||||||
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and | Greater than 90 | |||||||||||||||||||
| (In Thousands) | Continuous | Up to 30 Days | 30-90 Days | Days | Total | |||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| Securities sold under agreements to repurchase: | ||||||||||||||||||||
| Obligation of U.S. Government Corporations | ||||||||||||||||||||
| and Agencies: | ||||||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | $ | |||||||||||||||
| Other | ||||||||||||||||||||
| Total borrowings | $ | $ | $ | $ | $ | |||||||||||||||
| Gross amount of recognized liabilities for repurchase agreements | $ | |||||||||||||||||||
| Amounts related to agreements not included in offsetting disclosure above | $ | — | ||||||||||||||||||
The
fair value of securities pledged to secure repurchase agreements may decline. The Corporation manages this risk by having a policy
to pledge securities valued at
20
Long-Term Borrowings
Long-term FHLB borrowings consisted of the following at September 30, 2024 and December 31, 2023:
| (In Thousands) | September 30, 2024 | December 31, 2023 | ||||||
| Loans maturing in 2024 with a weighted-average rate of | $ | $ | ||||||
| Loans maturing in 2025 with a weighted-average rate of | ||||||||
| Loans maturing in 2026 with a weighted-average rate of | ||||||||
| Loans maturing in 2027 with a weighted-average rate of | ||||||||
| Loans maturing in 2028 with a weighted-average rate of | ||||||||
| Total long-term FHLB borrowings | ||||||||
| Unamortized fair value adjustments | ( | ) | ( | ) | ||||
| Total long-term borrowings | $ | $ | ||||||
Note: Weighted-average rates are presented as of September 30, 2024.
7. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Corporation establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The standard describes three levels of inputs that may be used to measure fair values:
| 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 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 judgement or estimation. |
This hierarchy requires the use of observable market data available.
The following table presents the assets reported on the Consolidated Balance Sheets at their fair value on a recurring basis as of September 30, 2024 and December 31, 2023, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| September 30, 2024 | ||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||
| Obligation of US Government Corporations and Agencies | ||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | ||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Other | ||||||||||||||||
| Obligations of state and political subdivisions | ||||||||||||||||
| Other debt securities | ||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | $ | ||||||||||||
| Marketable equity securities | $ | $ | $ | $ | ||||||||||||
| Real estate loans held for sale | $ | $ | $ | $ | ||||||||||||
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| December 31, 2023 | ||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||
| Obligation of US Government Corporations and Agencies | ||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | ||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Other | ||||||||||||||||
| Obligations of state and political subdivisions | ||||||||||||||||
| Other debt securities | ||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | $ | ||||||||||||
| Marketable equity securities | $ | $ | $ | $ | ||||||||||||
| Real estate loans held for sale | $ | $ | $ | $ | ||||||||||||
The fair values of equity securities classified as Level I are derived from quoted market prices in active markets; these assets consist entirely of stocks held in other banks. The fair values of all debt securities classified as Level II are obtained from nationally-recognized third-party pricing agencies. The fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Corporation (observable inputs) and are therefore classified as Level II within the fair value hierarchy. The fair values of real estate loans held for sale classified as Level II are derived from observable pricing inputs for similar assets in active markets.
The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of September 30, 2024, and December 31, 2023, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| September 30, 2024 | ||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||
| Assets Measured on a Non-recurring Basis: | ||||||||||||||||
| Loans individually evaluated for credit loss | $ | $ | $ | $ | ||||||||||||
| Foreclosed assets held for sale | ||||||||||||||||
| Total nonrecurring fair value measurements | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||
| Assets Measured on a Non-recurring Basis: | ||||||||||||||||
| Loans individually evaluated for credit loss | $ | $ | $ | $ | ||||||||||||
Loans are individually evaluated for credit loss when they do not share similar risk characteristics as similar loans within their loan pool. Foreclosed assets held for sale consist of real estate acquired by foreclosure. Loans individually evaluated for credit loss are reviewed and evaluated on at least a quarterly basis for individual reserve requirements and adjusted accordingly. The following table provides a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques on a nonrecurring basis as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | ||||||||||||||||
| Quantitative Information about Level III Fair Value Measurements | ||||||||||||||||
| (In Thousands) | Fair Value Estimate | Valuation Technique | Unobservable Input | Range | Weighted Average | |||||||||||
| Loans individually evaluated for credit loss: | ||||||||||||||||
| Commercial Real Estate | $ | Discounted cash flows | Charge-off rates | % | ||||||||||||
| Residential Real Estate | Sales comparison | Discount to appraised value | % | |||||||||||||
| Total loans individually evaluated for credit loss | $ | |||||||||||||||
| Foreclosed assets held for sale: | ||||||||||||||||
| Residential Real Estate | $ | Sales comparison | Discount to appraised value | % | % | |||||||||||
22
| December 31, 2023 | ||||||||||||||||
| Quantitative Information about Level III Fair Value Measurements | ||||||||||||||||
| (In Thousands) | Fair Value Estimate | Valuation Technique | Unobservable Input | Range | Weighted Average | |||||||||||
| Loans individually evaluated for credit loss: | ||||||||||||||||
| Commercial Real Estate | $ | Discounted cash flows | Charge-off rates | % | ||||||||||||
At September 30, 2024 and December 31, 2023, the carrying values and fair values of financial instruments that are not recorded at fair value on the Consolidated Balance Sheets are presented in the table below:
| September 30, 2024 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| (In Thousands) | Amount | Fair Value | Level I | Level II | Level III | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Interest-bearing time deposits | ||||||||||||||||||||
| Restricted equity securities | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Interest-bearing deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Noninterest-bearing deposits | ||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| (In Thousands) | Amount | Fair Value | Level I | Level II | Level III | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Interest-bearing time deposits | ||||||||||||||||||||
| Restricted equity securities | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Interest-bearing deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Noninterest-bearing deposits | ||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
Fair value is defined as a financial instrument which could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument, but focuses on the exit price of the asset and liability.
If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimate losses, and other factors as determined through various option pricing formulas. As many of these assumptions result from judgments made by management based upon estimates that are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimate fair values are based may have a significant impact on the resulting estimated fair values.
23
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, represents an overview of the financial condition and results of operations of the Corporation and should be read in conjunction with the more detailed and comprehensive disclosures included in the Annual Report on Form 10-K for the year ended December 31, 2023. In addition, please read this section in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements contained in Item 1, “Financial Statements” of Part I to this Quarterly Report on Form 10-Q.
The Corporation is in the business of providing customary retail, commercial banking and financial services to individuals, businesses and local governments through its 22 branch offices operated by Journey Bank, the Corporation’s wholly-owned subsidiary. The Corporations 22 branch offices are operated in Clinton, Columbia, Lycoming, Montour and Northumberland counties in central Pennsylvania.
CAUTIONARY STATEMENT
Certain statements in this section and elsewhere in this Quarterly Report on Form 10-Q, other periodic reports filed by us under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of us may include “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect our current views with respect to future events and financial performance. Such forward looking statements are based on general assumptions and are subject to various risks, uncertainties, and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to:
| ● | Our business and financial results are affected by business and economic conditions, both generally and specifically in the mostly North Central Pennsylvania market in which we operate. |
| ● | Changes in interest rates and valuations in the debt, equity and other financial markets. |
| ● | Disruptions in the liquidity and other functioning of financial markets, including such disruptions in the market for real estate and other assets commonly securing financial products. |
| ● | Actions by the Federal Reserve Board and other government agencies, including those that impact money supply and market interest rates. |
| ● | Changes in our customers’ and suppliers’ performance in general and their creditworthiness in particular. |
| ● | Changes in customer preferences and behavior, whether as a result of changing business and economic conditions or other factors. |
| ● | Changes resulting from the enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. |
| ● | A continuation of recent turbulence in significant segments of the United States and global financial markets, particularly if it worsens, could impact our performance, both directly by affecting our revenues and the value of our assets and liabilities and indirectly by affecting our customers and suppliers and the economy generally. |
| ● | Our business and financial performance could be impacted as the financial industry restructures in the current environment by changes in the competitive landscape. |
| ● | Given current economic and financial market conditions, our forward-looking statements are subject to the risk that these conditions will be substantially different than we are currently expecting. |
| ● | Legal and regulatory developments could have an impact on our ability to operate our businesses or our financial condition or results of operations or our competitive position or reputation. Reputational impacts, in turn, could affect matters such as business generation and retention, our ability to attract and retain management, liquidity and funding. These legal and regulatory developments could include: (a) the unfavorable resolution of legal proceedings or regulatory and other governmental inquiries; (b) increased litigation risk from recent regulatory and other governmental developments; (c) the results of the regulatory examination process, and regulators’ future use of supervisory and enforcement tools; (d) legislative and regulatory reforms, including changes to laws and regulations involving tax, pension, education and mortgage lending, the protection of confidential customer information, and other aspects of the financial institution industry; and (e) changes in accounting policies and principles. |
24
| ● | Our business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through the effective use of third-party insurance and capital management techniques. |
| ● | Our ability to anticipate and respond to technological changes can have an impact on our ability to respond to customer needs and to meet competitive demands. |
| ● | Our ability to implement our business initiatives and strategies could affect our financial performance over the next several years. |
| ● | Competition can have an impact on customer acquisition, growth and retention, as well as on our credit spreads and product pricing, which can affect market share, deposits and revenues. |
| ● | Our business and operating results can also be affected by widespread natural disasters, terrorist activities or international hostilities, either as a result of the impact on the economy and capital and other financial markets generally or on us or on our customers and suppliers. |
The words “believe,” “expect,” “anticipate,” “project” and similar expressions signify forward looking statements. Readers are cautioned not to place undue reliance on any forward looking statements made by or on behalf of us. Any such statement speaks only as of the date the statement was made. We undertake no obligation to update or revise any forward looking statements.
The following discussion and analysis should be read in conjunction with the detailed information and consolidated financial statements, including notes thereto, included elsewhere in this report. Our consolidated financial condition and results of operations are essentially those of our subsidiary, the Bank. Therefore, the analysis that follows is directed to the performance of the Bank.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Corporation’s financial statements have been prepared in accordance with U.S. GAAP and conform to general practices within the banking industry. In the preparation of its financial statements, the Corporation is required to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The Corporation’s critical accounting policies are fundamental to understanding this MD&A and are more fully described in Note 1 (“Summary of Significant Accounting Policies”) within the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023.
The Corporation defines its critical accounting policies, in accordance with U.S. GAAP. U.S. GAAP requires the Corporation to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on its financial condition and results of operations, as well as the specific manner in which those principles are applied. Application of assumptions different than those used by the Corporation could result in material changes in the Corporation’s financial position or results of operations. The Corporation believes its policies governing the determination of the allowance for credit/loan losses, the fair value of available-for-sale debt securities and the fair values of assets acquired and liabilities assumed in business combinations are critical accounting policies. The Corporation’s management has reviewed and approved these critical accounting policies and has discussed these policies with its Audit Committee. The Corporation believes the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments are as follows:
Allowance for Credit Losses (ACL) - Loans
As of January 1, 2023, the Corporation adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” which replaced the current loss impairment methodology under U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13, commonly referred to as Current Expected Credit Losses (“CECL”), requires a financial asset (or a group of financial assets) to be measured at an amortized cost basis and presented at the net amount expected to be collected. The amendments in this update affect financial assets and net investment in leases that are not accounted for at fair value through net income, including such financial assets as loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. Upon adoption of ASU 2016-13 on January 1, 2023, the Corporation recorded an incremental decrease in the ACL through a cumulative effect adjustment to equity, net of tax, with subsequent adjustments charged to earnings through a provision for credit losses.
25
Management evaluates the credit quality of the Corporation’s loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ACL on a quarterly basis. The ACL is established through a provision for credit losses charged to earnings and is maintained at a level that management considers to be an estimate of the lifetime expected credit losses of the portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ACL, while recoveries of amounts previously charged off are credited to the ACL.
Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows, estimated losses on pools of homogeneous loans based on historical loss experience and reasonable and supportable forecasts, as well as consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their examination of the Corporation, also review the ACL, and may require, based on information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ACL. Additionally, the ACL is determined, in part, by the composition and size of the loan portfolio.
The ACL consists of two components, a specific component and a general component. The specific component relates to loans that are individually analyzed for impairment. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience as adjusted for qualitative factors. The general reserve component of the ACL is based on pools of performing loans segregated by loan segment. Historical loss factors are applied based on historical losses in each risk rating category to determine the appropriate reserve related to those loans.
Although the Corporation’s management uses the best information available, the level of the ACL remains an estimate which is subject to significant judgment and short-term change which could have a significant impact on the Corporation’s financial condition or results of operations. From January 1, 2024 to September 30, 2024, the level of the ACL increased from $9.3 million to $9.4 million and the ACL to total loans decreased from at 0.87% to 0.85%. The Corporation’s ACL is highly sensitive to the methods, assumptions and estimates underlying its calculation. See Note 4 “Loans and Allowance for Credit Losses” within the Corporation’s Notes to the Unaudited Consolidated Financial Statements which are included in Part I of this Quarterly Report on Form 10-Q for additional qualitative and quantitative information about the Corporation’s ACL.
Fair Value of Available-For-Sale Debt Securities
Another material estimate is the calculation of fair values of the Corporation’s debt securities. For the Corporation’s debt securities, the Corporation receives estimated fair values from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers compare securities that have similar maturities, coupon rates, and credit ratings. Estimated fair values of debt securities may vary among brokers and other valuation services.
Business Combinations
Business combinations are accounted for by applying the acquisition method. As of acquisition date, the identifiable assets acquired and liabilities assumed are measured at fair value and recognized separately from goodwill. Results of operations of the acquired entity are included in the consolidated statement of income from the date of acquisition. The calculation of intangible assets including core deposits and the fair value of loans are based on significant judgements. Core deposit intangibles are calculated using a discounted cash flow model based on various factors including discount rate, attrition rate, interest rate, cost of alternative funds and net maintenance costs. Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value. Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.
MERGER WITH MUNCY BANK FINANCIAL, INC.
The Corporation’s merger with Muncy Bank Financial, Inc. (“MBF”) was completed November 11, 2023. MBF was a Pennsylvania corporation that conducted its business primarily through its wholly owned subsidiary The Muncy Bank & Trust Company, which operated from a main office in Muncy, Pennsylvania, and had nine additional branches throughout Northcentral Pennsylvania.
At the effective time of the merger, MBF’s shareholders received a fixed exchange ratio of 0.9259 shares of the Corporation’s common stock for each MBF common share they owned, except to the extent of cash received for fractional shares at $41.47 per share. Total purchase consideration was $55,101,000, including common stock with a fair value of $55,092,000 and cash of $9,000 paid for fractional shares. Holders of MBF common stock prior to the consummation of the merger held approximately 41.7% of the Corporation’s common stock outstanding immediately following the merger.
26
In connection with the acquisition, effective November 11, 2023, the Corporation recorded goodwill of $17.7 million and a core deposit intangible asset of $12.1 million. Assets acquired totaled $671.4 million, including gross loans valued at $504.1 million, available-for-sale debt securities valued at $93.0 million, bank-owned life insurance valued at $17.8 million and premises and equipment, net, valued at $14.9 million. Liabilities assumed totaled $634.0 million, including deposits valued at $521.3 million and borrowings valued at $105.5 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition.
For the three and nine months ended September 30, 2024, the Corporation incurred pre-tax merger-related expenses related to the MBF transaction of $43,000 and $340,000, respectively, compared to $757,000 and $1,206,000, respectively, for the three and nine months ended September 30, 2023. Merger-related expenses include voluntary severance and similar expenses as well as expenses related to conversion of MBF’s core banking system into the Corporation’s core system and legal and other professional expenses.
FINANCIAL CONDITION
Total assets at September 30, 2024, were $1.607 billion, a decrease of $32.5 million, or 2.0% from $1.640 billion at December 31, 2023. The change in total assets primarily reflected decreases in available-for-sale debt securities, restricted investment in bank stocks and deferred tax assets, net, partially offset by increases in cash and cash equivalents and loans receivable. Available-for-sale debt securities decreased $77.8 million, restricted investment in bank stocks decreased $2.9 million and deferred tax assets, net, decreased $3.7 million. Cash and cash equivalents increased $9.7 million and gross loans receivable increased $44.2 million. Total liabilities at September 30, 2024, were $1.438 billion, a decrease of $47.9 million, or 3.2% from $1.486 billion at December 31, 2023. Deposit balances increased by $139.8 million, short-term borrowings decreased $179.5 million and long-term borrowings decreased $10.0 million since December 31, 2023.
Total average assets increased 66.0% from $965.3 million for the three months ended September 30, 2023, to $1.602 billion for the three months ended September 30, 2024, primarily related to the MBF merger. Average earning assets were $1.493 billion for the three months ended September 30, 2024 and $898.2 million for the three months ended September 30, 2023. Average interest-bearing liabilities were $1.162 billion for the three months ended September 30, 2024 and $697.6 million for the three months ended September 30, 2023.
Total average assets increased 65.9% from $958.4 million for the nine months ended September 30, 2023, to $1.590 billion for the nine months ended September 30, 2024, primarily related to the MBF merger. Average earning assets were $1.490 billion for the nine months ended September 30, 2024 and $893.5 million for the nine months ended September 30, 2023. Average interest-bearing liabilities were $1.160 billion for the nine months ended September 30, 2024 and $688.8 million for the nine months ended September 30, 2023.
Available-for-sale debt securities decreased $77.8 million to $335.5 million at September 30, 2024 from $413.3 million at December 31, 2023. On January 17, 2024, the Corporation sold available-for-sale debt securities with a total market value of $50.3 million, the proceeds of which were utilized to paydown short-term FHLB borrowings. Securities sold included $34.2 million of US government agency securities, $15.5 million of mortgaged-backed securities and $563,000 of collateralized mortgage obligations. In addition to the securities sold, the Corporation received proceeds from paydowns, calls and maturities of available-for-sale debt securities of $35.9 million during the nine months ended September 30, 2024. Partially offsetting these changes was an increase in fair value of available-for-sale debt securities of $7.9 million for the nine months ended September 30, 2024.
Restricted investment in bank stocks decreased $2.9 million to $7.5 million at September 30, 2024 from $10.4 million at December 31, 2023. This decrease is directly attributable to the decrease in required FHLB stock holdings due to the paydown in short and long-term FHLB borrowings.
Deferred tax assets, net, decreased $3.7 million to $8.9 million at September 30, 2024 from $12.6 million at December 31, 2024. This decrease is primarily related to decreases in deferred tax assets related to unrealized holding losses on available-for-sale debt securities of $1.7 million and purchase accounting adjustments of $2.1 million, respectively, for the nine months ended September 30, 2024.
Cash and cash equivalents increased $9.7 million or 52.7% from $18.4 million at December 31, 2023 to $28.1 million at September 30, 2024. This increase is primarily related to increased excess cash balances held at the federal reserve, increased branch cash levels as well as the timing of items clearing through correspondent bank balances.
Gross loans not held for sale increased 4.1% to $1.113 billion at September 30, 2024 from $1.068 billion at December 31, 2023. This increase is related to strong loan demand in the first nine months of 2024.
Interest-bearing deposits increased $136.3 million to $1.021 billion at September 30, 2024 from $884.7 million at December 31, 2023. Noninterest-bearing deposits increased 1.3% from $266.0 million at December 31, 2023 to $269.5 million at September 30, 2024. The increase in interest-bearing deposits during the nine months ended September 30, 2024 was as a result of a strategic initiative to reposition customer repurchase agreements, which are classified as short-term borrowings, into core deposit accounts. The Bank anticipates a continued migration of customer repurchase accounts from short-term borrowings to interest bearing deposits throughout the remainder of 2024. The increase in noninterest-bearing deposits was as a result of overall organic deposit growth for the nine months ended September 30, 2024.
27
Short-term borrowings decreased $179.5 million to $73.0 million at September 30, 2024 from $252.5 million at December 31, 2023. This change was primarily related to the migration of customer repurchase agreements as well as a paydown in short-term FHLB borrowings during the quarter as discussed above.
Long-term borrowings were $60.5 million at September 30, 2024 compared to $70.5 million at December 31, 2023. This decrease is primarily related to $10.2 million in long-term borrowing maturities during the nine months ended September 30, 2024.
Total stockholder’s equity increased by $15.5 million, or 10.1%, from $153.8 million at December 31, 2023, to $169.3 million at September 30, 2024. The increase is primarily attributable to earnings, net of cash dividends, along with a decrease in accumulated other comprehensive loss due to changes in the fair values of available-for-sale debt securities. Accumulated other comprehensive loss amounted to $8.8 million as of September 30, 2024 and $15.0 million as of December 31, 2023.
The loan-to-deposit ratio is a key measurement of liquidity. Our loan-to-deposit ratio decreased from 92.0% as of December 31, 2023 to 85.5% as of September 30, 2024 due to the asset/liability mix changes noted above, and remains within internal policy limits.
It is our opinion that the asset/liability mix and the interest rate risk associated with the balance sheet are within manageable parameters. Constant monitoring using asset/liability reports and interest rate risk scenarios are in place along with quarterly asset/liability management meetings on the committee level by the Bank’s Board of Directors. Additionally, the Bank’s Asset/Liability Committee meets quarterly with an investment consultant and works with independent third parties regularly to review key assumptions and other metrics used in the modeling software.
Securities
The Corporation’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and interest income to increase profitability. Additionally, the investment securities portfolio is used to meet pledging requirements to secure public deposits, customer repurchase agreements and for other purposes. Debt securities are classified as either available-for-sale or held-to-maturity at the time of purchase based on management’s intent. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a component of stockholders’ equity in accumulated other comprehensive income (loss), net of tax, while held-to-maturity securities are carried at amortized cost. At September 30, 2024 and December 31, 2023, all debt securities were classified as available-for-sale. Equity securities with readily determinable fair values are carried at fair value, with gains and losses due to fluctuations in market value included in the Consolidated Statements of Income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. Decisions to purchase or sell investment securities are based upon management’s current assessment of long- and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies.
At September 30, 2024, the investment portfolio was comprised principally of available-for-sale debt securities including, fixed-rate, taxable and tax-exempt obligations of state and political subdivisions and fixed-rate and floating-rate securities issued by U.S. government or U.S. government-sponsored agencies, which include agencies, mortgage-backed securities and collateralized mortgage obligations, or CMOs. Additionally, the Corporation holds equity investments in the stock of certain publicly traded bank holding companies. Except for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of stockholders’ equity as of September 30, 2024.
The majority of the Corporation’s debt securities are fixed-rate instruments and inherently subject to interest rate risk, as the value of fixed-rate securities fluctuates with changes in interest rates. Generally, a security’s value reacts inversely with changes in interest rates. Available-for-sale securities are carried at fair value, with unrealized gains or losses reported in the accumulated other comprehensive income or loss component of stockholder’s equity, net of deferred income taxes. At September 30, 2024, the Corporation reported a net unrealized loss, included in accumulated other comprehensive loss, of $8.8 million, net of deferred income taxes of $2.4 million, a decrease of $3.8 million compared to the net unrealized holding loss of $15.0 million, net of deferred income taxes of $4.0 million, at December 31, 2023. Any future changes in interest rates could result in changes in the fair value of the Corporation’s securities portfolio and capital position. However, accumulated other comprehensive income and loss related to available-for-sale debt securities is excluded from regulatory capital and does not have an impact on the Corporation’s regulatory capital ratios.
28
The following table presents the carrying value of available-for-sale debt securities, at fair value at September 30, 2024 and December 31, 2023:
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| (In Thousands) | Cost | Value | Cost | Value | ||||||||||||
| AVAILABLE-FOR-SALE DEBT SECURITIES: | ||||||||||||||||
| Obligation of U.S.Government Corporations and Agencies: | ||||||||||||||||
| Mortgage-backed | $ | 117,904 | $ | 106,547 | $ | 145,196 | $ | 131,340 | ||||||||
| Collateralized mortgage obligations | 7,084 | 7,617 | 8,515 | 9,018 | ||||||||||||
| Other | 140,000 | 135,362 | 197,325 | 187,712 | ||||||||||||
| Obligations of state and political subdivisions | 81,427 | 85,725 | 81,033 | 84,956 | ||||||||||||
| Other debt securites | 272 | 284 | 267 | 276 | ||||||||||||
| Total available-for-sale debt securities | $ | 346,687 | $ | 335,535 | $ | 432,336 | $ | 413,302 | ||||||||
| Aggregate Unrealized Loss | $ | (11,152 | ) | $ | (19,034 | ) | ||||||||||
| Aggregate Unrealized Loss as a % of Amortized Cost | (3.2 | %) | (4.4 | %) | ||||||||||||
The following table presents the weighted-average yields on available-for-sale debt securities by major category and maturity period at September 30, 2024. Yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security. Because mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity date, they are not included in the maturity categories in the following summary.
| Within | One- | Five- | After | ||||||||||||||||||||||||||||||||
| One | Five | Ten | Ten | ||||||||||||||||||||||||||||||||
| (Dollars In Thousands) | Year | Yield | Years | Yield | Years | Yield | Years | Yield | Total | Yield | |||||||||||||||||||||||||
| AVAILABLE-FOR-SALE DEBT SECURITIES: | |||||||||||||||||||||||||||||||||||
| Obligation of U.S.Government Corporations and Agencies: | |||||||||||||||||||||||||||||||||||
| Other | $ | 72,000 | 0.74 | % | $ | 68,000 | 1.14 | % | $ | — | — | $ | — | — | $ | 140,000 | 0.93 | % | |||||||||||||||||
| Obligations of state and political subdivisions | 1,312 | 3.76 | % | 5,915 | 3.91 | % | 24,757 | 4.11 | % | 49,443 | 4.52 | % | 81,427 | 4.34 | % | ||||||||||||||||||||
| Other debt securities | 98 | 5.24 | % | 88 | 5.78 | % | 86 | 5.00 | % | — | — | 272 | 5.34 | % | |||||||||||||||||||||
| Sub-total | $ | 73,410 | 0.93 | % | $ | 74,003 | 1.48 | % | $ | 24,843 | 4.44 | % | $ | 49,443 | 4.52 | % | $ | 221,699 | 2.31 | % | |||||||||||||||
| Mortgage-backed securities | 117,904 | 1.75 | % | ||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | 7,084 | 5.29 | % | ||||||||||||||||||||||||||||||||
| Total | $ | 346,687 | 2.10 | % | |||||||||||||||||||||||||||||||
Marketable Equity Securities
At September 30, 2024 and December 31, 2023, the Corporation had $1.3 million in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2024 and 2023:
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| (In Thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Net gains (losses) recognized during the period on marketable equity securities | $ | 163 | $ | (118 | ) | $ | 8 | $ | (265 | ) | ||||||
| Less: Net gains (losses) recognized during the period on marketable equity securities sold during the period | — | — | — | — | ||||||||||||
| Unrealized gains (losses) recognized during the period on marketable equity securities still held at the reporting date | $ | 163 | $ | (118 | ) | $ | 8 | $ | (265 | ) | ||||||
See Note 3 within the Corporation’s Notes to the Unaudited Consolidated Financial Statements which are included in this Quarterly Report on Form 10-Q for more information regarding Corporation’s investment portfolio as of September 30, 2024.
29
Loans
Gross loans receivable increased 4.1% from $1.068 billion at December 31, 2023 to $1.113 billion at September 30, 2024. The percentage distribution in the loan portfolio is shown in the tables below:
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| (In Thousands) | Amount | % | Amount | % | ||||||||||||
| Commercial and industrial | $ | 93,593 | 8.4 | % | $ | 94,278 | 8.8 | % | ||||||||
| Commercial real estate: | ||||||||||||||||
| Commercial mortgages | 319,722 | 28.7 | % | 326,152 | 30.5 | % | ||||||||||
| Student housing | 40,577 | 3.6 | % | 33,650 | 3.1 | % | ||||||||||
| Residential real estate: | ||||||||||||||||
| Rental 1-4 family | 57,813 | 5.2 | % | 54,078 | 5.1 | % | ||||||||||
| 1-4 family residential mortgages | 578,458 | 52.0 | % | 535,206 | 50.1 | % | ||||||||||
| Consumer and other | 22,481 | 2.0 | % | 25,065 | 2.3 | % | ||||||||||
| Gross loans | $ | 1,112,644 | 100.0 | % | $ | 1,068,429 | 100.0 | % | ||||||||
Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Our lending activity is heavily concentrated in the geographic market areas we serve. This geographic concentration subjects our loan portfolio to the general economic conditions within the state. The risks created by this concentration have been considered by management and are monitored on an ongoing basis. As of September 30, 2024 and December 31, 2023, there were no concentrations of loans exceeding 10% of total loans other than the categories of loans disclosed in the table above. We believe our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories.
Banking regulators have established guidelines of less than 100% of tier 1 capital plus allowance for credit losses in construction lending and less than 300% of tier 1 capital plus allowance for credit losses in commercial real estate lending that management monitors as part of the risk management process. The construction concentration ratio is a percentage of the outstanding construction and land development loans to total tier 1 capital plus allowance for credit losses. The commercial real estate concentration ratio is a percentage of the outstanding balance of non-owner occupied commercial real estate, multifamily, and construction and land development loans to tier 1 capital plus allowance for credit losses. At September 30, 2024, the Bank’s exposure to commercial real estate was well below these guidelines.
As of September 30, 2024, commercial real estate loans totaled $360.3 million or 32.3% of total gross loans. Of this amount commercial mortgage loans represented $319.7 million or 28.7% of total gross loans and student housing loans represented $40.6 million or 3.6% of total gross loans. The following table presents the distribution of commercial mortgage loans and related percentage of the total loan portfolio as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | December 31, 2023 | |||||||||||||||
| (In Thousands) | Amount | % | Amount | % | ||||||||||||
| Commercial mortgages: | ||||||||||||||||
| Commercial construction | $ | 24,069 | 2.2 | % | $ | 22,530 | 2.1 | % | ||||||||
| Multifamily | 74,281 | 6.7 | % | 70,750 | 6.6 | % | ||||||||||
| Owner occupied nonfarm nonresidential | 93,274 | 8.4 | % | 100,095 | 9.4 | % | ||||||||||
| Non-owner occupied nonfarm nonresidential | 88,902 | 8.0 | % | 95,403 | 8.9 | % | ||||||||||
| Other commercial | 39,196 | 3.5 | % | 37,374 | 3.5 | % | ||||||||||
| Total commercial mortgages | $ | 319,722 | 28.7 | % | $ | 326,152 | 30.5 | % | ||||||||
30
The following table presents the maturity distribution and interest rate information of the loan portfolio by major category as of September 30, 2024:
| As of September 30, 2024 | ||||||||||||||||||||||||||||||||||||
| Fixed-Rate Loans | Variable- or Adjustable-Rate Loans | All Loans | ||||||||||||||||||||||||||||||||||
| 1 Year | 1-5 | 5-15 | >15 | 1 Year | 1-5 | 5-15 | >15 | |||||||||||||||||||||||||||||
| (In Thousands) | or Less | Years | Years | Years | Total | or Less | Years | Years | Years | Total | Total | |||||||||||||||||||||||||
| Commercial and industrial | $ | 4,963 | $ | 18,446 | $ | 16,040 | $ | 50 | $ | 39,499 | $ | 13,264 | $ | 3,938 | $ | 20,557 | $ | 16,335 | $ | 54,094 | $ | 93,593 | ||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||||||||||||||
| Commercial mortgages | 3,197 | 2,923 | 16,412 | 1,438 | 23,970 | 12,923 | 7,986 | 71,368 | 203,475 | 295,752 | 319,722 | |||||||||||||||||||||||||
| Student housing | - | 991 | 2,083 | - | 3,074 | 1,653 | 4,797 | 16,556 | 14,497 | 37,503 | 40,577 | |||||||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||||||||||
| Rental 1-4 family | 345 | 151 | 1,268 | 246 | 2,010 | 2,597 | 1,796 | 8,723 | 42,687 | 55,803 | 57,813 | |||||||||||||||||||||||||
| 1-4 family residential mortgages | 4,732 | 8,906 | 63,838 | 39,888 | 117,364 | 11,391 | 2,138 | 43,020 | 404,545 | 461,094 | 578,458 | |||||||||||||||||||||||||
| Consumer and other | 1,477 | 6,927 | 2,716 | 518 | 11,638 | 40 | 354 | 3,494 | 6,955 | 10,843 | 22,481 | |||||||||||||||||||||||||
| Total | $ | 14,714 | $ | 38,344 | $ | 102,357 | $ | 42,140 | $ | 197,555 | $ | 41,868 | $ | 21,009 | $ | 163,718 | $ | 688,494 | $ | 915,089 | $ | 1,112,644 | ||||||||||||||
See Note 4 within the Corporation’s Notes to the Unaudited Consolidated Financial Statements which are included in this Quarterly Report on Form 10-Q for more information regarding the Corporation’s loan portfolio as of September 30, 2024.
Asset Quality
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of deferred loan fees and costs, and reduced by the allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged to earnings.
The Corporation has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of loan officers, the Chief Credit Officer, the loan review function, as well as oversight from the Board of Directors. Management continually evaluates its credit risk management practices to ensure problems in the loan portfolio are addressed in a timely manner, although, as is the case with any financial institution, a certain degree of credit risk is dependent in part on local and general economic conditions that are beyond management’s control. Under the Corporation’s risk rating system, loans are rated pass, special mention, substandard, doubtful, or loss, with all categories reviewed regularly as part of the risk management practices.
Non-performing loans are monitored on an ongoing basis as part of the Corporation’s loan review process. Additionally, work-outs for non-performing loans and foreclosed assets held for sale are actively monitored through the Bank’s Credit Department. A potential loss on a non-performing asset is generally determined by comparing the outstanding loan balance to the fair market value of the pledged collateral, less estimated cost to sell.
Management actively manages non-performing loans in an effort to mitigate loss to the Corporation by working with customers to develop strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure and other appropriate means. In addition, management monitors employment and economic conditions within its market area, as weakening of conditions could result in real estate devaluations and an increase in loan delinquencies, which could negatively impact asset quality and cause an increase in the provision for credit losses.
The following table presents information about non-performing assets, as of September 30, 2024 and December 31, 2023:
Non-performing Assets
| September 30, | December 31, | |||||||
| (dollars in thousands) | 2024 | 2023 | ||||||
| Non-accrual loans | $ | 8,357 | $ | 4,012 | ||||
| Loans past due 90 days or more and still accruing | 148 | 294 | ||||||
| Total non-performing loans | 8,505 | 4,306 | ||||||
| Foreclosed assets held for sale | 70 | 170 | ||||||
| Total non-performing assets | $ | 8,575 | $ | 4,476 | ||||
| Non-performing loans as a percentage of total loans, gross | 0.76 | % | 0.40 | % | ||||
| Non-performing assets as a percentage of total assets | 0.53 | % | 0.27 | % | ||||
| Allowance for credit losses as a percentange of total loans, gross | 0.85 | % | 0.87 | % | ||||
| Allowance for credit losses to non-performing assets | 109.80 | % | 207.82 | % | ||||
31
Total non-performing assets amounted to $8,575,000, or 0.53% of total assets at September 30, 2024, as compared to $4,476,000, or 0.27% of total assets at December 31, 2023. For the nine months ended September 30, 2024, the increase in non-performing assets was primarily attributable to one real estate loan relationship with an aggregate balance of $2,221,000 which was placed on nonaccrual status during the first quarter. This relationship is well secured, and the Bank is working closely with the borrower to bring the relationship to a current status. The Bank does not expect to incur a credit loss related to this relationship at this time.
Allowance for Credit Losses
The allowance for credit losses was $9.4 million at September 30, 2024, compared to $9.3 million at December 31, 2023. The allowance equaled 0.85% of total loans, net of unearned fees and costs and unamortized fair value adjustments, at September 30, 2024 as compared to 0.87% of total loans at December 31, 2023. The allowance for credit losses was analyzed quarterly and reviewed by the Corporation’s Board of Directors. No concentration or apparent deterioration in classes of loans or pledged collateral was evident. Regular loan meetings with the Corporation’s Board of Directors reviewed new loans. Delinquent loans, loan exceptions and certain large loans are addressed by the full Board no less than monthly to determine compliance with policies.
The following tables present the allocation of the allowance for credit losses as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| (dollars in thousands) | Allowance for Credit Losses | Percent of Allowance | Percent of Loans to Gross Loans | Allowance for Credit Losses | Percent of Allowance | Percent of Loans to Gross Loans | ||||||||||||||||||
| Commercial and industrial | $ | 790 | 8.4 | % | 8.4 | % | $ | 801 | 8.6 | % | 8.8 | % | ||||||||||||
| Commercial real estate | 6,571 | 69.8 | % | 32.4 | % | 6,847 | 73.6 | % | 33.7 | % | ||||||||||||||
| Residential real estate | 1,772 | 18.8 | % | 57.2 | % | 1,474 | 15.8 | % | 55.2 | % | ||||||||||||||
| Consumer and other | 282 | 3.0 | % | 2.0 | % | 180 | 1.9 | % | 2.3 | % | ||||||||||||||
| Total | $ | 9,415 | 100.0 | % | 100.0 | % | $ | 9,302 | 100.0 | % | 100.0 | % | ||||||||||||
See Note 4 within the Corporation’s Notes to the Unaudited Consolidated Financial Statements which are included in this Quarterly Report on Form 10-Q for more information regarding the Corporation’s allowance for credit losses as of September 30, 2024.
Deposits
Deposits are the primary source of funds for the Corporation’s lending and investing activities. The Corporation provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts and time deposits. These accounts generally earn interest at rates the Corporation establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Corporation’s primary focus is on establishing customer relationships to attract core deposits, at times, the Corporation may use brokered deposits and other wholesale deposits to supplement its funding sources. As of September 30, 2024, the Corporation held no brokered deposits.
The following tables summarize the average balances outstanding and average interest rates for each major category of deposits for the three and nine month periods ending September 30, 2024 and 2023, respectively:
| For the Three Months Ended | ||||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | |||||||||||||||||||||||
| Average | Average | Average | Average | Balance Change | ||||||||||||||||||||
| Balance | Rate | Balance | Rate | Amount | % | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| Non-interest bearing | $ | 263,322 | — | % | $ | 172,841 | — | % | $ | 90,481 | 52.3 | % | ||||||||||||
| Savings | 196,138 | 0.03 | 156,701 | 0.03 | 39,437 | 25.2 | ||||||||||||||||||
| Interest-bearing demand deposits | 352,629 | 2.31 | 151,345 | 0.13 | 201,284 | 133.0 | ||||||||||||||||||
| Money market deposits | 113,131 | 2.23 | 42,337 | 1.48 | 70,794 | 167.2 | ||||||||||||||||||
| Time deposits | 344,704 | 3.96 | 129,046 | 2.06 | 215,658 | 167.1 | ||||||||||||||||||
| Total deposits | $ | 1,269,924 | 1.92 | % | $ | 652,270 | 0.54 | % | $ | 617,654 | 94.7 | % | ||||||||||||
32
| For the Nine Months Ended | ||||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | |||||||||||||||||||||||
| Average | Average | Average | Average | Balance Change | ||||||||||||||||||||
| Balance | Rate | Balance | Rate | Amount | % | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| Non-interest bearing | $ | 259,940 | — | % | $ | 175,167 | — | % | $ | 84,773 | 48.4 | % | ||||||||||||
| Savings | 199,776 | 0.03 | 162,218 | 0.03 | 37,558 | 23.2 | ||||||||||||||||||
| Interest-bearing demand deposits | 308,869 | 1.92 | 152,140 | 0.07 | 156,729 | 103.0 | ||||||||||||||||||
| Money market deposits | 109,679 | 2.08 | 46,286 | 1.35 | 63,393 | 137.0 | ||||||||||||||||||
| Time deposits | 337,989 | 4.01 | 127,881 | 1.79 | 210,108 | 164.3 | ||||||||||||||||||
| Total deposits | $ | 1,216,253 | 1.79 | % | $ | 663,692 | 0.46 | % | $ | 552,561 | 83.3 | % | ||||||||||||
The Corporation believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the three months ended September 30, 2024, and 2023, was 1.92% and 0.54%, respectively. The increased cost was primarily attributable to the increases in rates and increased pricing competition. The average cost of interest-bearing deposits for the nine months ended September 30, 2024, and 2023, was 1.79% and 0.46%, respectively. The increased cost was primarily attributable to the increases in rates and increased pricing competition.
At September 30, 2024, estimated uninsured deposits, or the portion of deposit accounts which exceeded the Federal Deposit Corporation insurance limit, totaled $366.0 million. Of this amount, $155.1 million was collateralized by securities pledged by the Corporation or letters of credit issued through the Federal Home Loan Bank of Pittsburgh. Time deposits of $250,000 or more totaled approximately $109.5 million at September 30, 2024.
See Note 5 within the Corporation’s Notes to the Unaudited Consolidated Financial Statements which are included in this Quarterly Report on Form 10-Q for more information regarding the Corporation’s deposits as of September 30, 2024.
Borrowings
Short-term borrowings consist primarily of securities sold under agreements to repurchase and periodic overnight or short-term Federal Home Loan Bank advances. Average short-term borrowings amounted to 7.9% and 11.8% of total interest-bearing liabilities for the three and nine months ended September 30, 2024, respectively, as compared to 27.7% and 27.2% for the three and nine months ended September 30, 2023, respectively. This change was primarily related to the migration of customer repurchase agreements as well as a paydown in short-term FHLB borrowings during 2024 as discussed above.
Long-term borrowings consist of advances due to the FHLB - Pittsburgh. Under terms of a blanket agreement, the loans are secured by certain qualifying assets of the Bank which consist principally of first mortgage loans. The carrying value of these collateralized items was $820.8 million at September 30, 2024. The Bank has lines of credit with the Federal Reserve Bank Discount Window, FHLB – Pittsburgh, and Atlantic Community Bankers Bank in the aggregate amount of $587.3 million at September 30, 2024. The unused portion of these lines of credit was $469.9 million at September 30, 2024.
See Note 6 within the Corporation’s Notes to the Unaudited Consolidated Financial Statements which are included in this Quarterly Report on Form 10-Q for more information regarding the Corporation’s borrowings as of September 30, 2024.
Capital Resources
Management believes, as of September 30, 2024, that Journey Bank meets all capital adequacy requirements to which it is subject. Management annually performs stress testing on its regulatory capital levels and expects Journey Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future.
Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, Journey Bank is subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although Muncy Columbia Financial Corporation is not subject to the specific consolidated capital requirements, its ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if it fails to hold sufficient capital commensurate with its overall risk profile.
33
The following table reflects the Bank’s actual capital amounts and ratios at September 30, 2024 and December 31, 2023:
| Journey Bank | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations | |||||||||||||||||
| (Dollars in Thousands) | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||
| September 30, 2024 | ||||||||||||||||||||
| Total capital (to risk-weighted assets) | $ | 148,279 | 15.54 | % | 8.00 | % | 10.50 | % | 10.00 | % | ||||||||||
| Tier I capital (to risk-weighted assets) | 139,258 | 14.59 | % | 6.00 | % | 8.50 | % | 8.00 | % | |||||||||||
| Tier I common equity (to risk-weighted assets) | 139,258 | 14.59 | % | 4.50 | % | 7.00 | % | 6.50 | % | |||||||||||
| Tier I capital (to average assets) | 139,258 | 8.82 | % | 4.00 | % | 4.00 | % | 5.00 | % | |||||||||||
| Total risk-weighted assets | 954,401 | |||||||||||||||||||
| Total average assets | 1,578,187 | |||||||||||||||||||
| Journey Bank | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations | |||||||||||||||||
| (Dollars in Thousands) | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| Total capital (to risk-weighted assets) | $ | 138,382 | 14.49 | % | 8.00 | % | 10.50 | % | 10.00 | % | ||||||||||
| Tier I capital (to risk-weighted assets) | 129,053 | 13.52 | % | 6.00 | % | 8.50 | % | 8.00 | % | |||||||||||
| Tier I common equity (to risk-weighted assets) | 129,053 | 13.52 | % | 4.50 | % | 7.00 | % | 6.50 | % | |||||||||||
| Tier I capital (to average assets) | 129,053 | 8.03 | % | 4.00 | % | 4.00 | % | 5.00 | % | |||||||||||
| Total risk-weighted assets | 954,878 | |||||||||||||||||||
| Total average assets | 1,607,661 | |||||||||||||||||||
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 2024 was $5,056,000, or $1.42 per share compared to net income of $1,171,000, or $0.56 per share for the same period in 2023. Net income for the nine months ended September 30, 2024 was $13,799,000, or $3.86 per share compared to $4,573,000, or $2.20 per share for the same period in 2023. The increase in net income for the three and nine months ended September 30, 2024, compared to the same periods in 2023, was primarily attributable to the MBF merger.
Net interest income increased $7.9 million, or 161.2% to $12.8 million for the three months ended September 30, 2024, from $4.9 million for the three months ended September 30, 2023. Non-interest income was $2.7 million for the three months ended September 30, 2024, an increase of $1.2 million, or 78.4%, from $1.5 million for the three months ended September 30, 2023, which primarily related to increases in service charges and fees, gains (losses) on marketable equity securities, interchange fees and other non-interest income. Non-interest expense was $9.4 million for the three months ended September 30, 2024, an increase of $4.1 million, or 77.6%, from $5.3 million for the three months ended September 30, 2023, which was primarily related to increases in expenses related to the MBF merger.
Net interest income increased $22.1 million, or 147.0% to $37.1 million for the nine months ended September 30, 2024, from $15.0 million for the nine months ended September 30, 2023. Non-interest income was $7.7 million for the nine months ended September 30, 2024, an increase of $2.8 million, or 57.9%, from $4.9 million for the nine months ended September 30, 2023, which primarily related to increases in service charges and fees, interchange fees and other non-interest income. Non-interest expense was $28.2 million for the nine months ended September 30, 2024, an increase of $13.3 million, or 88.7%, from $14.9 million for the nine months ended September 30, 2023, which was primarily related to increases in expenses related to the MBF merger.
For the three and nine months ended September 30, 2024, the annualized return on average assets was 1.26% and 1.13%, respectively, compared to 0.63% and 0.69% for the respective periods of 2023. The annualized return on average equity was 12.34% and 11.39%, respectively, for the three and nine months ended September 30, 2024, and 6.78% and 7.35%, respectively, for the comparable periods of 2023. The Corporation declared and paid dividends to holders of common stock of $0.44 per share for the third quarter of 2024 and $1.32 per share for the nine months ended September 30, 2024, compared to $0.43 and $1.28 per share, respectively, for the quarter-to-date and year-to-date periods of 2023.
34
Net Interest Income
Net interest income is the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits and borrowed funds. Net interest income represents the largest component of the Corporation’s operating income and, as such, is the primary determinant of profitability. Net interest income is impacted by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market interest rates and the level of non-performing assets. Interest income is shown on a fully tax-equivalent basis using the corporate statutory tax rate of 21.0% in 2024 and 2023.
Net interest income on a tax-equivalent basis increased $8.1 million, or 161.9%, to $13.1 million for the three months ended September 30, 2024 from $5.0 million for the comparable period of 2023. The increase in tax-equivalent net interest income primarily reflected an increase in tax equivalent interest income of $12.6 million, or 148.5%, to $21.1 million from $8.5 million, comparing the third quarters of 2024 and 2023, respectively, partially offset by an increase in interest expense of $4.5 million, to $8.0 million for the third quarter of 2024 from $3.5 million for the same quarter of 2023. The tax-equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-earning assets. The Corporation’s tax-equivalent net interest margin increased 127 basis points to 3.48% for the third quarter of 2024 from 2.21% for the same quarter of 2023. Additionally, rate spread, the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities shown on a fully tax-equivalent basis, increased 110 basis points to 2.87% for the three months ended September 30, 2024 from 1.77% for the same three months of 2023.
The $12.6 million, or 148.5%, increase in tax-equivalent interest income comparing the three months ended September 30, 2024 and 2023 largely reflected an increase in the tax-equivalent yield on average earning assets, coupled with significant growth in average earning assets related to the MBF merger. The tax-equivalent yield on average earning assets increased 187 basis points to 5.62% for the third quarter of 2024 from 3.75% for the same quarter of 2023, which resulted in a corresponding $5.1 million increase to tax-equivalent interest income. Specifically, the tax-equivalent yield on the loan portfolio increased 167 basis points to 6.64% from 4.97% comparing the third quarters of 2024 and 2023, which was due primarily to net accretion of loan fair value adjustments recorded in conjunction with the MBF merger as well as the continued repricing of existing loans in the Corporation’s portfolio. Additionally, the tax-equivalent yield on the investment portfolio increased 70 basis points to 2.44% for the third quarter of 2024 from 1.74% for the same quarter of 2023. These yield increases resulted in corresponding increases in tax-equivalent interest income of $4.7 million, and $341,000, respectively. Additionally, total average earning assets increased $595.0 million, or 66.2%, to $1.493 billion for the three months ended September 30, 2024, from $898.2 million for the same three months of 2023, which resulted in a corresponding increase in tax-equivalent interest income of $7.5 million. Specifically, average total loans increased $569.9 million, or 102.9%, to $1.124 billion for the third quarter of 2024 from $554.0 million for the same quarter of 2023, which largely reflected the impact of the MBF merger along with strong organic loan demand. The increase in the average loan balances resulted in a corresponding increase to tax-equivalent interest income of $7.1 million comparing the three months ended September 30, 2024, and 2023. Meanwhile, total securities averaged $361.4 million for the third quarter of 2024, an increase of $23.5 million, or 6.9%, from $338.0 million for the same quarter of 2023, which caused a corresponding increase to tax-equivalent interest income of $412,000.
The increase in interest expense of $4.5 million was primarily due to an increase in funding costs, coupled with growth in average interest-bearing liabilities. The Corporation experienced a 76 basis point increase in the cost of funds to 2.75% for the three months ended September 30, 2024, from 1.99% for the same three months of 2023, which resulted in a corresponding increase in interest expense of $3.9 million. The Corporation increased deposit rates and offered promotional certificate of deposit rates in response to rising market rates and increased competition. Specifically, the average rate paid for interest-bearing deposits increased 168 basis points to 2.42% for the third quarter of 2024 from 0.74% for the same period of 2023, resulting in a corresponding increase to interest expense of $3.8 million. The average rates paid on interest bearing demand deposits increased 218 basis points, resulting in a corresponding increase to interest expense of $1.9 million. Comparing the third quarters of 2024 and 2023, the average rates paid for money market deposits and time deposits, increased 75 basis points and 190 basis points, respectively, resulting in corresponding increases to interest expense of $217,000 and $1.7 million, respectively. Additionally, the Corporation experienced an increase in wholesale borrowing costs. Comparing the three months ended September 30, 2024 and 2023, the average rate paid for borrowed funds increased 9 basis points to 4.83% from 4.74%, respectively, and resulted in a corresponding increase to interest expense of $83,000. Average interest-bearing liabilities increased $464.3 million, or 66.6%, to $1.162 billion for the three months ended September 30, 2024, from $697.6 million for the same three months of 2023. The increase in average interest-bearing liabilities resulted in a corresponding increase to interest expense of $632,000. Average interest-bearing deposits increased $527.2 million, or 110.0%, to $1.007 billion from $479.4 million comparing the third quarters of 2024 and 2023, respectively. The increase in average interest-bearing deposits resulted in a corresponding increase to interest expense of $1.4 million. Average time deposits increased $215.7 million, or 167.1%, to $344.7 million for the three months ended September 30, 2024, from $129.0 million for the same three months of 2023, due to the MBF merger as well as changing customer deposit preferences due to the economic and rate environment continued to result in deposit migration from non-maturity deposits to higher-costing time deposits. The increase in average time deposit balances resulted in additional interest expense of $1.1 million. Partially offsetting the increase in interest expense due to higher deposit balances was a reduction in total borrowings. Average total borrowings decreased $62.9 million, or 28.8%, to $155.2 million for the third quarter of 2024 compared to $218.1 million for the same quarter of 2023, resulting in a decrease in interest expense of $805,000.
35
On a year-to-date basis, tax equivalent net interest income increased $22.6 million, or 148.0%, to $37.9 million for the nine months ended September 30, 2024, from $15.3 million for the comparable period of 2023. The increase in tax-equivalent net interest income for the year-to-date period was largely due to a $37.5 million, or 154.5%, increase in tax equivalent interest income, to $61.7 million, from $24.3 million for 2023, partially offset by an increase in interest expense of $14.8 million, or 165.7%, to $23.8 million for the nine months ended September 30, 2024, from $9.0 million for the nine months ended September 30, 2023. Similar to the quarterly period, the $22.6 million or 148.0%, increase in year-to-date tax equivalent interest income was primarily due to higher earning-asset yields, coupled with an increase in average earning assets balances primarily related to the MBF merger. The tax-equivalent yield on average earning assets increased 191 basis points to 5.54% for the first nine months of 2024 from 3.63% for the same period in 2023, which resulted in a corresponding increase of $22.6 million to tax-equivalent interest income. The tax-equivalent yield on loans increased 174 basis points, while the tax-equivalent yield on investments increased 77 basis points comparing the year-to-date periods of 2024 and 2023, which resulted in corresponding increases in tax-equivalent interest income of $21.2 million and $1.3 million, respectively. Regarding earning-asset volumes, total average earning assets increased $596.0 million, or 66.7%, to $1.490 billion for the nine months ended September 30, 2024, from $893.5 million for the same period of 2023, which resulted in a corresponding increase in tax-equivalent interest income of $14.9 million. Similar to the quarterly period, this was primarily due to an increase in average total loans which increased $564.5 million, or 103.3%, to $1.111 billion for the nine months ended September 30, 2024, from $546.2 million` for the same comparable period of 2023, which was primarily as a result of the MBF merger and strong organic loan demand. This increase resulted in a corresponding increase in tax-equivalent interest income of $13.7 million.
The $14.8 million, or 165.7%, increase in year-to-date interest expense was largely due to higher funding costs, coupled with an increase in average interest-bearing liabilities related to the MBF merger. The Corporation experienced a 100 basis point increase in the cost of interest-bearing liabilities to 2.74% for the first nine months of 2024 compared to 1.74% for the same period of 2023, which resulted in a corresponding increase to interest expense of $12.5 million. For the nine months ended September 30, 2024, the cost of interest-bearing deposits increased 165 basis points, to 2.28%, compared to 0.63% for the nine months ended September 30, 2023. This resulted in a corresponding increase to interest expense of $11.7 million. Average interest-bearing liabilities increased $471.4 million, or 68.4%, to $1.160 billion for the nine months ended September 30, 2024, from $688.8 million for the same nine months of 2023, resulting in a corresponding increase to interest expense of $2.4 million. Comparing the year-to-date periods of 2024 and 2023, average interest-bearing deposits increased $467.8 million, or 95.8%, to $956.3 million from $488.5 million, respectively, increasing interest expense by $2.4 million. Average total borrowings increased $3.6 million, or 1.8%, to $203.9 million for the nine months ended September 30, 2024 compared to $200.3 million for the same period of 2023, resulting in an increase in interest expense of $23,000.
The following Average Balance Sheet and Rate Analysis tables presents the average assets, actual income or expense and the average yield on assets, liabilities and stockholders' equity for the three and nine months ended September 30, 2024 and 2023.
36
AVERAGE BALANCE SHEET AND RATE ANALYSIS
THREE MONTHS ENDED SEPTEMBER 30,
| 2024 | 2023 | |||||||||||||||||||||||
| (In Thousands) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||
| ASSETS: | (1) | (1) | ||||||||||||||||||||||
| Tax-exempt loans | $ | 43,579 | $ | 524 | 4.78 | % | $ | 30,105 | $ | 307 | 4.05 | % | ||||||||||||
| All other loans | 1,080,350 | 18,234 | 6.71 | % | 523,896 | 6,629 | 5.02 | % | ||||||||||||||||
| Total loans (2)(3)(4) | 1,123,929 | 18,758 | 6.64 | % | 554,001 | 6,936 | 4.97 | % | ||||||||||||||||
| Taxable securities | 282,418 | 1,184 | 1.67 | % | 323,105 | 1,333 | 1.65 | % | ||||||||||||||||
| Tax-exempt securitites (3) | 79,028 | 1,037 | 5.22 | % | 14,893 | 135 | 3.63 | % | ||||||||||||||||
| Total securities | 361,446 | 2,221 | 2.44 | % | 337,998 | 1,468 | 1.74 | % | ||||||||||||||||
| Federal funds sold | — | — | 0.00 | % | 2 | — | 0.00 | % | ||||||||||||||||
| Interest-bearing deposits in other banks | 7,746 | 110 | 5.65 | % | 6,163 | 84 | 5.41 | % | ||||||||||||||||
| Total interest-earning assets | 1,493,121 | 21,089 | 5.62 | % | 898,164 | 8,488 | 3.75 | % | ||||||||||||||||
| Other assets | 108,904 | 67,141 | ||||||||||||||||||||||
| TOTAL ASSETS | $ | 1,602,025 | $ | 965,305 | ||||||||||||||||||||
| LIABILITIES : | ||||||||||||||||||||||||
Savings | $ | 196,138 | 15 | 0.03 | % | $ | 156,701 | 12 | 0.03 | % | ||||||||||||||
| Now deposits | 352,629 | 2,051 | 2.31 | % | 151,345 | 51 | 0.13 | % | ||||||||||||||||
| Money market deposits | 113,131 | 635 | 2.23 | % | 42,337 | 157 | 1.48 | % | ||||||||||||||||
| Time deposits | 344,704 | 3,432 | 3.96 | % | 129,046 | 671 | 2.06 | % | ||||||||||||||||
| Total interest-bearing deposits | 1,006,602 | 6,133 | 2.42 | % | 479,429 | 892 | 0.74 | % | ||||||||||||||||
| Short-term borrowings | 91,431 | 1,093 | 4.76 | % | 193,126 | 2,337 | 4.80 | % | ||||||||||||||||
| Long-term borrowings | 63,814 | 791 | 4.93 | % | 25,022 | 268 | 4.25 | % | ||||||||||||||||
| Total borrowings | 155,245 | 1,884 | 4.83 | % | 218,148 | 2,605 | 4.74 | % | ||||||||||||||||
| Total interest-bearing liabilities | 1,161,847 | 8,017 | 2.75 | % | 697,577 | 3,497 | 1.99 | % | ||||||||||||||||
| Noninterest-bearing deposits | 263,322 | 172,841 | ||||||||||||||||||||||
| Other liabilities | 13,836 | 5,028 | ||||||||||||||||||||||
| Stockholders' equity | 163,020 | 89,859 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS ' EQUITY | $ | 1,602,025 | $ | 965,305 | ||||||||||||||||||||
| Interest rate spread (6) | 2.87 | % | 1.77 | % | ||||||||||||||||||||
| Net interest income/margin (5) | $ | 13,072 | 3.48 | % | $ | 4,991 | 2.21 | % | ||||||||||||||||
| (1) | Average volume information was compared using daily averages for interest-earning and bearing accounts. |
| (2) | Interest on loans includes loan fee income. |
| (3) | Tax exempt interest revenue is shown on a tax-equivalent basis using a statutory federal income tax rate of 21 percent for 2024 and 2023. |
| (4) | Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. |
| (5) | Net interest margin is computed by dividing annualized tax-equivalent net interest income by total interest earning assets. |
| (6) | Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. |
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AVERAGE BALANCE SHEET AND RATE ANALYSIS NINE MONTHS ENDED SEPTEMBER 30,
| 2024 | 2023 | |||||||||||||||||||||||
| (In Thousands) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||
| ASSETS: | (1) | (1) | ||||||||||||||||||||||
| Tax-exempt loans | $ | 41,312 | $ | 1,375 | 4.45 | % | $ | 30,423 | $ | 853 | 3.75 | % | ||||||||||||
| All other loans | 1,069,391 | 53,231 | 6.65 | % | 515,801 | 18,862 | 4.89 | % | ||||||||||||||||
| Total loans (2)(3)(4) | 1,110,703 | 54,606 | 6.57 | % | 546,224 | 19,715 | 4.83 | % | ||||||||||||||||
| Taxable securities | 294,122 | 3,792 | 1.72 | % | 328,166 | 3,863 | 1.57 | % | ||||||||||||||||
| Tax-exempt securitites (3) | 78,865 | 3,092 | 5.24 | % | 14,772 | 504 | 4.55 | % | ||||||||||||||||
| Total securities | 372,987 | 6,884 | 2.47 | % | 342,938 | 4,367 | 1.70 | % | ||||||||||||||||
| Federal funds sold | — | — | 0.00 | % | 5 | — | 0.00 | % | ||||||||||||||||
| Interest-bearing deposits in other banks | 5,875 | 238 | 5.41 | % | 4,353 | 169 | 5.19 | % | ||||||||||||||||
| Total interest-earning assets | 1,489,565 | 61,728 | 5.54 | % | 893,520 | 24,251 | 3.63 | % | ||||||||||||||||
| Other assets | 100,828 | 64,895 | ||||||||||||||||||||||
| TOTAL ASSETS | $ | 1,590,393 | $ | 958,415 | ||||||||||||||||||||
| LIABILITIES : | ||||||||||||||||||||||||
| Savings | $ | 199,776 | 46 | 0.03 | % | $ | 162,218 | 36 | 0.03 | % | ||||||||||||||
| Now deposits | 308,869 | 4,450 | 1.92 | % | 152,140 | 82 | 0.07 | % | ||||||||||||||||
| Money market deposits | 109,679 | 1,706 | 2.08 | % | 46,286 | 467 | 1.35 | % | ||||||||||||||||
| Time deposits | 337,989 | 10,151 | 4.01 | % | 127,881 | 1,714 | 1.79 | % | ||||||||||||||||
| Total interest-bearing deposits | 956,313 | 16,353 | 2.28 | % | 488,525 | 2,299 | 0.63 | % | ||||||||||||||||
| Short-term borrowings | 137,198 | 5,017 | 4.88 | % | 187,266 | 6,248 | 4.46 | % | ||||||||||||||||
| Long-term borrowings | 66,695 | 2,436 | 4.88 | % | 13,026 | 414 | 4.25 | % | ||||||||||||||||
| Total borrowings | 203,893 | 7,453 | 4.88 | % | 200,292 | 6,662 | 4.45 | % | ||||||||||||||||
| Total interest-bearing liabilities | 1,160,206 | 23,806 | 2.74 | % | 688,817 | 8,961 | 1.74 | % | ||||||||||||||||
| Noninterest-bearing deposits | 259,940 | 175,167 | ||||||||||||||||||||||
| Other liabilities | 13,065 | 4,618 | ||||||||||||||||||||||
| Stockholders' equity | 157,182 | 89,813 | ||||||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS ' EQUITY | $ | 1,590,393 | $ | 958,415 | ||||||||||||||||||||
| Interest rate spread (6) | 2.79 | % | 1.89 | % | ||||||||||||||||||||
| Net interest income/margin (5) | $ | 37,922 | $ | 3.40 | % | $ | 15,290 | 2.29 | % | |||||||||||||||
| (1) | Average volume information was compared using daily averages for interest-earning and bearing accounts. |
| (2) | Interest on loans includes loan fee income. |
| (3) | Tax exempt interest revenue is shown on a tax-equivalent basis using a statutory federal income tax rate of 21 percent for 2024 and 2023. |
| (4) | Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. |
| (5) | Net interest margin is computed by dividing annualized tax-equivalent net interest income by total interest earning assets. |
| (6) | Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. |
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Reconcilement of Taxable Equivalent Net Interest Income | ||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Total interest income | $ | 20,791 | $ | 8,388 | $ | 60,875 | $ | 23,966 | ||||||||
| Total interest expense | 8,017 | 3,497 | 23,806 | 8,961 | ||||||||||||
| Net interest income | 12,774 | 4,891 | 37,069 | 15,005 | ||||||||||||
| Tax equivalent adjustment | 298 | 100 | 853 | 285 | ||||||||||||
| Net interest income (fully taxable equivalent) | $ | 13,072 | $ | 4,991 | $ | 37,922 | $ | 15,290 | ||||||||
Rate/Volume Analysis
To enhance the understanding of the effects of volumes (the average balance of earning assets and costing liabilities) and average interest rate fluctuations on the Consolidated Balance Sheets as it pertains to net interest income, the table below reflects these changes for the three and nine months ended September 30, 2024 versus the three and nine months ended September 30, 2023:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2024 vs 2023 Increase (Decrease) Due to | 2024
vs 2023 Increase (Decrease) Due to | |||||||||||||||||||||||
| (In Thousands) | Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Loans, tax-exempt | $ | 136 | $ | 81 | $ | 217 | $ | 203 | $ | 319 | $ | 522 | ||||||||||||
| Loans | 6,945 | 4,660 | 11,605 | 13,461 | 20,908 | 34,369 | ||||||||||||||||||
| Taxable investment securities | (167 | ) | 18 | (149 | ) | (266 | ) | 195 | (71 | ) | ||||||||||||||
| Tax-exempt investment securities | 579 | 323 | 902 | 1,450 | 1,138 | 2,588 | ||||||||||||||||||
| Federal funds sold | — | — | — | — | — | — | ||||||||||||||||||
| Interest bearing deposits | 21 | 5 | 26 | 39 | 30 | 69 | ||||||||||||||||||
| Total interest-earning assets | 7,514 | 5,087 | 12,601 | 14,887 | 22,590 | 37,477 | ||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Savings | 3 | — | 3 | 6 | 4 | 10 | ||||||||||||||||||
| NOW deposits | 67 | 1,933 | 2,000 | 56 | 4,312 | 4,368 | ||||||||||||||||||
| Money market deposits | 261 | 217 | 478 | 425 | 814 | 1,239 | ||||||||||||||||||
| Time deposits | 1,106 | 1,655 | 2,761 | 1,872 | 6,565 | 8,437 | ||||||||||||||||||
| Short-term borrowings | (1,215 | ) | (30 | ) | (1,245 | ) | (1,111 | ) | (120 | ) | (1,231 | ) | ||||||||||||
| Long-term borrowings, FHLB | 410 | 113 | 523 | 1,134 | 888 | 2,022 | ||||||||||||||||||
| Total interest-bearing liabilities | 632 | 3,888 | 4,520 | 2,382 | 12,463 | 14,845 | ||||||||||||||||||
| Change in net interest income | $ | 6,882 | $ | 1,199 | $ | 8,081 | $ | 12,505 | $ | 10,127 | $ | 22,632 | ||||||||||||
Provision (Credit) for Credit Losses - Loans
For the three and nine months ended September 30, 2024, the Corporation recorded a $151,000 and $288,000 provision for credit losses on loans, respectively, compared to a $172,000 and $594,000 credit, respectively, for the three and nine months ended September 30, 2023. For the three and nine months ended September 30, 2024, the provision for credit losses primarily reflects an increase in volume in the loan portfolio along with changes in qualitative factors. For the three and nine months ended September 30, 2023, the credit was primarily related to improved economic forecasts and ongoing low charge-off experience.
See Note 4 within the Corporation’s Notes to the Unaudited Consolidated Financial Statements which are included in this Quarterly Report on Form 10-Q for more information regarding the Corporation’s allowance for credit losses as of September 30, 2024.
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Non-interest Income
Total non-interest income increased $1.2 million or 78.4% to $2.7 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. Service charges and fees increased $250,000 due to an increased number of accounts and increased transaction volumes due to the MBF merger. Earnings on bank-owned life insurance increased $123,000 or 108.8% from $113,000 to $236,000 due to an increase in cash surrender values related to the MBF merger. Gains (losses) on marketable equity securities increased $281,000 or 238.1% due to an increase in the fair value of equity securities held during the third quarter. Interchange fees increased $236,000 or 55.1% due to an increase in the volume of transactions due to the MBF merger and continued increase in electronic payments. Other non-interest income increased $201,000 or 94.4% due primarily to increases in merchant services income and secondary market mortgage servicing fees.
For the nine months ended September 30, 2024, total non-interest income increased $2.8 million or 57.9% to $7.7 million, compared to $4.9 million for the nine months ended September 30, 2023. Similar to the quarterly period, increases in service charges and fees, earnings on bank-owned life insurance and interchange fees of $493,000, $357,000 and $676,000, respectively, were all related to the MBF merger. Gains (losses) on marketable equity securities increased $273,000 or 103.0% due to an increase in the fair value of equity securities held during the nine months ended September 30, 2024. Other non-interest income increased $746,000 or 100.4% due primarily to incentives received in conjunction with the launch of a debit card reissuance project as well as a governmental grant recorded in the first quarter in conjunction with the completion of a solar energy project.
| For the Three Months Ended | ||||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Change | ||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||
| Service charges and fees | $ | 727 | 26.8 | % | $ | 477 | 31.3 | % | $ | 250 | 52.4 | % | ||||||||||||
| Gain on sale of loans | 75 | 2.8 | 68 | 4.5 | 7 | 10.3 | ||||||||||||||||||
| Earnings on bank-owned life insurance | 236 | 8.7 | 113 | 7.4 | 123 | 108.8 | ||||||||||||||||||
| Brokerage | 193 | 7.1 | 146 | 9.6 | 47 | 32.2 | ||||||||||||||||||
| Trust | 243 | 9.0 | 195 | 12.8 | 48 | 24.6 | ||||||||||||||||||
| Gains (losses) on marketable equity securities | 163 | 6.0 | (118 | ) | (7.8 | ) | 281 | 238.1 | ||||||||||||||||
| Realized losses on available-for-sale debt securities, net | — | — | — | — | — | — | ||||||||||||||||||
| Interchange fees | 664 | 24.5 | 428 | 28.1 | 236 | 55.1 | ||||||||||||||||||
| Other non-interest income | 414 | 15.1 | 213 | 14.1 | 201 | 94.4 | ||||||||||||||||||
| Total non-interest income | $ | 2,715 | 100.0 | % | $ | 1,522 | 100.0 | % | $ | 1,193 | 78.4 | % | ||||||||||||
| For the Three Months Ended | ||||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Change | ||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||
| Service charges and fees | $ | 2,009 | 26.2 | % | $ | 1,516 | 31.2 | % | $ | 493 | 32.5 | % | ||||||||||||
| Gain on sale of loans | 244 | 3.2 | 193 | 4.0 | 51 | 26.4 | ||||||||||||||||||
| Earnings on bank-owned life insurance | 692 | 9.0 | 335 | 6.9 | 357 | 106.6 | ||||||||||||||||||
| Brokerage | 609 | 7.9 | 425 | 8.8 | 184 | 43.3 | ||||||||||||||||||
| Trust | 653 | 8.5 | 613 | 12.6 | 40 | 6.5 | ||||||||||||||||||
| Gains (losses) on marketable equity securities | 8 | 0.1 | (265 | ) | (5.5 | ) | 273 | 103.0 | ||||||||||||||||
| Realized losses on available-for-sale debt securities, net | (8 | ) | (0.1 | ) | — | — | (8 | ) | 100.0 | |||||||||||||||
| Interchange fees | 1,970 | 25.7 | 1,294 | 26.7 | 676 | 52.2 | ||||||||||||||||||
| Other non-interest income | 1,489 | 19.5 | 743 | 15.3 | 746 | 100.4 | ||||||||||||||||||
| Total non-interest income | $ | 7,666 | 100.0 | % | $ | 4,854 | 100.0 | % | $ | 2,812 | 57.9 | % | ||||||||||||
Non-interest Expense
Total non-interest expense increased $4.1 million or 77.6% from $5.3 million for the three months ended September 30, 2023, to $9.4 million for the three months ended September 30, 2024. The MBF merger has contributed significantly to increases in all components of non-interest expense. Salaries and employee benefits increased $2.4 million, occupancy increased $318,000, Pennsylvania shares tax increased $309,000, data processing and telecommunications increased $487,000 and other non-interest expense increased $417,000. All of these increases relate to the closing of the MBF merger on November 11, 2023. Merger-related expenses totaled $43,000 and amortization of intangibles totaled $558,000 for the three months ended September 30, 2024, compared to $757,000 and $0 for the three months ended September 30, 2023.
For the nine months ended September 30, 2024, total non-interest expense increased $13.3 million or 88.7% to $28.2 million, compared to $14.9 million for the nine months ended September 30, 2023. Similar to the quarterly period, increases in salaries and employee benefits, occupancy, Pennsylvania shares tax, data processing and telecommunications and other non-interest expense of $6.8 million, $874,000, $457,000, $1.6 million and $1.4 million, respectively, were all related to the closing of the MBF merger on November 11, 2023. Merger-related expenses totaled $340,000 and amortization of intangibles totaled $1.7 million for the nine months ended September 30, 2024, compared to $1.2 million and $0 for the nine months ended September 30, 2023.
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One standard to measure non-interest expense is to express annualized non-interest expense as a percentage of average total assets. For the three and nine months ended September 30, 2024 this percentage was 2.50% and 2.53%, respectively, compared to 2.35% and 2.24%, respectively, for the three and nine months ended September 30, 2023.
| For the Three Months Ended | ||||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Change | ||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||
| Salaries and employee benefits | $ | 4,704 | 50.2 | % | $ | 2,275 | 43.1 | % | $ | 2,429 | 106.8 | % | ||||||||||||
| Occupancy | 644 | 6.9 | 326 | 6.2 | 318 | 97.5 | ||||||||||||||||||
| Furniture and equipment | 448 | 4.8 | 305 | 5.8 | 143 | 46.9 | ||||||||||||||||||
| Pennsylvania shares tax | 251 | 2.7 | (58 | ) | (1.1 | ) | 309 | 532.8 | ||||||||||||||||
| Professional fees | 359 | 3.8 | 316 | 6.0 | 43 | 13.6 | ||||||||||||||||||
| Director's fees | 103 | 1.1 | 72 | 1.4 | 31 | 43.1 | ||||||||||||||||||
| Federal deposit insurance | 187 | 2.0 | 110 | 2.1 | 77 | 70.0 | ||||||||||||||||||
| Data processing and telecommunications | 848 | 9.1 | 361 | 6.8 | 487 | 134.9 | ||||||||||||||||||
| Automated teller machine and interchange | 107 | 1.1 | 111 | 2.1 | (4 | ) | (3.6 | ) | ||||||||||||||||
| Merger-related expenses | 43 | 0.5 | 757 | 14.4 | (714 | ) | (94.3 | ) | ||||||||||||||||
| Amortization of intangibles | 558 | 6.0 | — | — | 558 | 100.0 | ||||||||||||||||||
| Other non-interest expense | 1,115 | 11.8 | 698 | 13.2 | 417 | 59.7 | ||||||||||||||||||
| Total non-interest expense | $ | 9,367 | 100.0 | % | $ | 5,273 | 100.0 | % | $ | 4,094 | 77.6 | % | ||||||||||||
| For the Three Months Ended | ||||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Change | ||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||
| Salaries and employee benefits | $ | 14,146 | 50.2 | % | $ | 7,307 | 48.9 | % | $ | 6,839 | 93.6 | % | ||||||||||||
| Occupancy | 1,843 | 6.5 | 969 | 6.5 | 874 | 90.2 | ||||||||||||||||||
| Furniture and equipment | 1,238 | 4.4 | 872 | 5.8 | 366 | 42.0 | ||||||||||||||||||
| Pennsylvania shares tax | 691 | 2.4 | 234 | 1.6 | 457 | 195.3 | ||||||||||||||||||
| Professional fees | 1,135 | 4.0 | 838 | 5.6 | 297 | 35.4 | ||||||||||||||||||
| Director's fees | 342 | 1.2 | 227 | 1.5 | 115 | 50.7 | ||||||||||||||||||
| Federal deposit insurance | 595 | 2.1 | 327 | 2.2 | 268 | 82.0 | ||||||||||||||||||
| Data processing and telecommunications | 2,672 | 9.5 | 1,064 | 7.1 | 1,608 | 151.1 | ||||||||||||||||||
| Automated teller machine and interchange | 475 | 1.7 | 221 | 1.5 | 254 | 114.9 | ||||||||||||||||||
| Merger-related expenses | 340 | 1.2 | 1,206 | 8.1 | (866 | ) | (71.8 | ) | ||||||||||||||||
| Amortization of intangibles | 1,656 | 5.9 | — | — | 1,656 | 100.0 | ||||||||||||||||||
| Other non-interest expense | 3,074 | 10.9 | 1,682 | 11.2 | 1,392 | 82.8 | ||||||||||||||||||
| Total non-interest expense | $ | 28,207 | 100.0 | % | $ | 14,947 | 100.0 | % | $ | 13,260 | 88.7 | % | ||||||||||||
LIQUIDITY
The Bank’s liquidity, represented by cash and due from banks, is a product of its operating, investing and financing activities. The Bank’s primary sources of funds are deposits, securities sold under agreements to repurchase, principal repayments of securities and outstanding loans, funds provided from operations, and day-to-day FHLB – Pittsburgh borrowings. In addition, the Bank invests excess funds in short-term interest-earning assets such as overnight deposits or U.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the amortization of loans and securities and short-term investments are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and repayments on loans and mortgage-backed securities.
The Bank strives to maintain sufficient liquidity to fund operations, loan demand and to satisfy fluctuations in deposit levels. The Bank is required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound banking operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The Bank attempts to maintain adequate but not excessive liquidity, and liquidity management is both a daily and long-term function of its business management. The Bank manages its liquidity in accordance with a board of directors-approved asset liability policy, which is administered by its asset-liability committee (“ALCO”). ALCO reports interest rate sensitivity, liquidity, capital and investment-related matters on a quarterly basis to the Bank’s board of directors.
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The Bank reviews cash flow projections regularly and updates them in order to maintain liquid assets at levels believed to meet the requirements of normal operations, including loan commitments and potential deposit outflows from maturing certificates of deposit and savings withdrawals. While deposits and securities sold under agreements to repurchase are its primary source of funds, when needed it is also able to generate cash through borrowings from the FHLB. At September 30, 2024, the Bank had remaining available capacity with FHLB, subject to certain collateral restrictions, of $451.1 million.
Liquidity management is required to ensure that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt service payments, investment commitments, commercial and consumer loan demand, and ongoing operating expenses. Funding sources include principal repayments on loans, sale of assets, growth in time and core deposits, short and long-term borrowings, investment securities coming due, loan prepayments and repurchase agreements. Regular loan payments are a dependable source of funds, while the sale of investment securities, deposit growth and loan prepayments are significantly influenced by general economic conditions and the level of interest rates.
The statement of cash flows presents the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and interest-bearing deposits in other banks, which comprise cash and cash equivalents, are the Corporation’s most liquid assets. Cash and cash equivalents totaled $28.1 million at September 30, 2024, an increase of $9.7 million, or 52.7%, from $18.4 million at December 31, 2023, as net cash inflows from operating and investing activities were greater than net cash outflows from financing activities.
Net cash inflows from investing activities provided $52.8 million of cash and cash equivalents during the nine months ended September 30, 2024. Accounting for the majority of the net cash inflows was $86.2 million related to proceeds from sales, paydowns, calls and maturities of available-for-sale debt securities. This was partially offset by a net increase in loans and leases of $36.5 million, which reflected strong demand. Financing activities used $55.5 million in net cash, which resulted primarily from a decrease in short-term borrowings, consisting of customer repurchase agreements and short-term FHLB borrowings, of $179.5 million. These outflows were offset by a $138.8 million increase in deposits. These changes were primarily related to a strategic initiative to reposition customer repurchase agreements into core deposit accounts. Operating activities include net income, adjusted for the effects of non-cash transactions including, among others, depreciation and amortization and the provision for credit losses, and is the primary source of cash flows from operations. For the nine months ended September 30, 2024, operating activities provided the Corporation with $12.4 million in net cash, which primarily reflected net income of $13.8 million.
The Corporation regularly analyzes its ability to generate adequate amounts of cash to meet its short and long-term cash requirements and plans. As part of its quarterly asset liability management procedures, the Corporation performs liquidity cash flow forecasts in various base level and stress scenarios to monitor future cash needs. As of September 30, 2024, the Corporation is expected to maintain a level cash balance over the next 12 months. The Corporation has not identified any known demands, commitments, events or uncertainties that would result or that are reasonably likely to result in its liquidity position materially increasing or decreasing over the next 12 months. The Corporation’s long-term cash needs are regularly analyzed through its strategic planning process, which includes a detailed review of liquidity and funding needs.
We manage liquidity on a daily basis. We believe that our liquidity is sufficient to meet present and future financial obligations and commitments on a timely basis. However, see potential liquidity risk factors at Item 1A – Risk Factors of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023, and refer to the Consolidated Statements of Cash Flows in this Form 10-Q.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities. The Bank's net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Bank seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities.
One major objective of the Bank when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Bank's ALCO, which is comprised of senior management and Board members. ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk management is a regular part of management of the Bank. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of noncontractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings from shifts in interest rates.
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The ratio between assets and liabilities repricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.
To manage the interest sensitivity position, an asset/liability model called "gap analysis" is used to monitor the difference in the volume of the Bank's interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect. The Bank employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest sensitive assets and liabilities in order to determine what impact these rate changes will have upon our net interest spread. At Setptember 30, 2024, our cumulative gap positions were within the internal risk management guidelines.
In addition to gap analysis, the Bank uses net interest income simulations and economic value of equity (“EVE”) simulations as the primary tools in measuring and managing the Bank’s position and considers balance sheet forecasts, the Bank’s liquidity position, the economic environment, anticipated direction of interest rates and the Bank’s earnings sensitivity to changes in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable negative changes in net interest income. Furthermore, as part of its ongoing monitoring, ALCO requires annual back testing of modeling results, which involves after-the-fact comparisons of projections with the Bank’s actual performance to measure the validity of assumptions used in the modeling techniques.
The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +100, +200, +300, -100, -200, and -300 basis points on net interest income and the change in economic value over a one-year time horizon from the September 30, 2024 levels:
| Rates +100 | Rates +200 | Rates +300 | Rates -100 | Rates -200 | Rates -300 | |||||||||||||||||||||||||||||||||||||||||||
Simulation Results | Policy Limit | Simulation Results | Policy Limit | Simulation Results | Policy Limit | Simulation Results | Policy Limit | Simulation Results | Policy Limit | Simulation Results | Policy Limit | |||||||||||||||||||||||||||||||||||||
| Earnings at risk: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Percent change in net interest income | 7.15 | % | -10.00 | % | 2.33 | % | -15.00 | % | -2.74 | % | -20.00 | % | 13.86 | % | -10.00 | % | 14.14 | % | -15.00 | % | 13.72 | % | -20.00 | % | ||||||||||||||||||||||||
| Economic value at risk: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Percent change in economic value of equity | -7.19 | % | -15.00 | % | -15.43 | % | -25.00 | % | -24.49 | % | -30.00 | % | 4.68 | % | -15.00 | % | 6.51 | % | -25.00 | % | 7.73 | % | -30.00 | % | ||||||||||||||||||||||||
Model results from the simulation at September 30, 2024 indicated that the Bank was projected to see an increase in net interest income over a one-year horizon in any of the rate shock scenarios, with the exception of the +300 scenario, which showed a 2.74% decrease. The percent change in EVE is expected to decrease in all rates up scenarios and increase in all rates down scenarios. All modeled exposures to net interest income and EVE for the next twelve-month horizon are within internal ALCO policy guidelines.
This analysis does not represent a forecast for the Bank and should not be relied upon as being indicative of expected operating results. These simulations are based on numerous assumptions, including but not limited to, the nature and timing of interest rate levels, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacements of asset and liability cash flows, and other factors. While assumptions reflect current economic and local market conditions, the Bank cannot make any assurances as to the predictive nature of these assumptions, including changes in interest rates, customer preferences, competition and liquidity needs, or what actions ALCO might take in responding to these changes.
It is our opinion that the asset/liability mix and the interest rate risk associated with the balance sheet is within manageable parameters. Additionally, the Bank’s ALCO meets quarterly with an asset liability management consultant.
IMPACT OF INFLATION AND CHANGING PRICES
The preparation of financial statements in conformity with U.S. GAAP requires management to measure the Corporation’s financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the Corporation's operations is primarily related to increases in operating expenses. Management considers changes in interest rates to impact our financial condition and results of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. The Corporation manages interest rate risk in several ways. There can be no assurance that the Corporation will not be materially adversely affected by future changes in interest rates, as interest rates are highly sensitive to many factors that are beyond its control. Additionally, inflation may adversely impact the financial condition of the Corporation's borrowers and could impact their ability to repay their loans, which could negatively affect the Corporation's asset quality through higher delinquency rates and increased charge-offs. Management will carefully consider the impact of inflation and rising interest rates on the Corporation’s borrowers in managing credit risk related to the loan portfolio.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item can be found at Part I Item 2 of this Report on Form 10-Q under the caption “Interest Rate Risk Management” and is incorporated in its entirety by reference under this Item 3.
Item 4. Controls and Procedures
Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this Report, were effective as of such date at the reasonable assurance level as discussed below to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.
The CEO and CFO have evaluated the changes to our internal controls over financial reporting that occurred during our fiscal Quarter Ended September 30, 2024, as required by paragraph (d) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, and have concluded that there were no changes that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II Other Information
Item 1. Legal Proceedings
At September 30, 2024, the Corporation was not involved in any legal proceedings, other than routine legal proceedings in the ordinary course of business which involve amounts which, in the aggregate, are believed by management to be immaterial to the financial condition of the Corporation. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation by government authorities.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed March 12, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (a) | None |
| (b) | Not applicable |
| (c) | Effective May 14, 2024, the Corporation’s Board of Directors authorized a new treasury stock repurchase program. Under the program, the Corporation was authorized to repurchase up to 178,614 shares of the Corporation’s common stock. During the third quarter 2024, the Corporation did not repurchase any shares of its common stock. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
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Item 5. Other Information
| (a) | None |
| (b) | None |
| (c) | During
the three months ended September 30, 2024, |
Item 6. Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
101 The following materials from the Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2024, formatted in XBRL (Extensible Business Reporting Language); (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited), and (vi) the Notes to Unaudited Consolidated Financial Statements.
104 Cover Page for Interactive Data File (embedded with the Inline XBRL document)
45
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.
Muncy Columbia Financial Corporation
(Registrant)
| By: | /s/ Lance O. Diehl | Date: November 8, 2024 |
Lance O. Diehl President
and Chief Executive Officer |
||
| By: | /s/ Joseph K. O’Neill, Jr. | Date: November 8, 2024 |
Joseph K. O’Neill, Jr. Executive
Vice President and Chief Financial Officer |
46