UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-K
For the fiscal year ended December 31 , 2023
OR
For the transition period from to
Commission file number 0-17077
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |||||||
| incorporation or organization) | ||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant’s telephone number, including area code (570 ) 322-1111
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| | ☒ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
State the aggregate market value of the voting stock held by non-affiliates of the registrant $176,799,000 at June 30, 2023.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at March 1, 2024 | |||||||
| Common Stock, $5.55 Par Value | ||||||||
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of shareholders to be held on May 7, 2024 are incorporated by reference in Part III hereof.
INDEX
| ITEM | PAGE | |||||||
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PART I
ITEM 1 BUSINESS
A. General Development of Business and History
On January 7, 1983, Penns Woods Bancorp, Inc. (the “Corporation”) was incorporated under the laws of the Commonwealth of Pennsylvania as a bank holding company. In connection with the organization of the Corporation, Jersey Shore State Bank ("JSSB"), a Pennsylvania state-chartered bank, became a wholly owned subsidiary of the Corporation. On June 1, 2013, the Corporation acquired Luzerne Bank ("Luzerne") with Luzerne operating as a subsidiary of the Corporation (JSSB and Luzerne are collectively referred to as the "Banks"). The Corporation’s three other wholly-owned subsidiaries are Woods Real Estate Development Company, Inc., Woods Investment Company, Inc., and United Insurance Solutions, LLC. The Corporation’s business has consisted primarily of managing and supervising the Banks, and its principal source of income has been dividends paid by the Banks and Woods Investment Company, Inc.
The Banks are engaged in commercial and retail banking which includes the acceptance of time, savings, and demand deposits, the funding of commercial, consumer, and mortgage loans, and safe deposit services. Utilizing a branch office network, ATMs, Internet, and telephone banking delivery channels, the Banks deliver their products and services to the communities they reside in.
In October 2000, JSSB acquired The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The M Group, which operates as a subsidiary of JSSB, offers insurance and securities brokerage services. Securities are offered by The M Group through Cetera Financial Group, a registered broker-dealer.
Neither the Corporation nor the Banks anticipate that compliance with environmental laws and regulations will have any material effect on capital expenditures, earnings, or their competitive position. The Banks are not dependent on a single customer or a few customers, the loss of whom would have a material effect on the business of the Banks.
As of December 31, 2023, JSSB employed 237 persons, Luzerne employed 68 persons, and The M Group employed 3 persons in either a full-time or part-time capacity. The Corporation does not have any employees. The principal officers of the Banks also serve as officers of the Corporation.
Woods Investment Company, Inc., a Delaware holding company, maintains an investment portfolio that is managed for total return and to fund dividend payments by the Corporation.
Woods Real Estate Development Company, Inc. serves the Corporation through its acquisition and ownership of certain properties utilized by the Banks.
United Insurance Solutions, LLC offers property and casualty and auto insurance products within the Corporation's market footprint. The Corporation became the sole owner of United Insurance Solutions, LLC when it purchased the outstanding 20% minority interest on October 1, 2021.
We post publicly available reports required to be filed with the SEC on our website, www.pwod.com, as soon as reasonably practicable after filing such reports with the SEC. The required reports are available free of charge through our website. Information available on our website is not part of or incorporated by reference into this Report or any other report filed by this Corporation with the SEC.
B. Regulation and Supervision
The Corporation is a registered bank holding company and, as such is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Banks are also subject to the supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”), as their primary federal regulator and as the insurer of the Banks' deposits. The Banks are also regulated and examined by the Pennsylvania Department of Banking and Securities (the “Department”).
The insurance activities of The M Group are subject to regulation by the insurance departments of the various states in which The M Group conducts business, including principally the Pennsylvania Department of Insurance. The securities brokerage activities of The M Group are subject to regulation by federal and state securities commissions.
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The insurance activities of United Insurance Solutions, LLC are subject to regulation by the Pennsylvania Department of Insurance.
The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the FRB, pursuant to such regulations, may require the Corporation to stand ready to use its resources to provide adequate capital funds to the Banks during periods of financial stress or adversity. The BHCA requires the Corporation to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of 5% or more of any voting shares of any bank. Such a transaction would also require approval of the Department.
A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5% of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The current minimum capital requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”), a tier 1 capital ratio of 6.0%; (8.0% to be considered “well capitalized”), and a total capital ratio of 8.0% (10.0% to be considered “well capitalized”). In order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), as of January 1, 2019, a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.
In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio, under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 4.0% (5.0% to be considered "well capitalized"). The Banks are subject to similar capital requirements adopted by the FDIC.
During 2018, the FRB raised the threshold of its "small bank holding company" exemption to the application of consolidated capital requirements for qualifying small bank holding companies from $1 billion to $3 billion of consolidated assets. Consequently, qualifying bank holding companies having less than $3 billion of consolidated assets are not subject to the consolidated capital requirements unless otherwise directed by the FRB.
Dividends
Federal and state laws impose limitations on the payment of dividends by the Banks. The Pennsylvania Banking Code and the policies of the FDIC and the Department generally encourage the Banks to pay dividends from current net income and retained earnings. The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by the Banks to their accumulated net earnings.
In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment of dividends by the Banks if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the Banks.
Under Pennsylvania law, the Corporation may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts as they become due in the usual course of business and, after giving effect to the dividend, the total assets of the Corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the Corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the dividend.
It is also the policy of the FRB that a bank holding company generally may only pay dividends on common stock out of net income available to common shareholders over the past twelve months and only if the prospective rate of earnings retention appears consistent with a bank holding company’s capital needs, asset quality, and overall financial condition. A bank holding company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.
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C. Regulation of the Banks
The Banks are highly regulated by the FDIC and the Department. The laws that such agencies enforce limit the specific types of businesses in which the Banks may engage, and the products and services that the Banks may offer to customers. Generally, these limitations are designed to protect the insurance fund of the FDIC and/or the customers of the Banks, and not the Banks or their shareholders. From time to time, various types of new federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Banks. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect business of the Banks. As a consequence of the extensive regulation of commercial banking activities in the United States, the Banks' business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Some of the major regulatory provisions that affect the business of the Banks are discussed briefly below.
Prompt Corrective Action
The FDIC has specified the levels at which an insured institution will be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” and “critically undercapitalized.” In the event an institution’s capital deteriorates to the “undercapitalized” category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations prescribe an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent institution and liability for civil money damages for failure to fulfill its commitment on that guarantee; and (2) the placement of a hold on increases in assets, number of branches, or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions, the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity.
Deposit Insurance
The FDIC maintains the Deposit Insurance Fund ("DIF") by assessing depository institutions an insurance premium. The FDIC insures deposit accounts up to $250,000 per depositor.
Under the FDIC's risk-based assessment system, deposit insurance assessments are based on each insured institution's total assets less tangible equity, thereby basing deposit insurance assessments on an institution’s total liabilities, not only insured deposits. Small banks (generally, those with less than $10 billion in assets) are assigned an individual rate based on a formula using financial data and CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity) ratings. A bank’s assessment is calculated by multiplying its individual assessment rate by its assessment base (average consolidated total assets less average tangible equity), determined quarterly.
Federal Home Loan Bank System
The Banks are members of the Federal Home Loan Bank of Pittsburgh (the “FHLB”), which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. At December 31, 2023, the Banks had $387,295,000 in FHLB advances.
As a member, the Banks are required to purchase and maintain stock in the FHLB. The amount of required stock varies based on the FHLB products utilized by the Banks and the amount of the products utilized. At December 31, 2023, the Banks had $23,818,000 in stock of the FHLB, which was in compliance with this requirement.
Other Legislation
The 2010 Dodd-Frank Act made significant changes to the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act, among other things: (i) expands the authority of the FRB to examine bank holding companies and their subsidiaries, including insured depository institutions; (ii) requires a bank holding company to be well capitalized and well managed to receive approval of an interstate bank acquisition; (iii) provides mortgage reform provisions regarding a customer’s ability to pay and making more loans subject to provisions for higher-cost loans and new disclosures; (iv) creates the Consumer Financial Protection Bureau
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(the “CFPB”) that has rule making authority for a wide range of consumer protection laws that apply to all banks and has broad powers to supervise and enforce consumer protection laws; (v) introduces additional corporate governance and executive compensation requirements on public companies subject to the Securities and Exchange Act of 1934, such as the Corporation; (vi) permits FDIC-insured banks to pay interest on business demand deposits; (vii) requires that holding companies and other companies that directly or indirectly control an insured depository institution serve as a source of financial strength to that institution; (viii) makes permanent the $250,000 limit for federal deposit insurance at all insured depository institutions; and (ix) permits national and state banks to establish interstate branches to the same extent as the branch host state allows establishment of in-state branches.
The CFPB created by the Dodd-Frank Act has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Banks will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
Under the Bank Secrecy Act, a financial institution is required to have systems in place to detect certain types of transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and that the financial institution knows, suspects or has reason to suspect, involves illegal funds, is designed to evade the requirements of the law, or has no lawful purpose.
Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the “USA PATRIOT Act,” financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to detect, and prevent, the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs, including employee training and independent audit requirements, meet minimum specified standards, follow minimum standards for customer identification and maintenance of customer identification records.
The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies, including the Corporation, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control, and ethics standards for accounting firms. In response to the legislation, the national securities exchanges and NASDAQ, adopted new rules relating to certain governance matters, including the independence of members of a company’s audit committee as a condition to listing or continued listing.
Congress is often considering financial industry legislation, and the federal banking agencies routinely propose new regulations. The Corporation cannot predict how any new legislation, or new rules adopted by federal or state banking agencies, may affect the business of the Corporation and its subsidiaries in the future.
Environmental Laws
Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs, and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. The Corporation is not aware of any borrower who is currently subject to any
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environmental investigation or clean up proceeding which is likely to have a material adverse effect on the financial condition or results of operations of the Corporation.
Effect of Government Monetary Policies
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies. The monetary policies of the FRB have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments, and deposits through its open market operations in the United States Government securities and through its regulation of, among other things, the discount rate on borrowings by member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
DESCRIPTION OF THE BANKS
History and Business
JSSB was incorporated under the laws of the Commonwealth of Pennsylvania as a state bank in 1934 and became a wholly owned subsidiary of the Corporation on July 12, 1983. As of December 31, 2023, JSSB had total assets of $1,584,746,000; total shareholders’ equity of $125,428,000; and total deposits of $1,101,906,000. JSSB's deposits are insured by the FDIC for the maximum amount provided under current law.
Luzerne was acquired by the Corporation on June 1, 2013. As of December 31, 2023, Luzerne had total assets of $644,872,000; total shareholders’ equity of $64,913,000; and total deposits of $488,722,000. Luzerne's deposits are insured by the FDIC for the maximum amount provided under current law.
The Banks engage in business as commercial banks, doing business at locations in Lycoming, Clinton, Centre, Montour, Union, Blair, and Luzerne Counties, Pennsylvania. The Banks offer insurance, securities brokerage services, annuity and mutual fund investment products, and financial planning through the M Group.
Services offered by the Banks include accepting time, demand and savings deposits including Super NOW accounts, statement savings accounts, money market accounts, and fixed rate certificates of deposit. Their services also include making secured and unsecured business and consumer loans that include financing commercial transactions as well as construction and residential mortgage loans and revolving credit loans with overdraft protection.
The Banks' loan portfolio mix can be classified into three principal categories: commercial and agricultural, real estate, and consumer. Real estate loans can be further segmented into residential, commercial, and construction. Qualified borrowers are defined by our loan policy and our underwriting standards. Owner provided equity requirements range from 0% to 35%, depending on the collateral offered for the loan. Terms are generally restricted to 30 years or less with the exception of construction and land development, which are generally limited to one and five years, respectively. Real estate appraisals, property construction verifications, and site visitations comply with our loan policy and with industry regulatory standards.
Prospective residential mortgage customer’s repayment ability is determined from information contained in the application and recent income tax returns, or other verified income sources. Emphasis is on credit, employment, income, and residency verification. Broad hazard insurance is always required and flood insurance where applicable. In the case of construction mortgages, builders risk insurance is requested.
Agricultural loans for the purchase or improvement of real estate must meet the Banks' real estate underwriting criteria. Agricultural loans made for the purchase of equipment are usually payable in five years, but never more than ten, depending upon the useful life of the purchased asset. Minimum borrower equity ranges from 0% to 35% depending on the purpose. Livestock financing criteria depends upon the nature of the operation. Agricultural loans are also made for crop production purposes. Such loans are structured to repay within the production cycle and not carried over into a subsequent year.
Commercial loans are made for the acquisition and improvement of real estate, purchase of equipment, and for working capital purposes on a seasonal or revolving basis. General purpose working capital loans are also available with repayment expected within one year. Equipment loans are generally amortized over three to ten years. Insurance coverage with the Banks as loss payee is required, especially in the case where the equipment is rolling stock. It is also a general policy to collateralize non-real estate loans with the asset purchased and, depending upon loan terms, junior liens are filed on other available assets. Financial
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information required on all commercial mortgages includes the most current three years balance sheets and income statements and projections on income to be developed through the project. In the case of corporations and partnerships, the principals are often asked to personally guaranty the entity’s debt.
Seasonal and revolving lines of credit are offered for working capital purposes. Collateral for such a loan may vary but often includes the pledge of inventory and/or receivables. Drawing availability is usually 50% of inventory and 80% of eligible receivables. Eligible receivables are defined as invoices less than 90 days delinquent. Exclusive reliance is very seldom placed on such collateral; therefore, other lienable assets are also taken into the collateral pool. Where reliance is placed on inventory and accounts receivable, the applicant must provide financial information including agings on a specified basis. In addition, the guaranty of the principals is usually obtained.
Letter of credit availability is usually limited to standby or performance letters of credit where the customer is well known to the Banks. The credit criteria is the same as that utilized in making a direct loan. Collateral is obtained in most cases.
Consumer loan products include residential mortgages, home equity loans and lines, automobile financing, personal loans and lines of credit, overdraft and check lines. Our policy includes standards used in the industry on debt service ratios and terms are consistent with prudent underwriting standards and the use of proceeds. Verifications are made of employment and residency, along with credit history.
Second mortgages are confined to equity borrowing and home improvements. Terms are generally fifteen years or less. Loan to collateral value criteria is 90% or less and verifications are made to determine values. Automobile financing is generally restricted to five years and done on both an indirect and direct basis. The Banks, as a practice, do not floor plan and therefore do not discount dealer paper. Small loan requests are to accommodate personal needs such as debt consolidation or the purchase of small appliances. Overdraft check lines are usually limited to $5,000 or less.
The Banks' investment portfolios are analyzed and priced on a monthly basis. Investments are made in U.S. Treasuries, U.S. Agency issues, bank qualified tax-exempt municipal bonds, taxable municipal bonds, corporate bonds, and corporate stocks which consist of Pennsylvania bank stocks. Bonds with BBB or better ratings are used, unless a local issue is purchased that has a lesser or no rating. Factors taken into consideration when investments are purchased include liquidity, the Corporation’s tax position, tax equivalent yield, third party investment ratings, and the policies of the Asset/Liability Committee.
The banking environment in Lycoming, Clinton, Centre, Montour, Union, Blair, and Luzerne Counties, Pennsylvania is highly competitive. The Banks operate twenty-four full service offices in these markets and compete for loans and deposits with numerous commercial banks, savings and loan associations, and other financial institutions. The economic base of the region is developed around small business, health care, educational facilities (college and public schools), light manufacturing industries, and agriculture.
The Banks have a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors, excluding public entities that account for approximately 6% of total deposits. Although the Banks have regular opportunities to bid on pools of funds of $100,000 or more in the hands of municipalities, hospitals, and others, it does not rely on these monies to fund loans or intermediate or longer-term investments.
The Banks have not experienced any significant seasonal fluctuations in the amount of deposits.
Supervision and Regulation
As referenced elsewhere, the banking business is highly regulated, and the Banks are only able to engage in business activities, and to provide products and services, that are permitted by applicable law and regulation. In addition, the earnings of the Banks are affected by the policies of regulatory authorities including the FDIC and the FRB. An important function of the FRB is to regulate the money supply and interest rates. Among the instruments used to implement these objectives are open market operations in U.S. Government Securities, changes in reserve requirements against member bank deposits, and limitations on interest rates that member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, and their use may also affect interest rates charged on loans or paid for deposits.
The policies and regulations of the FRB have had and will probably continue to have a significant effect on the Banks' deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Banks' operation in the future. The effect of such policies and regulations upon the future business and earnings of the Banks cannot accurately be predicted.
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ITEM 1A RISK FACTORS
The following sets forth several risk factors that may affect the Corporation's financial condition or results of operations.
Changes in interest rates could reduce our income, cash flows and asset values.
Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings but will also affect our ability to originate loans and obtain deposits and the value of our investment portfolio. If the rate of interest we pay on our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest income, and therefore our earnings, could be adversely affected. Our earnings also could be adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.
Economic conditions either nationally or locally in areas in which our operations are concentrated may adversely affect our business.
Deterioration in local, regional, national, or global economic conditions could cause us to experience a reduction in deposits and new loans, an increase in the number of borrowers who default on their loans, and a reduction in the value of the collateral securing their loans, all of which could adversely affect our performance and financial condition. Unlike larger banks that are more geographically diversified, we provide banking and financial services locally. Therefore, we are particularly vulnerable to adverse local economic conditions.
Many of our loans are secured, in whole or in part, with real estate collateral which is subject to declines in value.
In addition to considering the financial strength and cash flow characteristics of a borrower, we often secure our loans with real estate collateral. Real estate values and the real estate market are generally affected by, among other things, changes in local, regional or national economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and acts of nature. The real estate collateral provides an alternate source of repayment in the event of default by the borrower. If real estate prices in our markets decline, the value of the real estate collateral securing our loans could be reduced. If we are required to liquidate real estate collateral securing loans during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer-relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur; or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability; any of which could have a material adverse effect on our financial condition and results of operations.
We face the risk of cyber-attack to our computer systems.
Our computer systems, software and networks have been and will continue to be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events. These threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. If one or more of these events occurs, it could result in the disclosure of confidential client information, damage to our reputation with our clients and the market, additional costs to us (such as repairing systems or adding new personnel or protection technologies), regulatory penalties and financial losses, to both us and our clients and customers. Such events could also cause interruptions or malfunctions in our operations (such as the lack of availability of our online banking system), as well as the operations of our clients, customers or other third
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parties. Although we maintain safeguards to protect against these risks, there can be no assurance that we will not suffer losses in the future that may be material in amount.
Competition may decrease our growth or profits.
We face substantial competition in all phases of our operations from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, leasing companies, insurance companies, and money market mutual funds. There is very strong competition among financial services providers in our principal service area. Our competitors may have greater resources, higher lending limits, or larger branch systems than we do. Accordingly, they may be able to offer a broader range of products and services as well as better pricing for those products and services than we can.
In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on federally insured financial institutions. As a result, those non-bank competitors may be able to access funding and provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.
The value of certain investment securities is volatile and future declines or other-than-temporary impairments could materially adversely affect our future earnings and regulatory capital.
Continued volatility in the market value for certain of our investment securities, whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities. This could have a material adverse impact on our accumulated other comprehensive income/loss and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades or defaults in these securities could result in future classifications of investment securities as other than temporarily impaired. This could have a material impact on our future earnings.
We may be adversely affected by government regulation.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Changes in the laws, regulations, and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition.
The potential exists for additional federal or state laws and regulations, or changes in policy, affecting many aspects of our operations, including capital levels, lending and funding practices, and liquidity standards. New laws and regulations may increase our costs of regulatory compliance and of doing business and otherwise affect our operations, and may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills, knowledge of our market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.
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Failure to implement new technologies in our operations may adversely affect our growth or profits.
The market for financial services, including banking services and consumer finance services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking, and telebanking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely affect our business, financial condition, or operating results.
External events, including natural disasters, national or global health emergencies, and events of armed conflict in other countries, and terrorist threats could impact our ability to do business or otherwise adversely affect our business, operations or financial condition.
Financial institutions, like other businesses, are susceptible to the effects of external events that can compromise operating and communications systems and otherwise have adverse effects. Such events, should they occur, can cause significant damage, impact the stability of our operations or facilities, result in additional expense, or impair the ability of our borrowers to repay their loans. Although we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations, and financial condition. In addition, other external events, including natural disasters, health emergencies and epidemics or pandemics, such as the COVID-19 pandemic, and events of armed conflict in other parts of the world, such as the present armed conflict involving Ukraine and Russia, could adversely affect the global or regional economies resulting in unfavorable economic conditions in the United States. Any such development could have an adverse effect on our business, operations or financial condition.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 1C CYBERSECURITY RISK MANAGEMENT, STRATEGY AND GOVERNANCE
The Corporation maintains comprehensive and continually evolving processes for assessing, identifying, and managing material risks from cybersecurity threats, including any potential unauthorized occurrence on, or conducted through, the Corporation’s information systems that may result in adverse effects on the confidentiality, integrity, or availability of such systems or any information residing on such systems. The processes relating to cybersecurity threats are integrated into the Corporation’s overall risk management processes, which are overseen by the entire board of directors and not delegated to any committee or subcommittee of the board.
As part of the Corporation’s overall risk management processes, the board of directors has established both a senior management Risk Management Committee and a separate senior management Information Technology Steering Committee. Each of these Committees meets regularly and consists of the Corporation’s senior management department heads, plus the Chief Executive Officer and the President and Chief Financial Officer of the Corporation (each of whom also serves as a director of the Corporation). The Information Technology Steering Committee reports directly to the board of directors, with the Corporation’s Chief Information Officer (“CIO”) presenting to the board a detailed report on information systems and cybersecurity matters at least once annually. The board of directors also receives and reviews copies of minutes of all meetings of both the Risk Management Committee and the Information Technology Steering Committee.
The Corporation’s information technology resources are managed by a separate Information Technology Department, which is responsible for identifying, assessing, and managing material risks from cybersecurity threats. The Information Technology Department is managed by the CIO, who reports to the Corporation’s President and Chief Financial Officer. The present CIO has been employed by the Corporation in the information technology area for twenty-eight years and holds an undergraduate degree in computer science. The Information Technology Department also employs a separate Information Security Officer (“ISO”), whose responsibilities include security relating to the Corporation’s information systems. The present ISO is a Certified Information Systems Security Professional and also a Certified Fraud Examiner. The ISO reports directly to the Information Technology Steering Committee and to the Chief Risk Officer. The ISO, among other duties, supervises internal employee training relating to cybersecurity risks, conducts access reviews relating to the Corporation’s information systems, and monitors implemented checks and balances relating to access to information. Information relating to cybersecurity risks and cybersecurity incidents, if any, is reported by the CIO and the ISO to both the Risk Management Committee and to the
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Information Technology Steering Committee, each of which Committees includes the Chief Executive Officer and the President and Chief Financial Officer who are also directors of the Corporation.
The Corporation maintains an Incident Response Plan that provides documented guidelines for handling potential threats and taking appropriate measures including timely notification of cybersecurity threats and incidents to senior management and the board of directors when appropriate. The Incident Response Plan is managed by the Information Technology Department, including the ISO, and is reviewed and tested at least annually.
The Corporation uses third-party vendors to assist in monitoring, detecting, and managing cyber threats, including managed security service monitoring, penetration testing and vulnerability assessment. The Risk Management Committee has established risk management guidelines for third-party vendors. The Corporation conducts due diligence reviews of third-party vendors before contracts or agreements for provision of services are signed and conducts ongoing due diligence and oversight procedures with the frequency of the procedures determined based on a risk assessment of the services provided. Generally, the Corporation’s agreements with service providers include requirements related to cybersecurity and data privacy. All such agreements are reviewed at least annually. The Corporation cannot guarantee, however, that such agreements, due diligence, and oversight procedures will prevent a cybersecurity incident from impacting information systems. Moreover, as a result of applicable laws and regulations or applicable contractual provisions, the Corporation may be held responsible for cybersecurity incidents attributed to its service providers in relation to any data that the Corporation shares with such providers.
To date, the Corporation has not experienced any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect the Corporation, including its business strategy, results of operations, or financial condition. As discussed under “Risk Factors” in Item 1A, however, the sophistication of cybersecurity threats continues to increase, and the preventative actions taken by the Corporation to reduce the risk of cybersecurity threats or incidents may not be sufficient in a particular circumstance. Accordingly, the Corporation may not be able to anticipate all cybersecurity breaches no matter how well designed or implemented the Corporation’s cybersecurity controls and procedures are, and the Corporation may not be able to implement effective preventive measures against such security breaches in a timely manner.
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ITEM 2 PROPERTIES
The Corporation owns or leases its properties. Listed herewith are the locations of properties owned or leased as of December 31, 2023, in which the banking offices are located; all properties are in good condition and adequate for the Corporation's purposes:
| Jersey Shore State Bank & Subsidiaries | ||||||||||||||
| Office | Address | Ownership | ||||||||||||
| Main Street | 115 South Main Street, PO Box 5098 | Owned | ||||||||||||
| Jersey Shore, PA 17740 | ||||||||||||||
| Bridge Street | 112 Bridge Street | Owned | ||||||||||||
| Jersey Shore, PA 17740 | ||||||||||||||
| DuBoistown | 2675 Euclid Avenue | Owned | ||||||||||||
| Williamsport, PA 17702 | ||||||||||||||
| Williamsport | 300 Market Street | Owned | ||||||||||||
| P.O. Box 967 | ||||||||||||||
| Williamsport, PA 17703-0967 | ||||||||||||||
| Montgomery | 9094 Rt. 405 Highway | Owned | ||||||||||||
| Montgomery, PA 17752 | ||||||||||||||
| Lock Haven | 4 West Main Street | Owned | ||||||||||||
| Lock Haven, PA 17745 | ||||||||||||||
| Mill Hall | (Inside Wal-Mart), 173 Hogan Boulevard | Under Lease | ||||||||||||
| Mill Hall, PA 17751 | ||||||||||||||
| Centre Hall | 2842 Earlystown Road | Land Under Lease | ||||||||||||
| Centre Hall, PA 16828 | ||||||||||||||
| State College | 2050 North Atherton Street | Land Under Lease | ||||||||||||
| State College, PA 16803 | ||||||||||||||
| Montoursville | 820 Broad Street | Owned | ||||||||||||
| Montoursville, PA 17754 | ||||||||||||||
| Danville | 150 Continental Boulevard | Under Lease | ||||||||||||
| Danville, PA 17821 | ||||||||||||||
| Loyalsock | 1720 East Third Street | Owned | ||||||||||||
| Williamsport, PA 17701 | ||||||||||||||
| Lewisburg | 550 North Derr Drive | Owned | ||||||||||||
| Lewisburg, PA 17837 | ||||||||||||||
| Muncy-Hughesville | 3081 Route 405 Highway | Owned | ||||||||||||
| Muncy, PA 17756 | ||||||||||||||
| Altoona | 503 East Plank Road | Under Lease | ||||||||||||
| Altoona, PA 16602 | ||||||||||||||
| Bellefonte | 835 East Bishop Street | Under Lease | ||||||||||||
| Bellefonte, PA 16823 | ||||||||||||||
| The M Group, Inc. | 1720 East Third Street | Owned | ||||||||||||
| D/B/A The Comprehensive Financial Group | Williamsport, PA 17701 | |||||||||||||
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| Luzerne Bank | ||||||||||||||
| Office | Address | Ownership | ||||||||||||
| Dallas | 509 Main Road | Owned | ||||||||||||
| Memorial Highway | ||||||||||||||
| Dallas, PA 18612 | ||||||||||||||
| Lake | Corners of Rt. 118 & 415 | Owned | ||||||||||||
| Dallas, PA 18612 | ||||||||||||||
| Hazle Twp. | 10 Dessen Drive | Owned | ||||||||||||
| Hazle Twp., PA 18202 | ||||||||||||||
| Luzerne | 118 Main Street | Owned | ||||||||||||
| Luzerne, PA 18709 | ||||||||||||||
| Wilkes-Barre | 67 Public Square | Under Lease | ||||||||||||
| Wilkes-Barre, PA 18701 | ||||||||||||||
| Conyngham Valley | 669 State Route 93 STE 5 | Under Lease | ||||||||||||
| Sugarloaf, PA 18249 | ||||||||||||||
| Pittston | 285 South Main Street | Under Lease | ||||||||||||
| Pittston, PA 18640 | ||||||||||||||
| Forty Fort | 1320 Wyoming Avenue | Under Lease | ||||||||||||
| Forty Fort, PA 18704 | ||||||||||||||
ITEM 3 LEGAL PROCEEDINGS
The Corporation is subject to lawsuits and claims arising out of its business in the ordinary course. In the opinion of management, after review and consultation with counsel, there are no legal proceedings currently pending or threatened that are reasonably likely to have a material adverse effect on the consolidated financial position or results of operations of the Corporation.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5 MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation’s common stock is listed on the NASDAQ Global Select Market under the symbol “PWOD”. The following table sets forth (1) the quarterly high and low closing sale prices for a share of the Corporation’s common stock during the periods indicated, and (2) quarterly dividends on a share of the common stock with respect to each quarter since January 1, 2021.
| Price Range | Dividends | ||||||||||||||||
| High | Low | Declared | |||||||||||||||
| 2023 | |||||||||||||||||
| First quarter | $ | 27.77 | $ | 21.90 | $ | 0.32 | |||||||||||
| Second quarter | 27.34 | 21.95 | 0.32 | ||||||||||||||
| Third quarter | 27.17 | 20.70 | 0.32 | ||||||||||||||
| Fourth quarter | 23.64 | 20.05 | 0.32 | ||||||||||||||
| 2022 | |||||||||||||||||
| First quarter | $ | 24.67 | $ | 23.64 | $ | 0.32 | |||||||||||
| Second quarter | 24.35 | 22.34 | 0.32 | ||||||||||||||
| Third quarter | 24.29 | 22.02 | 0.32 | ||||||||||||||
| Fourth quarter | 26.89 | 23.15 | 0.32 | ||||||||||||||
| 2021 | |||||||||||||||||
| First quarter | $ | 27.78 | $ | 20.55 | $ | 0.32 | |||||||||||
| Second quarter | 26.51 | 23.03 | 0.32 | ||||||||||||||
| Third quarter | 24.42 | 22.78 | 0.32 | ||||||||||||||
| Fourth quarter | 24.65 | 23.50 | 0.32 | ||||||||||||||
The Corporation has paid dividends since the effective date of its formation as a bank holding company. It is the present intention of the Corporation’s board of directors to continue the dividend payment policy; however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions, and other factors relevant at the time the board of directors of the Corporation considers dividend policy. Cash available for dividend distributions to shareholders of the Corporation primarily comes from dividends paid by JSSB and Luzerne to the Corporation. Therefore, the restrictions on the Banks' dividend payments are directly applicable to the Corporation. See also the information appearing in Note 19 to “Notes to Consolidated Financial Statements” for additional information related to dividend restrictions.
Under the Pennsylvania Business Corporation Law of 1988 a corporation may not pay a dividend, if after giving effect thereto, the corporation would be unable to pay its debts as they become due in the usual course of business and after giving effect thereto the total assets of the corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders whose preferential rights are superior to those receiving the dividend.
As of March 1, 2024, the Corporation had approximately 3,632 shareholders of record.
Following is a schedule of the shares of the Corporation’s common stock purchased by the Corporation during the fourth quarter of 2023.
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Units) Purchased | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| Month #1 (October 1 - October 31, 2023) | — | $ | — | — | 353,000 | |||||||||||||||||||||
| Month #2 (November 1 - November 30, 2023) | — | — | — | 353,000 | ||||||||||||||||||||||
| Month #3 (December 1 - December 31, 2023) | — | — | — | 353,000 | ||||||||||||||||||||||
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ITEM 6 [RESERVED]
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to taxable equivalents based on the marginal corporate federal tax rate of 21%. The tax equivalent adjustments to net interest income for 2023, 2022, and 2021 were $525,000, $522,000, and $449,000, respectively.
2023 vs. 2022
Reported net interest income decreased $2,816,000 to $54,964,000 for the year ended December 31, 2023 compared to the year ended December 31, 2022, as the growth in the earning asset portfolio balance and yield was more than offset by an increase in rate paid on interest-bearing liabilities. Total interest income increased $26,667,000 or $26,670,000 on a tax equivalent basis, primarily from growth in the loan portfolio balance and yield. Tax equivalent interest income on the investment portfolio increased as legacy assets matured with the proceeds reinvested predominately into short and medium term bonds carrying a higher yield than the legacy assets. The overall increase in the yield on the earning asset portfolio was driven by the impact of the rate increases enacted by the Federal Open Market Committee ("FOMC").
Interest expense increased $29,483,000 to $36,631,000 for the year ended December 31, 2023 compared to 2022. The increase in interest expense was driven by a 168 bp increase in the average rate paid on interest-bearing deposits led by a 282 bp increase in the average rate paid on time deposits coupled with an increase of $131,270,000 in average time deposit balances as deposits shifted from lower cost core deposits and the use of brokered deposits increased. Interest expense on total borrowings increased $11,042,000 as utilization of borrowings increased to supplement the funding of the loan portfolio growth.
2022 vs. 2021
Reported net interest income increased $8,062,000 to $57,780,000 for the year ended December 31, 2022 compared to the year ended December 31, 2021, as the growth in the earning asset portfolio and decline in rate paid on interest-bearing liabilities more than offset a slight decrease in the yield on the loan portfolio to 3.95% from 3.98%. Total interest income increased $6,514,000 or $6,587,000 on a tax equivalent basis, primarily from growth in the loan portfolio. Tax equivalent interest income on the investment portfolio increased as legacy assets matured with the proceeds reinvested predominately into short and medium term municipal bonds carrying a higher yield than the legacy assets. The overall increase in the yield on the earning asset portfolio was driven by the impact of the rate increases enacted by the Federal Open Market Committee ("FOMC").
Interest expense decreased $1,548,000 to $7,148,000 for the year ended December 31, 2022 compared to 2021. The decrease in interest expense was driven by a 17 bp decrease in the average rate paid on interest-bearing deposits led by a 78 bp decrease in the average rate paid on time deposits coupled with a decrease of $82,359,000 in average time deposit balances. Interest expense on total borrowings increased $307,000 as utilization of short-term borrowings increased during the second half of 2022. The increase in average short-term borrowing balances was due to FHLB long-term borrowings totaling $23,000,000 maturing during the year ended December 31, 2022. In addition, short-term borrowings provided funding for the growth in the loan portfolio.
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AVERAGE BALANCES AND INTEREST RATES
The following tables set forth certain information relating to the Corporation’s average balance sheet and reflect the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars In Thousands) | Average Balance (1) | Interest | Average Rate | Average Balance (1) | Interest | Average Rate | Average Balance (1) | Interest | Average Rate | |||||||||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt loans (3) | $ | 66,863 | $ | 1,849 | 2.77 | % | $ | 55,364 | $ | 1,441 | 2.60 | % | $ | 46,312 | $ | 1,308 | 2.82 | % | ||||||||||||||||||||||||||||||||||||||
All other loans (4) | 1,691,742 | 81,830 | 4.84 | % | 1,439,550 | 57,544 | 4.00 | % | 1,299,321 | 52,199 | 4.02 | % | ||||||||||||||||||||||||||||||||||||||||||||
Total loans (2) | 1,758,605 | 83,679 | 4.76 | % | 1,494,914 | 58,985 | 3.95 | % | 1,345,633 | 53,507 | 3.98 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Fed funds sold | — | — | — | % | 32,863 | 465 | 1.41 | % | 28,395 | 202 | 0.71 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Taxable securities | 189,804 | 7,263 | 3.83 | % | 156,584 | 4,455 | 2.88 | % | 148,066 | 4,083 | 2.80 | % | ||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt securities (3) | 23,872 | 654 | 2.74 | % | 44,301 | 1,042 | 2.38 | % | 36,993 | 829 | 2.27 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total securities | 213,676 | 7,917 | 3.71 | % | 200,885 | 5,497 | 2.77 | % | 185,059 | 4,912 | 2.69 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits | 10,916 | 524 | 4.80 | % | 74,401 | 503 | 0.68 | % | 201,273 | 242 | 0.12 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 1,983,197 | 92,120 | 4.65 | % | 1,803,063 | 65,450 | 3.63 | % | 1,760,360 | 58,863 | 3.35 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Other assets | 131,704 | 128,213 | 129,582 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 2,114,901 | $ | 1,931,276 | $ | 1,889,942 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and shareholders’ equity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings | $ | 231,000 | 685 | 0.30 | % | $ | 247,003 | 138 | 0.06 | % | $ | 225,637 | 116 | 0.05 | % | |||||||||||||||||||||||||||||||||||||||||
| Super Now deposits | 276,868 | 4,155 | 1.50 | % | 387,370 | 1,344 | 0.35 | % | 307,446 | 900 | 0.29 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Money market deposits | 292,755 | 7,024 | 2.40 | % | 289,820 | 1,105 | 0.38 | % | 305,883 | 972 | 0.32 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 293,252 | 10,267 | 3.50 | % | 161,982 | 1,103 | 0.68 | % | 244,341 | 3,557 | 1.46 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 1,093,875 | 22,131 | 2.02 | % | 1,086,175 | 3,690 | 0.34 | % | 1,083,307 | 5,545 | 0.51 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 157,140 | 8,401 | 5.36 | % | 29,315 | 1,007 | 3.44 | % | 7,178 | 9 | 0.13 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Long-term borrowings | 186,094 | 6,099 | 3.28 | % | 110,027 | 2,451 | 2.32 | % | 135,474 | 3,142 | 2.32 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total borrowings | 343,234 | 14,500 | 4.23 | % | 139,342 | 3,458 | 2.48 | % | 142,652 | 3,151 | 2.21 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,437,109 | 36,631 | 2.55 | % | 1,225,517 | 7,148 | 0.58 | % | 1,225,959 | 8,696 | 0.71 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Demand deposits | 477,828 | 519,189 | 478,984 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 31,243 | 24,182 | 23,568 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 168,721 | 162,388 | 161,431 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 2,114,901 | $ | 1,931,276 | $ | 1,889,942 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate spread | 2.10 | % | 3.05 | % | 2.64 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income/margin | $ | 55,489 | 2.80 | % | $ | 58,302 | 3.24 | % | $ | 50,167 | 2.85 | % | ||||||||||||||||||||||||||||||||||||||||||||
1.Information on this table has been calculated using average daily balance sheets to obtain average balances.
2.Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.
3.Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% see reconciliation below.
4.Fees on loans are included with interest on loans as follows: 2023 - $301,000; 2022 - $529,000; 2021 - $852,000.
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Reconciliation of Taxable Equivalent Net Interest Income
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| Total interest income | $ | 91,595 | $ | 64,928 | $ | 58,414 | ||||||||||||||
| Total interest expense | 36,631 | 7,148 | 8,696 | |||||||||||||||||
| Net interest income | 54,964 | 57,780 | 49,718 | |||||||||||||||||
| Tax equivalent adjustment | 525 | 522 | 449 | |||||||||||||||||
| Net interest income (fully taxable equivalent) | $ | 55,489 | $ | 58,302 | $ | 50,167 | ||||||||||||||
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated. For interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average volume). Increases and decreases due to both interest rate and volume, which cannot be separated, have been allocated proportionally to the change due to volume and the change due to interest rate. Income and interest rates are on a taxable equivalent basis.
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||
| Increase (Decrease) Due To | Increase (Decrease) Due To | |||||||||||||||||||||||||||||||||||||
| (In Thousands) | Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||||||||||||||||
| Loans, tax-exempt | $ | 311 | $ | 97 | $ | 408 | $ | 168 | $ | (35) | $ | 133 | ||||||||||||||||||||||||||
| Loans | 11,046 | 13,240 | 24,286 | 5,356 | (11) | 5,345 | ||||||||||||||||||||||||||||||||
| Fed funds sold | (465) | — | (465) | 37 | 226 | 263 | ||||||||||||||||||||||||||||||||
| Taxable investment securities | 1,099 | 1,709 | 2,808 | 248 | 124 | 372 | ||||||||||||||||||||||||||||||||
| Tax-exempt investment securities | (532) | 144 | (388) | 171 | 42 | 213 | ||||||||||||||||||||||||||||||||
| Interest-bearing deposits | (432) | 453 | 21 | (74) | 335 | 261 | ||||||||||||||||||||||||||||||||
| Total interest-earning assets | 11,027 | 15,643 | 26,670 | 5,906 | 681 | 6,587 | ||||||||||||||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||||||||||||||
| Savings deposits | (11) | 558 | 547 | 7 | 15 | 22 | ||||||||||||||||||||||||||||||||
| Super Now deposits | (487) | 3,298 | 2,811 | 248 | 196 | 444 | ||||||||||||||||||||||||||||||||
| Money market deposits | 11 | 5,908 | 5,919 | (11) | 144 | 133 | ||||||||||||||||||||||||||||||||
| Time deposits | 1,499 | 7,665 | 9,164 | (949) | (1,505) | (2,454) | ||||||||||||||||||||||||||||||||
| Short-term borrowings | 6,555 | 839 | 7,394 | 106 | 892 | 998 | ||||||||||||||||||||||||||||||||
| Long-term borrowings | 2,170 | 1,478 | 3,648 | (574) | (117) | (691) | ||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 9,737 | 19,746 | 29,483 | (1,173) | (375) | (1,548) | ||||||||||||||||||||||||||||||||
| Change in net interest income | $ | 1,290 | $ | (4,103) | $ | (2,813) | $ | 7,079 | $ | 1,056 | $ | 8,135 | ||||||||||||||||||||||||||
PROVISION FOR CREDIT LOSSES
2023 vs. 2022
The provision for credit losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed semi-annually for the Corporation. Management remains committed to an aggressive program of problem loan identification and resolution.
18
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for credit losses is adequate at December 31, 2023, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy or employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased credit loss provisions and reductions in interest income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' credit loss allowance. The banking regulators could require additions to the credit loss allowance based on their judgment of information available to them at the time of their examination.
When determining the appropriate allowance level, management has attributed the allowance for credit losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.
The allowance for credit losses decreased from $15,637,000 at December 31, 2022 to $11,446,000 at December 31, 2023. At December 31, 2023, the allowance for credit losses was 0.62% of total loans compared to 0.95% of total loans at December 31, 2022. The decrease in allowance was primarily due to the adoption of CECL on January 1, 2023 which decreased the reserve by $3,789,000 coupled with net recoveries of $525,000 for the period ended December 31, 2023.
The provision for credit losses was a recovery of $927,000 for the year ended December 31, 2023 compared to $1,910,000 for the year ended December 31, 2022. The decrease in the provision was appropriate when considering the impact of CECL adoption, net recoveries during 2023, and gross loan growth of $200,033,000. Net recoveries of $525,000 represented 0.03% of average loans for the year ended December 31, 2023 compared to net charge-offs of $449,000 or 0.03% of average loans for the year ended December 31, 2022 which reduced the historical loss rate in the model. The provision related to the commercial, financial and agricultural segment of the loan portfolio decreased due to an increase in net recoveries of $1,332,000 coupled with the adoption of CECL. An increase occurred in the automobile segment of the loan portfolio due to portfolio growth and an increase in net charge-offs. Non-performing loans decreased due to a payoff of a non-performing loan during 2023. The majority of the non-performing loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within the allowance for credit losses. Significant loan portfolio growth, impact of CECL adoption, internal loan review and analysis, level of net recoveries, and decreased level of non-performing loans noted previously, dictated a decrease in the provision for credit losses resulting in the allowance for loan losses as a percentage of gross loans to decrease. Utilizing both internal and external resources, as noted, senior management has concluded that the allowance for credit losses remains at a level adequate to provide for expected credit losses inherent in the loan portfolio.
2022 vs. 2021
The allowance for loan losses increased from $14,176,000 at December 31, 2021 to $15,637,000 at December 31, 2022. At December 31, 2022, the allowance for loan losses was 0.95% of total loans compared to 1.02% of total loans at December 31, 2021.
The provision for loan losses totaled $1,910,000 for the year ended December 31, 2022 compared to $640,000 for the year ended December 31, 2021. The increase in the provision was appropriate when considering gross loan growth of $247,584,000 and negative economic outlook offset by a reduction in non-performing loans and a low level of net charge-offs during 2022. Net charge-offs of $449,000 represented 0.03% of average loans for the year ended December 31, 2022 compared to net charge-offs of $267,000 or 0.02% of average loans for the year ended December 31, 2021. The provision related to the commercial real estate mortgage segment of the loan portfolio decreased as improvement in credit metrics offset the impact of portfolio growth. An increase occurred in the automobile segment of the loan portfolio due to portfolio growth and concerns regarding the impact of inflation on the customer base. Nonperforming loans decreased $1,360,000 due to a payoff of a nonperforming loan during 2022. The majority of the nonperforming loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within the allowance for loan losses. Significant loan portfolio growth, internal loan review and analysis, level of net charge-offs, and decreased level of nonperforming loans noted previously, dictated an increase in the provision for loan losses while the allowance for loan losses as a percentage of gross loans decreased. Utilizing both internal and external resources, as noted, senior management has
19
concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.
NON-INTEREST INCOME
2023 vs. 2022
Total non-interest income decreased $338,000 from the year ended December 31, 2022 to December 31, 2023. Excluding net security losses, non-interest income decreased $525,000 year over year. Bank owned life insurance increased primarily due to a gain recognized on the receipt of death benefit in 2023 of $381,000. Gain on sale of loans and loan broker income decreased significantly as mortgage volume decreased due to the increase in interest rates caused by the rate increases enacted by the FOMC. Brokerage commissions decreased primarily due to the downturn and volatility the stock market which led to decreased portfolio values and associated fees. Debit card income decreased as usage declined.
| 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||||||||||||||||
| Service charges | $ | 2,090 | 24.96 | % | $ | 2,103 | 24.14 | % | $ | (13) | (0.62) | % | ||||||||||||||||||||||||||
| Net debt securities losses, available for sale | (193) | (2.30) | (219) | (2.51) | 26 | (11.87) | ||||||||||||||||||||||||||||||||
| Net equity securities gains (losses) | 15 | 0.18 | (146) | (1.68) | 161 | 110.27 | ||||||||||||||||||||||||||||||||
| Bank owned life insurance | 1,063 | 12.69 | 664 | 7.62 | 399 | 60.09 | ||||||||||||||||||||||||||||||||
| Gain on sale of loans | 1,046 | 12.49 | 1,131 | 12.98 | (85) | (7.52) | ||||||||||||||||||||||||||||||||
| Insurance commissions | 529 | 6.32 | 491 | 5.64 | 38 | 7.74 | ||||||||||||||||||||||||||||||||
| Brokerage commissions | 575 | 6.87 | 620 | 7.12 | (45) | (7.26) | ||||||||||||||||||||||||||||||||
| Loan broker income | 992 | 11.84 | 1,674 | 19.21 | (682) | (40.74) | ||||||||||||||||||||||||||||||||
| Debit card income | 1,328 | 15.86 | 1,464 | 16.80 | (136) | (9.29) | ||||||||||||||||||||||||||||||||
| Other | 930 | 11.09 | 931 | 10.68 | (1) | (0.11) | ||||||||||||||||||||||||||||||||
| Total non-interest income | $ | 8,375 | 100.00 | % | $ | 8,713 | 100.00 | % | $ | (338) | (3.88) | % | ||||||||||||||||||||||||||
2022 vs. 2021
Total non-interest income decreased $2,956,000 from the year ended December 31, 2021 to December 31, 2022. Excluding net security gains, non-interest income decreased $1,932,000 year over year. Bank owned life insurance decreased primarily due to gains recognized on the receipt of death benefits in 2021. Gain on sale of loans and loan broker income decreased significantly as mortgage volume decreased due to the increase in interest rates caused by the rate increases enacted by the FOMC during 2022. Brokerage commissions decreased primarily due to the downturn in the stock market which led to decreased portfolio values and associated fees.
| 2022 | 2021 | Change | ||||||||||||||||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||||||||||||||||
| Service charges | $ | 2,103 | 24.14 | % | $ | 1,703 | 14.59 | % | $ | 400 | 23.49 | % | ||||||||||||||||||||||||||
| Net debt securities (losses) gains, available for sale | (219) | (2.51) | 699 | 5.99 | (918) | (131.33) | ||||||||||||||||||||||||||||||||
| Net equity securities losses | (146) | (1.68) | (40) | (0.35) | (106) | (265.00) | ||||||||||||||||||||||||||||||||
| Bank owned life insurance | 664 | 7.62 | 916 | 7.85 | (252) | (27.51) | ||||||||||||||||||||||||||||||||
| Gain on sale of loans | 1,131 | 12.98 | 2,474 | 21.20 | (1,343) | (54.28) | ||||||||||||||||||||||||||||||||
| Insurance commissions | 491 | 5.64 | 553 | 4.74 | (62) | (11.21) | ||||||||||||||||||||||||||||||||
| Brokerage commissions | 620 | 7.12 | 851 | 7.29 | (231) | (27.14) | ||||||||||||||||||||||||||||||||
| Loan broker income | 1,674 | 19.21 | 2,164 | 18.55 | (490) | (22.64) | ||||||||||||||||||||||||||||||||
| Debit card income | 1,464 | 16.80 | 1,511 | 12.95 | (47) | (3.11) | ||||||||||||||||||||||||||||||||
| Other | 931 | 10.68 | 838 | 7.19 | 93 | 11.10 | ||||||||||||||||||||||||||||||||
| Total non-interest income | $ | 8,713 | 100.00 | % | $ | 11,669 | 100.00 | % | $ | (2,956) | (25.33) | % | ||||||||||||||||||||||||||
20
NON-INTEREST EXPENSE
2023 vs. 2022
Total non-interest expenses increased $1,498,000 from the year ended December 31, 2022 to December 31, 2023. The increase in salaries and employee benefits was attributable to routine wage and benefit increases coupled with the hiring of additional commercial lenders. Occupancy and furniture and equipment expense increased primarily due to increased maintenance costs. Contributing to the decrease in Pennsylvania shares tax expense was a tax credit purchasing program that was started in 2022. Professional fees increased as internal and external audit fees increased along with an increase in general legal expenses. FDIC deposit insurance increased primarily due to an increase in the assessment rate. Other expenses increased primarily due to the level of expenses associated with the defined benefit pension plan.
| 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 25,062 | 56.32 | % | $ | 24,267 | 56.44 | % | $ | 795 | 3.28 | % | ||||||||||||||||||||||||||
| Occupancy | 3,168 | 7.12 | 3,080 | 7.16 | 88 | 2.86 | ||||||||||||||||||||||||||||||||
| Furniture and equipment | 3,392 | 7.62 | 3,288 | 7.65 | 104 | 3.16 | ||||||||||||||||||||||||||||||||
| Software amortization | 843 | 1.89 | 840 | 1.95 | 3 | 0.36 | ||||||||||||||||||||||||||||||||
| Pennsylvania shares tax | 1,082 | 2.43 | 1,452 | 3.38 | (370) | (25.48) | ||||||||||||||||||||||||||||||||
| Professional fees | 2,953 | 6.64 | 2,434 | 5.66 | 519 | 21.32 | ||||||||||||||||||||||||||||||||
| Federal Deposit Insurance Corporation deposit insurance | 1,578 | 3.55 | 938 | 2.18 | 640 | 68.23 | ||||||||||||||||||||||||||||||||
| Marketing | 684 | 1.54 | 690 | 1.60 | (6) | (0.87) | ||||||||||||||||||||||||||||||||
| Intangible amortization | 117 | 0.26 | 154 | 0.36 | (37) | (24.03) | ||||||||||||||||||||||||||||||||
| Goodwill impairment | — | — | 653 | 1.52 | (653) | n/a | ||||||||||||||||||||||||||||||||
| Other | 5,617 | 12.63 | 5,202 | 12.10 | 415 | 7.98 | ||||||||||||||||||||||||||||||||
| Total non-interest expense | $ | 44,496 | 100.00 | % | $ | 42,998 | 100.00 | % | $ | 1,498 | 3.48 | % | ||||||||||||||||||||||||||
2022 vs. 2021
Total non-interest expenses increased $2,093,000 from the year ended December 31, 2021 to December 31, 2022. The increase in salaries and employee benefits was attributable to routine wage and benefit increases coupled with the hiring of additional commercial lenders. Occupancy and furniture and equipment expense decreased primarily due to a branch closure that occurred during the first quarter of 2022. Marketing expenses increased as loan product advertising levels increased. Other expenses increased primarily due to the proxy solicitation efforts related to an update to the articles of incorporation. The goodwill impairment is related to the wealth management unit (The M Group) as a decline in stock market valuations during 2022 resulted in a decreased level of net income for this entity.
| 2022 | 2021 | Change | ||||||||||||||||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 24,267 | 56.44 | % | $ | 23,014 | 56.26 | % | $ | 1,253 | 5.44 | % | ||||||||||||||||||||||||||
| Occupancy | 3,080 | 7.16 | 3,209 | 7.85 | (129) | (4.02) | ||||||||||||||||||||||||||||||||
| Furniture and equipment | 3,288 | 7.65 | 3,522 | 8.61 | (234) | (6.64) | ||||||||||||||||||||||||||||||||
| Software amortization | 840 | 1.95 | 868 | 2.12 | (28) | (3.23) | ||||||||||||||||||||||||||||||||
| Pennsylvania shares tax | 1,452 | 3.38 | 1,350 | 3.30 | 102 | 7.56 | ||||||||||||||||||||||||||||||||
| Professional fees | 2,434 | 5.66 | 2,432 | 5.95 | 2 | 0.08 | ||||||||||||||||||||||||||||||||
| Federal Deposit Insurance Corporation deposit insurance | 938 | 2.18 | 963 | 2.35 | (25) | (2.60) | ||||||||||||||||||||||||||||||||
| Marketing | 690 | 1.60 | 545 | 1.33 | 145 | 26.61 | ||||||||||||||||||||||||||||||||
| Intangible amortization | 154 | 0.36 | 191 | 0.47 | (37) | (19.37) | ||||||||||||||||||||||||||||||||
| Goodwill impairment | 653 | 1.52 | — | — | 653 | n/a | ||||||||||||||||||||||||||||||||
| Other | 5,202 | 12.10 | 4,811 | 11.76 | 391 | 8.13 | ||||||||||||||||||||||||||||||||
| Total non-interest expense | $ | 42,998 | 100.00 | % | $ | 40,905 | 100.00 | % | $ | 2,093 | 5.12 | % | ||||||||||||||||||||||||||
21
INCOME TAXES
2023 vs. 2022
The provision for income taxes for the year ended December 31, 2023 resulted in an effective income tax rate of 18.28% compared to 19.29% for 2022.
2022 vs. 2021
The provision for income taxes for the year ended December 31, 2022 resulted in an effective income tax rate of 19.29% compared to 19.12% for 2021.
FINANCIAL CONDITION
INVESTMENTS
2023
The fair value of the investment portfolio decreased $2,748,000 from December 31, 2022 to December 31, 2023. The decrease in value is the result of a decrease in the municipal segment of the portfolio as the investment portfolio continues to be actively managed in order to reduce interest rate and market risk along with required capital allocation. This strategy is being deployed through selective purchasing of bonds that mature within ten years with an emphasis on those carrying a regulatory capital risk weighting of 0-20%. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 79% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.
2022
The fair value of the investment portfolio increased $27,117,000 from December 31, 2021 to December 31, 2022. The increase in value is the result of growth in the municipal segment of the portfolio as the investment portfolio continues to be actively managed in order to reduce interest rate and market risk. This strategy is being deployed through selective purchasing of bonds that mature within ten years. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 86% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.
The carrying amounts of investment securities are summarized as follows for the years ended December 31, 2023 and 2022:
| 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||
| (In Thousands) | Balance | % Portfolio | Balance | % Portfolio | Amount | % | ||||||||||||||||||||||||||||||||
| Available for sale (AFS): | ||||||||||||||||||||||||||||||||||||||
| U.S. Government agency securities | $ | 3,943 | 2.05 | % | $ | 2,896 | 1.49 | % | $ | 1,047 | 36.15 | % | ||||||||||||||||||||||||||
| Mortgage-backed securities | 15,355 | 8.00 | 1,282 | 0.66 | 14,073 | 1,097.74 | % | |||||||||||||||||||||||||||||||
| State and political securities | 115,615 | 60.20 | 142,809 | 73.30 | (27,194) | (19.04) | % | |||||||||||||||||||||||||||||||
| Other debt securities | 56,032 | 29.17 | 46,686 | 23.96 | 9,346 | 20.02 | % | |||||||||||||||||||||||||||||||
| Total debt securities | 190,945 | 99.42 | 193,673 | 99.41 | (2,728) | (1.41) | % | |||||||||||||||||||||||||||||||
| Investment equity securities: | ||||||||||||||||||||||||||||||||||||||
| Other equity securities | 1,122 | 0.58 | 1,142 | 0.59 | (20) | (1.75) | % | |||||||||||||||||||||||||||||||
| Total equity securities | 1,122 | 0.58 | 1,142 | 0.59 | (20) | (1.75) | % | |||||||||||||||||||||||||||||||
| Total | $ | 192,067 | 100.00 | % | $ | 194,815 | 100.00 | % | $ | (2,748) | (1.41) | % | ||||||||||||||||||||||||||
22
The following table shows the maturities and repricing of investment securities, at amortized cost and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 21% tax rate) at December 31, 2023:
| (In Thousands) | One Year or Less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Amortized Cost Total | |||||||||||||||||||||||||||
| U.S. Government agency securities: | ||||||||||||||||||||||||||||||||
| Amortized cost | $ | 1,999 | $ | 1,001 | $ | 1,000 | $ | — | $ | 4,000 | ||||||||||||||||||||||
| Yield | 3.08 | % | 2.85 | % | 5.12 | % | — | % | 3.53 | % | ||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||||||||||
| Amortized cost | — | 986 | 7,651 | 6,820 | 15,457 | |||||||||||||||||||||||||||
| Yield | — | % | 5.034 | % | 5.04 | % | 4.46 | % | 4.78 | % | ||||||||||||||||||||||
| State and political securities: | ||||||||||||||||||||||||||||||||
| Amortized cost | 18,712 | 62,967 | 35,383 | 3,678 | 120,740 | |||||||||||||||||||||||||||
| Yield | 1.91 | % | 2.66 | % | 3.44 | % | 4.23 | % | 2.82 | % | ||||||||||||||||||||||
| Other debt securities: | ||||||||||||||||||||||||||||||||
| Amortized cost | 17,280 | 13,647 | 27,917 | — | 58,844 | |||||||||||||||||||||||||||
| Yield | 3.12 | % | 2.31 | % | 5.23 | % | — | % | 3.93 | % | ||||||||||||||||||||||
| Total Amount | $ | 37,991 | $ | 78,601 | $ | 71,951 | $ | 10,498 | 199,041 | |||||||||||||||||||||||
| Total Yield | 2.52 | % | 2.63 | % | 4.33 | % | 4.38 | % | 3.31 | % | ||||||||||||||||||||||
| Equity Securities | ||||||||||||||||||||||||||||||||
| Investment equity amortized cost | 1,300 | |||||||||||||||||||||||||||||||
| Total Investment Portfolio Value | $ | 200,341 | ||||||||||||||||||||||||||||||
| Total Investment Portfolio Yield | 3.29 | % | ||||||||||||||||||||||||||||||
All yields represent weighted average yields expressed on a tax equivalent basis. They are calculated on the basis of the cost, adjusted for amortization of premium and accretion of discount, and effective yields weighted for the scheduled maturity of each security. The taxable equivalent adjustment represents the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 21% tax rate (derived by dividing tax-exempt interest by 79%).
The distribution of credit ratings by amortized cost and estimated fair value for the debt security portfolio at December 31, 2023 follows:
| A- to AAA | B- to BBB+ | C to CCC+ | Not Rated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available for sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | 4,000 | $ | 3,943 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 4,000 | $ | 3,943 | ||||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | 15,457 | 15,355 | — | — | — | — | — | — | 15,457 | 15,355 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| State and political securities | 116,449 | 111,345 | — | — | — | — | 4,291 | 4,270 | 120,740 | 115,615 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other debt securities | 21,164 | 19,895 | 8,259 | 7,712 | — | — | 29,421 | 28,425 | 58,844 | 56,032 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total debt securities | $ | 157,070 | $ | 150,538 | $ | 8,259 | $ | 7,712 | $ | — | $ | — | $ | 33,712 | $ | 32,695 | $ | 199,041 | $ | 190,945 | ||||||||||||||||||||||||||||||||||||||||||
LOAN PORTFOLIO
2023
Gross loans of $1,839,764,000 at December 31, 2023 represented an increase of $200,033,000 from December 31, 2022. The residential segment increased primarily due to continued growth in home equity products. In addition the commercial real estate segment of the loan portfolio increased from the previous year as emphasis remains on this segment of the portfolio. Indirect auto lending increased as this segment of the portfolio is emphasized as its characteristics provide diversification.
23
2022
Gross loans of $1,639,731,000 at December 31, 2022 represented an increase of $247,584,000 from December 31, 2021. The residential segment increased primarily due to growth in home equity products. In addition the commercial real estate segment of the loan portfolio increased from the previous year as emphasis remains on this segment of the portfolio coupled with our entrance into the Altoona market during 2020. Indirect auto lending increased as supply chain issues that previously limited dealer activity lessened.
The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loan at December 31, 2023 and 2022:
| 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 213,466 | 11.60 | % | $ | 190,461 | 11.62 | % | 23,005 | 12.08 | % | |||||||||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential | 798,501 | 43.40 | 708,209 | 43.19 | 90,292 | 12.75 | % | |||||||||||||||||||||||||||||||
| Commercial | 531,601 | 28.90 | 500,632 | 30.53 | 30,969 | 6.19 | % | |||||||||||||||||||||||||||||||
| Construction | 40,389 | 2.20 | 43,308 | 2.64 | (2,919) | (6.74) | % | |||||||||||||||||||||||||||||||
| Consumer Automobile | 244,398 | 13.28 | 186,112 | 11.35 | 58,286 | 31.32 | % | |||||||||||||||||||||||||||||||
| Other consumer installment loans | 10,361 | 0.56 | 10,361 | 0.63 | — | — | % | |||||||||||||||||||||||||||||||
| Net deferred loan fees and discounts | 1,048 | 0.06 | 648 | 0.04 | 400 | 61.73 | % | |||||||||||||||||||||||||||||||
| Gross loans | $ | 1,839,764 | 100.00 | % | $ | 1,639,731 | 100.00 | % | 200,033 | 12.20 | % | |||||||||||||||||||||||||||
The amounts of domestic loans at December 31, 2023 are presented below by category and maturity:
| Commercial, financial, and agricultural | Real Estate | Consumer automobile | Other consumer installment | |||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | Residential | Commercial | Construction | Total | ||||||||||||||||||||||||||||||||||||||||
| Loans with variable interest rates: | ||||||||||||||||||||||||||||||||||||||||||||
| 1 year or less | $ | 498 | $ | 663 | $ | 1,792 | $ | 93 | $ | — | $ | 546 | $ | 3,592 | ||||||||||||||||||||||||||||||
| 1 through 5 years | 3,833 | 3,802 | 6,481 | 178 | — | — | 14,294 | |||||||||||||||||||||||||||||||||||||
| 5 through 15 years | 53,335 | 70,905 | 158,082 | 2,097 | — | 150 | 284,569 | |||||||||||||||||||||||||||||||||||||
| After 15 years | 57,428 | 614,364 | 313,918 | 21,178 | — | 2,516 | 1,009,404 | |||||||||||||||||||||||||||||||||||||
| Total floating interest rate loans | 115,094 | 689,734 | 480,273 | 23,546 | — | 3,212 | 1,311,859 | |||||||||||||||||||||||||||||||||||||
| Loans with fixed interest rates: | ||||||||||||||||||||||||||||||||||||||||||||
| 1 year or less | 3,161 | 1,213 | 730 | 1,093 | 1,890 | 417 | 8,504 | |||||||||||||||||||||||||||||||||||||
| 1 through 5 years | 58,345 | 4,520 | 8,169 | 6,309 | 104,941 | 4,538 | 186,822 | |||||||||||||||||||||||||||||||||||||
| 5 through 15 years | 30,369 | 26,588 | 35,541 | 4,080 | 137,567 | 2,194 | 236,339 | |||||||||||||||||||||||||||||||||||||
| After 15 years | 6,497 | 76,446 | 6,888 | 5,361 | — | — | 95,192 | |||||||||||||||||||||||||||||||||||||
| Total fixed interest rate loans | 98,372 | 108,767 | 51,328 | 16,843 | 244,398 | 7,149 | 526,857 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 213,466 | $ | 798,501 | $ | 531,601 | $ | 40,389 | $ | 244,398 | $ | 10,361 | 1,838,716 | |||||||||||||||||||||||||||||||
| Net deferred loan fees and discounts | 1,048 | |||||||||||||||||||||||||||||||||||||||||||
| Total, net | $ | 1,839,764 | ||||||||||||||||||||||||||||||||||||||||||
· The loan maturity information is based upon original loan terms and is not adjusted for “rollovers.” In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, at interest rates prevailing at the date of renewal.
· Scheduled repayments are reported in maturity categories in which the payment is due.
The Banks do not make loans that provide for negative amortization, nor do any loans contain conversion features. The Banks did not have any foreign loans outstanding at December 31, 2023.
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ALLOWANCE FOR CREDIT LOSSES
2023
The allowance for credit losses represents the amount which management estimates is adequate to provide for future expected losses inherent in its loan portfolio as of the consolidated balance sheet date. All loan losses are charged to the allowance and all recoveries are credited to it per the allowance method of providing for credit losses. The allowance for credit losses is established through a provision for credit losses charged to operations. The provision for credit losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, individually evaluated loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed semi-annually for the Banks. Management remains committed to an aggressive program of problem loan identification and resolution.
Maintaining an appropriate allowance for credit losses is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, residential construction, commercial and industrial, and commercial real estate, an internal credit rating process is used. Management believes that internal credit ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal credit rating categories is a significant component of the allowance for credit losses methodology for these loans, which bases the probability of default on this migration. Assigning credit ratings involves judgment. The Company's loan review process provide a separate assessment of credit rating accuracy. Credit ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff or if specific loan review assessments identify a deterioration or an improvement in the loans.
Management considers the performance of the loan portfolio and its impact on the allowance for credit losses. Management does not assign internal credit ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, and consumer automobile loans. For these loans, the most relevant credit quality indicator is delinquency status and management evaluates credit quality based on the aging status of the loan.
Historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A base life time loss within the portfolio is calculated utilizing discounted cash flows driven by the charge-off and recovery data over the past ten years and certain credit quality indicators within the portfolio. Management has identified a number of additional qualitative factors which it uses to supplement the base loss lifetime rate because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.
The allowance for credit losses decreased from $15,637,000 at December 31, 2022 to $11,446,000 at December 31, 2023. At December 31, 2023 and 2022, the allowance for credit losses to total loans was 0.62% and 0.95%, respectively. The drivers of the decrease were the change in the ACL model upon the adoption of CECL on January 1, 2023 coupled with net loan recoveries of $525,000 or 0.03% of average loans for the year ended December 31, 2023.
2022
The allowance for loan losses increased from $14,176,000 at December 31, 2021 to $15,637,000 at December 31, 2022. At December 31, 2022 and 2021, the allowance for loan losses to total loans was 0.95% and 1.02%, respectively. Net loan charge-offs of $449,000 or 0.03% of average loans for the year ended December 31, 2022 countered the impact of the provision for loan losses of $1,910,000. The allowance for loan losses increased primarily due to the significant growth in the gross loan portfolio of $247,584,000 or 17.78% from December 31, 2021 to 2022. Management concluded that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date as noted in the provision for loan losses discussion.
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| Allocation of the Allowance For Credit Losses | ||||||||||||||||||||||||||
| December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| (In Thousands) | Amount | Percentage of Loans in Each Category to Total Loans | Amount | Percentage of Loans in Each Category to Total Loans | ||||||||||||||||||||||
| Balance at end of period applicable to: | ||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 3,379 | 11.61 | % | $ | 1,914 | 11.62 | % | ||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||
| Residential | 1,200 | 43.43 | 5,061 | 43.21 | ||||||||||||||||||||||
| Commercial | 3,352 | 28.91 | 6,110 | 30.54 | ||||||||||||||||||||||
| Construction | 145 | 2.20 | 188 | 2.64 | ||||||||||||||||||||||
| Consumer automobiles | 2,668 | 13.29 | 1,617 | 11.35 | ||||||||||||||||||||||
| Other consumer installment loans | 702 | 0.56 | 109 | 0.64 | ||||||||||||||||||||||
| Unallocated | — | — | 638 | — | ||||||||||||||||||||||
| $ | 11,446 | 100.00 | % | $ | 15,637 | 100.00 | % | |||||||||||||||||||
Additional allowance for credit losses and net (charge-offs) recoveries information is presented by loan portfolio segment in the tables below. The twelve months ending December 31, 2023 was impacted by the CECL adoption reclassification entry disclosed in Note 6. Loan Credit Quality and Related Allowance for Credit Losses.
| Amount of Allowance for Credit Losses Allocated | Total loans | Allowance for Credit Losses to Total Loans Ratio | Net (Charge-Offs) Recoveries | Average Loans | Ratio of Net (Charge-Offs) Recoveries to Average Loans | |||||||||||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 3,379 | $ | 213,466 | 1.58 | % | $ | 1,497 | $ | 204,817 | 0.73 | % | ||||||||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential | 1,200 | 798,501 | 0.15 | % | (53) | 751,379 | (0.01) | % | ||||||||||||||||||||||||||||||
| Commercial | 3,352 | 531,601 | 0.63 | % | (36) | 516,248 | (0.01) | % | ||||||||||||||||||||||||||||||
| Construction | 145 | 40,389 | 0.36 | % | — | 48,786 | — | % | ||||||||||||||||||||||||||||||
| Consumer automobiles | 2,668 | 244,398 | 1.09 | % | (587) | 227,017 | (0.26) | % | ||||||||||||||||||||||||||||||
| Other consumer installment loans | 702 | 10,361 | 6.78 | % | (296) | 10,358 | (2.86) | % | ||||||||||||||||||||||||||||||
| $ | 11,446 | $ | 1,838,716 | 0.62 | % | $ | 525 | $ | 1,758,605 | 0.03 | % | |||||||||||||||||||||||||||
| Total non-accrual loans outstanding | $ | 998 | ||||||||||||||||||||||||||||||||||||
| Non-accrual loans to total loans outstanding | 0.05 | % | ||||||||||||||||||||||||||||||||||||
| Allowance for loan losses to non-accrual loans | 1146.89 | % | ||||||||||||||||||||||||||||||||||||
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| Amount of Allowance Allocated | Total loans | Allowance for Credit Losses to Total Loans Ratio | Net (Charge-Offs) Recoveries | Average Loans | Ratio of Net (Charge-Offs) Recoveries to Average Loans | |||||||||||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 1,914 | $ | 190,461 | 1.00 | % | $ | 165 | $ | 173,433 | 0.10 | % | ||||||||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential | 5,061 | 708,209 | 0.71 | % | 26 | 649,989 | — | % | ||||||||||||||||||||||||||||||
| Commercial | 6,110 | 500,632 | 1.22 | % | (150) | 466,526 | (0.03) | % | ||||||||||||||||||||||||||||||
| Construction | 188 | 43,308 | 0.43 | % | 29 | 44,968 | 0.06 | % | ||||||||||||||||||||||||||||||
| Consumer automobiles | 1,617 | 186,112 | 0.87 | % | (328) | 150,261 | (0.22) | % | ||||||||||||||||||||||||||||||
| Other consumer installment loans | 109 | 10,361 | 1.05 | % | (191) | 9,737 | (1.96) | % | ||||||||||||||||||||||||||||||
| Unallocated | 638 | |||||||||||||||||||||||||||||||||||||
| $ | 15,637 | $ | 1,639,083 | 0.95 | % | $ | (449) | $ | 1,494,914 | (0.03) | % | |||||||||||||||||||||||||||
| Total non-accrual loans outstanding | $ | 3,615 | ||||||||||||||||||||||||||||||||||||
| Non-accrual loans to total loans outstanding | 0.22 | % | ||||||||||||||||||||||||||||||||||||
| Allowance for loan losses to non-accrual loans | 432.56 | % | ||||||||||||||||||||||||||||||||||||
| Amount of Allowance Allocated | Total loans | Allowance for Credit Losses to Total Loans Ratio | Net (Charge-Offs) Recoveries | Average Loans | Ratio of Net (Charge-Offs) Recoveries to Average Loans | |||||||||||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 1,946 | $ | 163,285 | 1.19 | % | $ | (10) | $ | 175,631 | (0.01) | % | ||||||||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||||||||||||||
| Residential | 4,701 | 595,847 | 0.79 | % | (107) | 584,849 | (0.02) | % | ||||||||||||||||||||||||||||||
| Commercial | 5,336 | 446,734 | 1.19 | % | 95 | 381,306 | 0.02 | % | ||||||||||||||||||||||||||||||
| Construction | 179 | 37,295 | 0.48 | % | 10 | 41,564 | 0.02 | % | ||||||||||||||||||||||||||||||
| Consumer automobiles | 1,411 | 139,408 | 1.01 | % | (143) | 152,496 | (0.09) | % | ||||||||||||||||||||||||||||||
| Other consumer installment loans | 111 | 9,277 | 1.20 | % | (112) | 9,787 | (1.14) | % | ||||||||||||||||||||||||||||||
| Unallocated | 492 | |||||||||||||||||||||||||||||||||||||
| $ | 14,176 | $ | 1,391,846 | 1.02 | % | $ | (267) | $ | 1,345,633 | (0.02) | % | |||||||||||||||||||||||||||
| Total non-accrual loans outstanding | $ | 5,389 | ||||||||||||||||||||||||||||||||||||
| Non-accrual loans to total loans outstanding | 0.39 | % | ||||||||||||||||||||||||||||||||||||
| Allowance for loan losses to non-accrual loans | 263.05 | % | ||||||||||||||||||||||||||||||||||||
The provision for all segments of the loan portfolio were impacted by the adoption of CECL on January 1, 2023. The provision for commercial and agricultural loans decreased during 2023 due to an increase in the level of net recoveries. The provision for residential real estate loans decreased primarily due to the adoption of CECL. The provision for commercial real estate loans decreased primarily due to the adoption of CECL and a minimal amount of net charge-offs. The provision for consumer automobiles increased due to increased indirect loan volume and an increase in net charge-offs.
The provision for commercial and agricultural loans decreased during 2022 due to levels and trends of non-accrual loans in our portfolio and a decline in net charge-offs. The provision for residential real estate loans remained flat as the portfolio size increased but was offset by a decline in the level of net charge-offs. The provision for this loan type is adjusted by national indices as well as our historical losses. The provision for commercial real estate loans decreased primarily due to an
27
improvement in portfolio credit metrics. The provision for consumer automobiles increased due to increased indirect loan volume and concerns regarding the impact of inflation on the customer base.
The provision for commercial and agricultural loans decreased during 2021 due to levels and trends of non-accrual loans in our portfolio and a decline in net charge-offs. The provision for residential real estate loans remained flat as the portfolio size increased slightly and the level of net charge-offs declined modestly. The provision for this loan type is adjusted by national indices as well as our historical losses. The provision for commercial and construction real estate loans increased as the economic environment has continued to remain soft as the impact of the COVID-19 pandemic and associated supply chain issues is felt within the markets we serve. The provision for consumer automobiles decreased due to reduction in indirect loan volume and a decrease in portfolio size. The provision for other consumer installment loans has decreased as the portfolio declined to $9,277,000 at December 31, 2021 from $19,940,000 at December 31, 2020. The COVID-19 pandemic and associated supply chain issues has resulted in various businesses operating at less than 100% capacity. This has caused an increase in the risk profile of the commercial segment of the loan portfolio resulting in a provision shift from unallocated to the commercial real estate mortgage segment of the loan portfolio. Average loan amounts are calculated off of end of month balances.
NON-PERFORMING LOANS
The decrease in non-performing loans during 2023 is primarily due to a payoff of a non-accrual loan. The majority of the non-performing loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within the allowance for credit losses.
The following table presents information concerning non-performing loans. The accrual of interest will be discontinued when the principal or interest of a loan is in default for 90 days or more, or as soon as payment is questionable, unless the loan is well secured and in the process of collection. Consumer loans and residential real estate loans secured by 1 to 4 family dwellings are not ordinarily subject to those guidelines. The reversal of previously accrued but uncollected interest applicable to any loan placed in a non-accrual status and the treatment of subsequent payments of either principal or interest is handled in accordance with GAAP. These principles do not require a write-off of previously accrued interest if principal and interest are ultimately protected by sound collateral values. A non-performing loan may be restored to accruing status when:
1. Principal and interest is no longer due and unpaid;
2. It becomes well secured and in the process of collection; and
3. Prospects for future contractual payments are no longer in doubt.
| Total Nonperforming Loans | ||||||||||||||||||||
| (In Thousands) | 90 Days Past Due | Nonaccrual | Total | |||||||||||||||||
| 2023 | $ | 2,150 | $ | 998 | $ | 3,148 | ||||||||||||||
| 2022 | 1,275 | 3,615 | 4,890 | |||||||||||||||||
The level of non-accruing loans continues to fluctuate annually and is attributed to the various economic factors experienced both regionally and nationally. Overall, the portfolio is well secured with a majority of the balance making regular payments or scheduled to be satisfied in the near future. Presently, there are no significant loans where serious doubts exist as to the ability of the borrower to comply with the current loan payment terms which are not included in the nonperforming categories as indicated above.
Management’s judgment in determining the amount of the additions to the allowance charged to operating expense includes but is not limited to the following factors with no single factor being determinative:
1. Economic conditions and the impact on the loan portfolio;
2. Analysis of past loan charge-offs experienced by category and comparison to outstanding loans;
3. Effect of problem loans on overall portfolio quality; and
4. Reports of examination of the loan portfolio by the Department and the FDIC.
DEPOSITS
2023 vs. 2022
Total average deposits decreased $33,661,000 or 2.10% from 2022 to 2023. Noninterest-bearing deposits average balance decreased $41,361,000 as deposits shifted from non-interest bearing and lower rate deposit products into time deposits. This shift in deposits, along with utilization of brokered deposits, resulted in time deposits increasing $131,270,000. The Bank had
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major deposit customers with a combined outstanding balances of approximately $0 and $112,228,000 at December 31, 2023 and 2022, respectively.
2022 vs. 2021
Total average deposits increased $43,073,000 or 2.76% from 2021 to 2022. Noninterest-bearing deposits average balance increased $40,205,000 as the focus was on core deposit gathering which led to a decrease in average time deposit balances of $82,359,000. The Bank had major deposit customers with a combined outstanding balances of approximately $112,228,000 and $74,874,000 million at December 31, 2022 and 2021, respectively.
The average amount and the average rate paid on deposits are summarized below for the years ended December 31, 2023, 2022, and 2021:
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||
| (In Thousands) | Average Amount | Rate | Average Amount | Rate | Average Amount | Rate | ||||||||||||||||||||||||||||||||
| Noninterest-bearing | $ | 477,828 | 0.00 | % | $ | 519,189 | 0.00 | % | $ | 478,984 | 0.00 | % | ||||||||||||||||||||||||||
| Savings | 231,000 | 0.30 | 247,003 | 0.06 | 225,637 | 0.05 | ||||||||||||||||||||||||||||||||
| Super Now | 276,868 | 1.50 | 387,370 | 0.35 | 307,446 | 0.29 | ||||||||||||||||||||||||||||||||
| Money Market | 292,755 | 2.40 | 289,820 | 0.38 | 305,883 | 0.32 | ||||||||||||||||||||||||||||||||
| Time | 293,252 | 3.50 | 161,982 | 0.68 | 244,341 | 1.46 | ||||||||||||||||||||||||||||||||
| Total average deposits | $ | 1,571,703 | 1.41 | % | $ | 1,605,364 | 0.23 | % | $ | 1,562,291 | 0.36 | % | ||||||||||||||||||||||||||
The following table shows the scheduled maturities of time deposits that are in excess of the FDIC insurance limit as of December 31, 2023.
| (In Thousands) | 2023 | |||||||
| Due within 3 months or less | $ | 11,195 | ||||||
| Due after 3 months and within 6 months | 2,986 | |||||||
| Due after 6 months and within 12 months | 3,519 | |||||||
| Due after 12 months | 2,522 | |||||||
| Total | $ | 20,222 | ||||||
As of December 31, 2023 and 2022 the Company had $436,074,000 and $617,515,000, respectively, in uninsured deposits. Included in the total uninsured deposits is a concentration of public funds which were collateralized by the Banks in the amount of $77,687,000 and $180,252,000 at December 31, 2023 and 2022, respectively. Total uninsured deposits less collateralized public funds was $358,387,000 and $437,263,000 at December 31, 2023 and 2022.
SHAREHOLDERS’ EQUITY
2023
Shareholders’ equity increased $23,891,000 to $191,556,000 at December 31, 2023 compared to December 31, 2022. During the twelve months ended December 31, 2023 the Company sold 420,069 shares of common stock, for net proceeds of $8,291,000, in a registered at-the-market offering. An additional 17,929 shares for net proceeds of $406,000 were issued as part of the Dividend Reinvestment Plan during the twelve months ended December 31, 2023. Accumulated other comprehensive loss of $9,150,000 at December 31, 2023 decreased from a loss of $13,958,000 at December 31, 2022 as a result of a decrease in net unrealized loss on available for sale securities to $6,396,000 at December 31, 2023 from a net unrealized loss of $9,819,000 at December 31, 2022 coupled with a decrease in loss of $1,385,000 in the defined benefit plan obligation. The current level of shareholders’ equity equates to a book value per share of $25.51 at December 31, 2023 compared to $23.76 at December 31, 2022, and an equity to asset ratio of 8.69% at December 31, 2023 and 8.38% at December 31, 2022. Dividends declared for the twelve months ended December 31, 2023 and 2022 were $1.28 per share.
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2022
Shareholders’ equity decreased $4,609,000 to $167,665,000 at December 31, 2022 compared to December 31, 2021. Accumulated other comprehensive loss of $13,958,000 at December 31, 2022 increased from a loss of $1,112,000 at December 31, 2021 as a result of a $9,819,000 net unrealized loss on available for sale securities at December 31, 2022 (compared to an unrealized gain of $2,373,000 at December 31, 2021) coupled with an increase in loss of $654,000 in the defined benefit plan obligation. The current level of shareholders’ equity equates to a book value per share of $23.76 at December 31, 2022 compared to $24.37 at December 31, 2021, and an equity to asset ratio of 8.38% at December 31, 2022 and 8.88% at December 31, 2021. Dividends declared for the twelve months ended December 31, 2022 and 2021 were $1.28 per share.
Bank regulators have risk based capital guidelines. Under these guidelines the Corporation and each Bank are required to maintain minimum ratios of core capital and total qualifying capital as a percentage of risk weighted assets and certain off-balance sheet items. At December 31, 2023, both the Corporation’s and each Bank’s required ratios were well above the minimum ratios (and including the current capital conservation buffer where applicable) as follows:
| Corporation | Jersey Shore State Bank | Luzerne Bank | Minimum Standards | ||||||||||||||||||||
| Common equity tier 1 capital to risk-weighted assets | 10.098 | % | 9.890 | % | 10.288 | % | 7.000 | % | |||||||||||||||
| Tier 1 capital to risk-weighted assets | 10.098 | % | 9.890 | % | 10.288 | % | 8.500 | % | |||||||||||||||
| Total capital to risk-weighted assets | 10.798 | % | 10.701 | % | 10.686 | % | 10.500 | % | |||||||||||||||
| Tier 1 capital to average assets | 8.597 | % | 8.344 | % | 8.316 | % | 4.000 | % | |||||||||||||||
For a more comprehensive discussion of these requirements, see “Regulation and Supervision” in Item 1 of the Annual Report on Form 10-K and Note 18 to the consolidated financial statements. Management believes that the Corporation and the Banks will continue to exceed regulatory capital requirements.
RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average shareholders’ equity, and other certain equity ratios are presented as follows:
| 2023 | 2022 | 2021 | |||||||||||||||
| Percentage of net income to: | |||||||||||||||||
| Average total assets | 0.79 | % | 0.90 | % | 0.85 | % | |||||||||||
| Average shareholders’ equity | 9.84 | % | 10.73 | % | 9.93 | % | |||||||||||
| Percentage of dividends declared to net income | 55.18 | % | 51.87 | % | 56.39 | % | |||||||||||
| Percentage of average shareholders’ equity to average total assets | 7.98 | % | 8.41 | % | 8.54 | % | |||||||||||
LIQUIDITY, INTEREST RATE SENSITIVITY, AND MARKET RISK
The Asset/Liability Committee addresses the liquidity needs of the Corporation to ensure that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.
The following liquidity measures are monitored for compliance and were within the limits cited at December 31, 2023, except for net loans to total deposits which was 115%.
1. Net Loans to Total Assets, 85% maximum
2. Net Loans to Total Deposits, 100% maximum
3. Cumulative 90 day Maturity GAP %, +/- 20% maximum
4. Cumulative 1 Year Maturity GAP %, +/- 25% maximum
Fundamental objectives of the Corporation’s asset/liability management process are to maintain adequate liquidity while minimizing interest rate risk. The maintenance of adequate liquidity provides the Corporation with the ability to meet its financial obligations to depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business opportunities as they arise. The objective of interest rate sensitivity management is to increase net
30
interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.
The Corporation, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments, and expenses. In order to control cash flow, the Corporation estimates future flows of cash from deposits and loan payments. The primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, as well as FHLB borrowings. Funds generated are used principally to fund loans and purchase investment securities. Management believes the Corporation has adequate resources to meet its normal funding requirements.
Management monitors the Corporation’s liquidity on both a short and long-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long term funding needs are addressed by cash on hand, maturities and sales of available for sale investment securities, loan repayments and maturities, loan sales, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides core ingredients to satisfy depositor, borrower, and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Corporation has a current borrowing capacity at the FHLB of $859,444,000 with a total credit exposure of $396,365,000 utilized, leaving $463,079,000 available. In addition to this credit arrangement, the Corporation has additional lines of credit with correspondent banks of $100,000,000. The Corporation’s management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs through the utilization of cash on hand, borrowing lines, sale of investments and loans, and property sale leasebacks,
Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Corporation’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by segmenting both assets and liabilities into future time periods (usually 12 months or less) based upon when repricing can be effected. Repriceable assets are subtracted from repriceable liabilities for a specific time period to determine the “gap” or difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In addition to gap management, the Corporation has an asset liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Corporation’s balance sheet.
The Corporation currently maintains a gap position of being asset sensitive due to the relative short duration of the loan and investment portfolios. A slight lengthening of the investment portfolio is being undertaken due to the higher yields on current investment products. The liability portfolio is being shortened with emphasis being placed on short term funding in addition to the focus on time deposits shifting towards five to ten month products.
A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Corporation’s balance sheet and more specifically shareholders’ equity. The Corporation does not manage the balance sheet structure in order to maintain compliance with this calculation. The calculation serves as a guideline with greater emphasis placed on interest rate sensitivity. Changes to calculation results from period to period are reviewed as changes in results could be a signal of future events.
INTEREST RATE SENSITIVITY
In this analysis the Corporation examines the result of various changes in market interest rates in 100 basis point increments and their effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner. Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.
The following is a rate shock forecast for the twelve month period ending December 31, 2024 assuming a static balance sheet as of December 31, 2023.
31
| Parallel Rate Shock in Basis Points | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | (300) | (200) | (100) | Static | 100 | 200 | 300 | 400 | ||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 59,827 | $ | 62,027 | $ | 64,174 | $ | 66,144 | $ | 67,918 | $ | 69,354 | $ | 70,586 | $ | 71,763 | ||||||||||||||||||||||||||||||||||
| Change from static | (6,317) | (4,117) | (1,970) | — | 1,774 | 3,210 | 4,442 | 5,619 | ||||||||||||||||||||||||||||||||||||||||||
| Percent change from static | -9.55 | % | -6.22 | % | -2.98 | % | — | 2.68 | % | 4.85 | % | 6.72 | % | 8.50 | % | |||||||||||||||||||||||||||||||||||
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. Generally, management believes the Corporation is well positioned to respond expeditiously when the market interest rate outlook changes.
INFLATION
The asset and liability structure of a financial institution is primarily monetary in nature; therefore, interest rates rather than inflation have a more significant impact on the Corporation’s performance. Interest rates are not always affected in the same direction or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors that are not measured by a price index.
CRITICAL ACCOUNTING POLICIES
The Corporation’s accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the “Notes to Consolidated Financial Statements” included in Item 8 of this Annual Report on Form 10-K. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments, and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.
Allowance for Credit Losses
Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. Areas that require Managements judgment in calculating the ACL include cash flow assumptions such as prepayment speeds, probability of default, forecast of economic events, and other adjustments for qualitative factors. The Corporation’s allowance for credit losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for credit losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for credit losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Corporation’s methodology of assessing the adequacy of the reserve for allowance for loan losses, refer to Note 1 of the “Notes to Consolidated Financial Statements” included in Item 8 of this Annual Report on Form 10-K.
Goodwill and Other Intangible Assets
As discussed in Note 8 of the “Notes to Consolidated Financial Statements,” the Corporation must assess goodwill and other intangible assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill and other intangible assets balances, we would be required to take a charge against earnings to write down the assets to the lower value.
CONTRACTUAL OBLIGATIONS
The Corporation has various financial obligations, including contractual obligations which may require future cash payments. The following table presents, as of December 31, 2023, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the “Notes to Consolidated Financial Statements” included in Item 8 of this Annual Report on Form 10-K.
32
| Payments Due In | ||||||||||||||||||||||||||||||||
| (In Thousands) | One Year or Less | One to Three Years | Three to Five Years | Over Five Years | Total | |||||||||||||||||||||||||||
| Deposits without a stated maturity | $ | 1,204,701 | $ | — | $ | — | $ | — | $ | 1,204,701 | ||||||||||||||||||||||
| Time deposits | 266,948 | 111,794 | 5,493 | 557 | 384,792 | |||||||||||||||||||||||||||
| Repurchase agreements | 3,631 | — | — | — | 3,631 | |||||||||||||||||||||||||||
| Short-term borrowings | 142,295 | — | — | — | 142,295 | |||||||||||||||||||||||||||
| Long-term borrowings | 40,175 | 110,872 | 95,359 | 6,192 | 252,598 | |||||||||||||||||||||||||||
| Operating leases | 255 | 517 | 539 | 2,029 | 3,340 | |||||||||||||||||||||||||||
The Corporation’s operating lease obligations represent short and long-term lease and rental payments for branch facilities and equipment. The Bank leases certain facilities under operating leases which expire on various dates through 2049. Renewal options are available on the majority of these leases.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Corporation cautions readers that the following important factors, among others in addition to the factors discussed in Item 1 - "Business" and in Item 1A - "Risk Factors", may have affected and could in the future affect the Corporation’s actual results and could cause the Corporation’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Corporation herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Corporation must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board; (iii) the effect on the Corporation’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the effect of changes in the business cycle and downturns in the local, regional or national economies; and (vi) the effects of health emergencies, including the spread of infectious diseases or pandemics, and other external events, such as armed conflicts in other parts of the world, that could affect regional or global economies.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk for the Corporation is comprised primarily from interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at the Banks' level as well as the Corporation level. The Corporation’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced internally. Additional information and details are provided in the Interest Sensitivity section of Item 7 - "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
Generally, management believes the Corporation is well positioned to respond expeditiously when the market interest rate outlook changes.
33
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
| December 31, | ||||||||||||||
| (In Thousands, Except Share Data) | 2023 | 2022 | ||||||||||||
| ASSETS: | ||||||||||||||
| Noninterest-bearing balances | $ | $ | ||||||||||||
| Interest-bearing deposits in other financial institutions | ||||||||||||||
| Total cash and cash equivalents | ||||||||||||||
| Investment debt securities, available for sale, at fair value | ||||||||||||||
| Investment equity securities, at fair value | ||||||||||||||
| Restricted investment in bank stock | ||||||||||||||
| Loans held for sale | ||||||||||||||
| Loans | ||||||||||||||
| Allowance for credit losses | ( | ( | ||||||||||||
| Loans, net | ||||||||||||||
| Premises and equipment, net | ||||||||||||||
| Accrued interest receivable | ||||||||||||||
| Bank-owned life insurance | ||||||||||||||
| Investment in limited partnerships | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangibles | ||||||||||||||
| Operating lease right of use asset | ||||||||||||||
| Deferred tax assets | ||||||||||||||
| Other assets | ||||||||||||||
| TOTAL ASSETS | $ | $ | ||||||||||||
| LIABILITIES: | ||||||||||||||
| Interest-bearing deposits | $ | $ | ||||||||||||
| Noninterest-bearing deposits | ||||||||||||||
| Total deposits | ||||||||||||||
| Short-term borrowings | ||||||||||||||
| Long-term borrowings | ||||||||||||||
| Accrued interest payable | ||||||||||||||
| Operating lease liability | ||||||||||||||
| Other liabilities | ||||||||||||||
| TOTAL LIABILITIES | ||||||||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||||||||
Preferred stock, no par value, | ||||||||||||||
Common stock, par value $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive loss: | ||||||||||||||
| Net unrealized loss on available for sale securities | ( | ( | ||||||||||||
| Defined benefit plan | ( | ( | ||||||||||||
Treasury stock at cost, | ( | ( | ||||||||||||
| TOTAL SHAREHOLDERS' EQUITY | ||||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||||||||
See accompanying notes to the consolidated financial statements.
34
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
| Year Ended December 31, | |||||||||||||||||
| (In Thousands, Except Per Share Data) | 2023 | 2022 | 2021 | ||||||||||||||
| INTEREST AND DIVIDEND INCOME: | |||||||||||||||||
| Loans, including fees | $ | $ | $ | ||||||||||||||
| Investment securities: | |||||||||||||||||
| Taxable | |||||||||||||||||
| Tax-exempt | |||||||||||||||||
| Dividend and other interest income | |||||||||||||||||
| TOTAL INTEREST AND DIVIDEND INCOME | |||||||||||||||||
| INTEREST EXPENSE: | |||||||||||||||||
| Deposits | |||||||||||||||||
| Short-term borrowings | |||||||||||||||||
| Long-term borrowings | |||||||||||||||||
| TOTAL INTEREST EXPENSE | |||||||||||||||||
| NET INTEREST INCOME | |||||||||||||||||
| (Recovery) provision for loan credit losses | ( | ||||||||||||||||
| Recovery for off balance sheet credit exposures | ( | ||||||||||||||||
| TOTAL (RECOVERY) PROVISION FOR CREDIT LOSSES | ( | ||||||||||||||||
| NET INTEREST INCOME AFTER (RECOVERY) PROVISION FOR CREDIT LOSSES | |||||||||||||||||
| NON-INTEREST INCOME: | |||||||||||||||||
| Service charges | |||||||||||||||||
| Net debt securities (losses) gains, available for sale | ( | ( | |||||||||||||||
| Net equity securities gains (losses) | ( | ( | |||||||||||||||
| Bank-owned life insurance | |||||||||||||||||
| Gain on sale of loans | |||||||||||||||||
| Insurance commissions | |||||||||||||||||
| Brokerage commissions | |||||||||||||||||
| Loan broker income | |||||||||||||||||
| Debit card income | |||||||||||||||||
| Other | |||||||||||||||||
| TOTAL NON-INTEREST INCOME | |||||||||||||||||
| NON-INTEREST EXPENSE: | |||||||||||||||||
| Salaries and employee benefits | |||||||||||||||||
| Occupancy | |||||||||||||||||
| Furniture and equipment | |||||||||||||||||
| Software amortization | |||||||||||||||||
| Pennsylvania shares tax | |||||||||||||||||
| Professional fees | |||||||||||||||||
| Federal Deposit Insurance Corporation deposit insurance | |||||||||||||||||
| Marketing | |||||||||||||||||
| Intangible amortization | |||||||||||||||||
| Goodwill impairment | |||||||||||||||||
| Other | |||||||||||||||||
| TOTAL NON-INTEREST EXPENSE | |||||||||||||||||
| INCOME BEFORE INCOME TAX PROVISION | |||||||||||||||||
| INCOME TAX PROVISION | |||||||||||||||||
| CONSOLIDATED NET INCOME | $ | $ | $ | ||||||||||||||
| Earnings attributable to noncontrolling interest | |||||||||||||||||
| NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC. | $ | $ | $ | ||||||||||||||
| EARNINGS PER SHARE - BASIC | $ | $ | $ | ||||||||||||||
| EARNINGS PER SHARE - DILUTED | $ | $ | $ | ||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC | |||||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
35
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| Net Income | $ | $ | $ | |||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Unrealized gain (loss) on available for sale securities | ( | ( | ||||||||||||||||||
| Tax effect | ( | |||||||||||||||||||
| Net realized loss (gain) included in net income | ( | |||||||||||||||||||
| Tax effect | ( | ( | ||||||||||||||||||
| Decrease (increase) of unrecognized pension and post-retirement items | ( | |||||||||||||||||||
| Tax effect | ( | ( | ||||||||||||||||||
| Total other comprehensive income (loss) | ( | ( | ||||||||||||||||||
| Comprehensive income | $ | $ | $ | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
36
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
| (In Thousands, Except Per Share Data) | COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | RETAINED EARNINGS | ACCUMULATED OTHER COMPREHENSIVE LOSS | TREASURY STOCK | NON-CONTROLLING INTEREST | TOTAL SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||
| SHARES | AMOUNT | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation recognized in earnings | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared, ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for employee stock purchase plan | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for director compensation plan | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest purchase | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Cash settlement of options | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation recognized in earnings | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared, ($ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for employee stock purchase plan | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for director compensation plan | ||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation recognized in earnings | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared, ($ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued for employee stock purchase plan | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for director compensation plan | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for registered at-the-market offering, net proceeds | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend reinvestment plan | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
37
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
| Year Ended December 31, | ||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net Income | $ | $ | $ | |||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||||||
| Amortization of investment security discounts and premiums, net | ||||||||||||||||||||
| Goodwill impairment | ||||||||||||||||||||
| (Gain) loss on sale of premises and equipment | ( | |||||||||||||||||||
| (Recovery) provision for credit losses | ( | |||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| Securities losses (gains), available for sale | ( | |||||||||||||||||||
| Originations of loans held for sale | ( | ( | ( | |||||||||||||||||
| Proceeds of loans held for sale | ||||||||||||||||||||
| Gain on sale of loans | ( | ( | ( | |||||||||||||||||
| Net equity securities (gains) losses | ( | |||||||||||||||||||
| Security trades payable | ( | ( | ||||||||||||||||||
| Earnings on bank-owned life insurance | ( | ( | ( | |||||||||||||||||
| Increase (decrease) in deferred tax asset | ( | ( | ||||||||||||||||||
| Other, net | ( | ( | ||||||||||||||||||
| Net cash provided by operating activities | ||||||||||||||||||||
| INVESTING ACTIVITIES: | ||||||||||||||||||||
| Investment debt securities available for sale: | ||||||||||||||||||||
| Proceeds from sales | ||||||||||||||||||||
| Proceeds from calls, maturities and repayments | ||||||||||||||||||||
| Purchases | ( | ( | ( | |||||||||||||||||
| Proceeds from sales of equity securities | ||||||||||||||||||||
| Net increase in loans | ( | ( | ( | |||||||||||||||||
| Acquisition of premises and equipment | ( | ( | ( | |||||||||||||||||
| Proceeds from sale of premises and equipment | ||||||||||||||||||||
| Proceeds from the sale of foreclosed assets | ||||||||||||||||||||
| Purchase of bank-owned life insurance | ( | ( | ( | |||||||||||||||||
| Proceeds from bank-owned life insurance death benefit | ||||||||||||||||||||
| Distribution of non-controlling interest | ( | |||||||||||||||||||
| Investment in limited partnership | ( | ( | ||||||||||||||||||
| Proceeds from redemption of regulatory stock | ||||||||||||||||||||
| Purchases of regulatory stock | ( | ( | ( | |||||||||||||||||
| Net cash used for investing activities | ( | ( | ( | |||||||||||||||||
| FINANCING ACTIVITIES: | ||||||||||||||||||||
| Net increase (decrease) in interest-bearing deposits | ( | |||||||||||||||||||
| Net (decrease) increase in noninterest-bearing deposits | ( | |||||||||||||||||||
| Proceeds from long-term borrowings | ||||||||||||||||||||
| Repayment of long-term borrowings | ( | ( | ( | |||||||||||||||||
| Net (decrease) increase in short-term borrowings | ( | |||||||||||||||||||
| Finance lease principal payments | ( | ( | ( | |||||||||||||||||
| Dividends paid | ( | ( | ( | |||||||||||||||||
| Distributions to non-controlling interest | ( | |||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||
| Purchase of treasury stock | ( | |||||||||||||||||||
| Net cash provided by financing activities | ||||||||||||||||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | ( | ( | ||||||||||||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING | ||||||||||||||||||||
| CASH AND CASH EQUIVALENTS, ENDING | $ | $ | $ | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
| Year Ended December 31, | ||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||||||||||
| Interest paid | $ | $ | $ | |||||||||||||||||
| Income taxes paid | ||||||||||||||||||||
| Transfer of loans to foreclosed real estate | ||||||||||||||||||||
| Right of use lease assets obtained in exchange for lessee finance lease liabilities | ||||||||||||||||||||
| Recognition of low-income housing tax asset | ||||||||||||||||||||
| Recognition of commitment on low-income housing project | ||||||||||||||||||||
| Adoption of ASU 2016-13, financial instruments - credit losses non-cash impact | ||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
38
PENNS WOODS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. and its wholly owned subsidiaries, Jersey Shore State Bank (“JSSB”), Luzerne Bank ("Luzerne" and collectively with JSSB , the "Banks"), Woods Real Estate Development Co., Inc., Woods Investment Company, Inc., United Insurance Solutions, LLC, and The M Group Inc. D/B/A The Comprehensive Financial Group (“The M Group”), a wholly owned subsidiary of JSSB (collectively, the “Corporation”). All significant intercompany balances and transactions have been eliminated.
Nature of Business
The Banks engage in a full-service commercial banking business, making available to the community a wide range of financial services including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction financing, farm loans, community development loans, loans to non-profit entities and local government, and various types of demand and time deposits including, but not limited to, checking accounts, savings accounts, money market deposit accounts, certificates of deposit, and IRAs. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law.
The financial services are provided by the Banks to individuals, partnerships, non-profit organizations, and corporations through their twenty-four offices located in Clinton, Lycoming, Centre, Montour, Union, Blair, and Luzerne Counties, Pennsylvania.
Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the Banks.
Woods Investment Company, Inc., a Delaware holding company, is engaged in investing activities.
The M Group engages in securities brokerage and financial planning services, which include the sale of life insurance products, annuities, and estate planning services.
United Insurance Solutions, LLC offers property and casualty and auto insurance products within the Corporation's market footprint. The Corporation became the sole owner of United Insurance Solutions, LLC when it purchased the outstanding 20 % minority interest on October 1, 2021.
Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial service operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of net deferred tax assets, impairment of goodwill, credit losses of debt securities, fair value of financial instruments, and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks and federal funds sold. Interest-earning deposits mature within 90 days and are carried at cost. Net cash flows are reported for loan, deposit, and short-term borrowing transactions.
Restrictions on Cash and Cash Equivalents
Based on deposit levels, the Banks must maintain cash and other reserves with the Federal Reserve Bank of Philadelphia ("FRB").
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Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity, securities available for sale, or securities held for trading. Debt securities acquired with the intent and ability to hold to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available for sale securities are reported as a separate component of shareholders’ equity, net of tax, until realized. Equity securities are carried at fair value. Unrealized holding gains and losses for equity securities are recognized as a separate component within the income statement. Realized security gains and losses are computed using the specific identification method for debt securities and the average cost method for marketable equity securities. Interest and dividends on investment securities are recognized as income when earned and is not included within the investment balance.
Securities are periodically reviewed for credit losses upon a number of factors, including, but not limited to, extent to which the fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its fair value, whether it is more likely than not that the Corporation would be required to sell the security before its anticipated recovery in fair value, and a review of the Corporation’s capital adequacy, interest rate risk position, and liquidity. The assessment of a security’s ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, and management’s intent and ability requires considerable judgment. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statement of Income.
Fair values of investment securities are based on observed market prices. Certain investment securities do not have observed bid prices and their fair value is based on instruments with similar risk elements. Since regulatory stock is redeemable at par, the Corporation carries it at cost.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are stated at the principal amount outstanding, net of deferred fees and discounts, unamortized loan fees and costs, and the allowance for credit losses. Interest on loans is recognized as income when earned on the accrual method and is not included within the loan balance. The Corporation’s general policy has been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectability of additional interest. Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in payment and, in management’s judgment, the borrower has the ability and intent to make future principal payments. Otherwise, payments are applied to the unpaid principal balance of the loan. Loans are restored to accrual status if certain conditions are met, including but not limited to, the repayment of all unpaid interest and scheduled principal due, ongoing performance consistent with the contractual agreement, and the future expectation of continued, timely payments.
Loan origination and commitment fees as well as certain direct loan origination costs are being deferred and amortized as an adjustment to the related loan’s yield over the contractual lives of the related loans.
Allowance for Credit Losses
CECL Adoption and Updated Significant Accounting Policy
On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology, and is referred to as CECL. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to off-balance sheet (“OBS”) credit exposures (loan commitments, standby letters of credit, financial guarantees, and other similar instruments).
The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, net of investments in leases and OBS credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Company recorded an overall decrease of $3,789,000 to the Allowance for Credit Losses (“ACL”) on January 1, 2023 as a result of the adoption of CECL with an associated increase to retained earnings of $2,993,000 and decrease to deferred tax assets of $796,000 . The Company also recorded a liability of $1,703,000 for OBS credit exposures that resulted in a decrease to retained earnings of $1,346,000 and an increase to deferred tax assets of $357,000 .
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The discussion that follows describes the methodology for determining the ACL under the CECL model that was adopted effective January 1, 2023. The allowance methodology for prior periods is disclosed in the Company’s 2022 Annual Report on Form 10-K.
The Company has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.
Loans: The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses. The ACL also includes certain qualitative and forecast adjustments to the CECL model.
Loans Evaluated Collectively:
• | Loans aggregated into pools based on similar risk characteristics. | ||||
• | The probability of default "PD" and loss given default rate "LGD" CECL model components are determined based on loss estimates driven by historical experience at the input level. | ||||
• | The PD model component uses "through the economic cycle transition" matrices based on the Company's historical loan and transaction data across each pool of loans. Adjustments to PD are made based on the borrowers credit score and origination. | ||||
• | The LGD model component calculates a lifetime LGD estimate across each pool of loans utilizing a nonparametric loss curve modeling approach. Adjustments to LGD are made based on the loan-to-value at origination. | ||||
• | Reasonable and supportable forecasts are incorporated through the utilization of qualitative factors. | ||||
• | Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate. | ||||
• | A constant prepayment rate is calculated for each loan pool in the CECL model. | ||||
Loans Evaluated Individually: Loans evaluated individually for expected credit losses include loans determined to be collateral-dependant or that do not share similar risk characteristics with the rest of the pool.
Loans evaluated individually may have specific allocations assigned. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans.
For loans secured by real estate, estimated fair values are determined through appraisals performed by third-party appraisers or third party evaluations for commercial real estate loans and our internal appraisal department for 1-4 family real estate secured loans, discounted to arrive at expected net sale proceeds. For collateral dependent loans, estimated real estate fair values are also net of estimated selling costs. When a real estate secured loan is impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Company’s experience and knowledge of the real estate market; the purpose of the loan; market factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Company generally obtains updated evaluations for collateral dependent loans secured predominantly by real estate every 12 months.
When updated evaluations are not obtained for loans secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and there has not been a significant deterioration in the collateral value since the original appraisal was performed.
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal credit rating process is used. The Company believes that internal credit ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal credit rating categories is a significant component of the ACL methodology for these loans, which bases the PD on this migration. Assigning credit ratings involves judgment. Credit ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.
The following is a summary of the Company's internal credit rating categories:
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• | Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk. | ||||
• | Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak. | ||||
• | Substandard or Lower: There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt. | ||||
The allocation of the ACL is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Company considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type.
Qualitative and Other Adjustments to ACL: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These include changes in lending policy, volume of the portfolio, economy conditions, credit concentrations, level of problem loans, loan review, collateral value, and experience of credit staff. Qualitative adjustments are judgmental and are based on Management’s knowledge of the portfolio and the markets in which the Company operates. Qualitative adjustments are evaluated and approved on a quarterly basis.
OBS Credit Exposures: The ACL for OBS credit exposures is recorded in other liabilities on the consolidated balance sheet. This ACL represents management’s estimate of expected losses in its unfunded loan commitments and other OBS credit exposures, such as letters of credit and credit recourse on sold residential mortgage loans. The ACL specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for OBS credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses.
The impact from the adoption of CECL is shown below:
| January 1, 2023 | ||||||||||||||||||||
| (In Thousands) | Pre-Adoption | Adoption Impact | As Reported | |||||||||||||||||
| Assets | ||||||||||||||||||||
| ACL on loans | ||||||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | $ | |||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | ( | |||||||||||||||||||
| Commercial | ( | |||||||||||||||||||
| Construction | ( | |||||||||||||||||||
| Consumer automobile loans | ||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||
| Unallocated | ( | |||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| ACL for unfunded commitments | ||||||||||||||||||||
| $ | $ | ( | $ | |||||||||||||||||
The allowance for credit losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio as of the Consolidated Balance Sheet date. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for credit losses is established through a provision for credit losses charged to operations. The provision for credit losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify individually evaluated loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed semi-annually for the Banks. Management remains committed to an aggressive program of problem loan identification and resolution.
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Although management believes that it uses the best information available to make such determinations and that the allowance for credit losses is adequate at December 31, 2023, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, rising unemployment, or negative performance trends in financial information from borrowers could be indicators of subsequent increased levels of nonperforming assets and possible charge-offs, which would normally require increased credit loss provisions. An integral part of the periodic regulatory examination process is the review of the adequacy of the Banks' credit loss allowance. The regulatory agencies could require the Banks, based on their evaluation of information available at the time of their examination, to provide additional credit loss provisions to further supplement the allowance.
Loan Charge-off Policies
Loans are generally fully or partially charged down to the fair value of collateral securing the asset when:
• management judges the asset to be uncollectible;
•repayment is deemed to be protracted beyond reasonable time frames;
•the asset has been classified as a loss by either the internal loan review process or external examiners;
•the borrower has filed bankruptcy and the loss becomes evident due to a lack of assets; or
•the loan is 180 days past due unless both well secured and in the process of collection.
Troubled Loan Modifications
Under GAAP, a modification is a Troubled Loan Modification (TLM) if the borrower is experiencing financial difficulties and the modification is a direct change in contractual cash flows. This excludes insignificant payment delays.
ASU 2022-02 does not amend the current modification guidance other than to eliminate Troubled Debt Restructures (TDRs). An evaluation needs to be completed to determine whether the modification represents a new loan or a continuation of an existing loan. A loan modification or refinancing results in a new loan if: the terms of the new loan are at least as favorable to the lender as the terms of the other loans to similar borrowers, and the modifications to the terms of the loan are more than minor.
Financial difficulties existing when:
•the borrower may have financial difficulties even though not currently in default with the lender;
•the borrower is currently delinquent on any of its debt (with or outside of the Bank);
•it is probable the borrower will be in payment default on any of its debt in the foreseeable future without modification;
•the borrower has declared or is declaring bankruptcy;
•there is substantial doubt as to whether the borrower will continue to be a going concern (commercial loans);
•the borrower has securities that have been, are in the process of, or under threat of being delisted from an exchange;
•the forecasted cash flows will be insufficient to service the existing debt for the foreseeable future; and
•without modification, the borrower cannot obtain funds from other sources at the same rate as a non-troubled borrower.
A direct change in contractual cash flows includes: principal forgiveness, interest rate reduction, and term extension (other than an insignificant payment delay).
Loans Held for Sale
In general, fixed rate residential mortgage loans originated by the Banks are held for sale and are carried at cost due to their short holding period, which can range from less than two weeks to a maximum of thirty days. Sold loans are not serviced by the Banks. Proceeds from the sale of loans in excess of the carrying value are accounted for as a gain. Total gains on the sale of loans are shown as a component of non-interest income within the Consolidated Statement of Income.
Foreclosed Assets
Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Net operating expenses and gains and losses
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realized from disposition are included in non-interest expense and income, respectively, within the Consolidated Statement of Income.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets, which range from to ten years for furniture, fixtures, and equipment and to forty years for buildings and improvements. Costs incurred for routine maintenance and repairs are charged to operations as incurred. Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Corporation has purchased life insurance policies on certain officers and directors. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as a component of non-interest income within the Consolidated Statement of Income.
Goodwill
Intangible Assets
The Corporation also had intangible assets of $210,000 , which is net of accumulated amortization of $810,000 , as a result of the purchase of two books of business related to investment product sales. The book of business intangible is being amortized using the straight-line method over a period of ten years .
Investments in Limited Partnerships
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Corporation enters into off-balance sheet financial instruments. Those instruments consist of commitments to extend credit and standby letters of credit. When those instruments are funded or become payable, the Corporation reports the amounts in its financial statements.
Marketing Cost
Marketing costs are generally expensed as incurred.
Income Taxes
The Corporation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax
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positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Corporation analyzed its deferred tax asset position and determined that there was not a need for a valuation allowance due to the Corporation’s ability to generate future ordinary and capital taxable income.
The Corporation when applicable recognizes interest and penalties on income taxes as a component of income tax provision.
Earnings Per Share
The Corporation provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported in the numerator and weighted average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options are adjusted in the denominator.
Employee Benefits
Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the eligible employees of JSSB. The plan is funded on a current basis to the extent that it is deductible under existing federal tax regulations. Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering eligible employees. Contributions matching those made by eligible employees are funded throughout the year. In addition, an elective contribution may be made annually at the discretion of the board of directors.
The M Group Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds. The revenues generated from life insurance sales are commission only, as The M Group does not underwrite the policies. Life insurance sales include permanent and term policies with the majority of the policies written being permanent. Term life insurance policies are written for 10 , 15 , 20 , and 30 year terms with the majority of the policies being written for 20 years. None of these products are offered as an integral part of lending activities.
Commissions from the sale of annuities are recognized at the time notice is received from the third party broker/dealer or an insurance company that the transaction has been accepted and approved, which is also the time when commission income is received.
Life insurance commissions are recognized at varying points based on the payment option chosen by the customer. Commissions from monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly and semi-annual premium payments are recognized quarterly and semi-annually when the earnings process is complete. For example, semi-annual payments on the first of January and July would result in commission income recognition on the first of January and July, while payments on the first of January, April, July, and October would result in commission income recognition on those dates. The potential for chargebacks only exists for those policies on a monthly payment plan since income is recognized at the beginning of the annual coverage period versus at the time of each monthly payment. No liability is maintained for chargebacks as these are removed from income at the time of the occurrence.
Accumulated Other Comprehensive Income (Loss)
The Corporation is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented. Accumulated other comprehensive income (loss) is comprised of unrealized holding gains (losses) on the available for sale securities portfolio and the unrecognized components of net periodic benefit costs of the defined benefit pension plan.
Segment Reporting
The Corporation has determined that its only reportable segment is Community Banking.
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Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect net income or shareholders’ equity.
Recent Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This amendment clarifies the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. It also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The amendments will be applied prospectively, with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.
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In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. This Update is not expected to have a significant impact on the Company’s financial statements.
In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement-Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation-Stock Compensation (Topic 718), which amends or supersedes various SEC paragraphs within the Codification to conform to past SEC announcements and guidance issued by the SEC. The ASU does not provide any new guidance so there is no transition or effective date associated with it. This ASU did not have a significant impact on the Company’s financial statements.
In August 2023, the FASB issued ASU 2023-04, Liabilities (Topic 405), which adds various SEC paragraphs to the Codification to reflect guidance included in SEC Staff Accounting Bulletin 121 on safeguarding crypto assets. The standard does not provide any new guidance so there is no transition or effective date associated with it. This ASU did not have a significant impact on the Company’s financial statements.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvement: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, which incorporates several SEC disclosure requirements into US GAAP and adds interim and annual disclosure requirements to a variety of topics in the Accounting Standards Codification, including those focusing on accounting changes, earnings per share, debt and repurchase agreements. For entities subject to the SEC disclosure requirements and those “required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer,” the US GAAP requirements will be effective when the removal of the related SEC rule is effective. Early adoption is not permitted for these entities. For all other entities, the effective date will be two years later, and early adoption is permitted. That is, financial statements issued after the effective date of each amendment are required to include on a prospective basis the related disclosure incorporated into US GAAP by this ASU. However, if the SEC does not act to remove its related requirements by June 30, 2027, any related FASB amendments will be removed from the Codification and will not be effective for any entities.
NOTE 2 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The changes in accumulated other comprehensive income (loss) by component shown, net of tax and parenthesis indicating debits to net income, as of December 31, 2023, 2022, and 2021 were as follows:
| Twelve Months Ended December 31, 2023 | Twelve Months Ended December 31, 2022 | Twelve Months Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | Net Unrealized (Loss) Gain on Available for Sale Securities* | Defined Benefit Plan* | Total* | Net Unrealized Gain (Loss) on Available for Sale Securities* | Defined Benefit Plan* | Total* | Net Unrealized Gain (Loss) on Available for Sale Securities* | Defined Benefit Plan* | Total* | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||
*Amounts net of 21% tax rate
47
The reclassifications out of accumulated other comprehensive (loss) income shown, net of tax and parenthesis indicating debits to net income, as of December 31, 2023, 2022, and 2021 were as follows:
| (In Thousands) | Amount Reclassified from Accumulated Other Comprehensive (Loss) Income | |||||||||||||||||||||||||
| Details about Accumulated Other Comprehensive (Loss) Income Components | Twelve Months Ended | Affected Line Item in the Consolidated Statement of Income | ||||||||||||||||||||||||
| December 31, 2023 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||
| Net realized (loss) gain on available for sale securities | $ | ( | $ | ( | $ | Net debt securities (losses) gain, net available for sale | ||||||||||||||||||||
| Income tax effect | ( | Income tax provision | ||||||||||||||||||||||||
| $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Net unrecognized pension expense | $ | ( | $ | ( | $ | ( | Other non-interest expense | |||||||||||||||||||
| Income tax effect | Income tax provision | |||||||||||||||||||||||||
| $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
NOTE 3 - PER SHARE DATA
There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share; therefore, net income as presented on the consolidated statement of income will be used as the numerator. The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.
| Year Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Weighted average common shares issued | ||||||||||||||||||||
| Average treasury stock shares | ( | ( | ( | |||||||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||||||
| Dilutive effect of outstanding stock options | ||||||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||||||
There were a total of 1,000,000 non-qualified employee stock options (Note 14) outstanding on December 31, 2023 that had a weighted average strike price of $25.55 . Options on December 31, 2022 had an average strike price of $25.34 with a total of 914,000 options outstanding. Grants outstanding at year-end 2021 totaled to 1,034,525 options with an average strike price of $27.23 . These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the 2023, 2022, and 2021 periods presented due to the average market price of common shares being less than the strike price of the options.
48
NOTE 4 - INVESTMENT SECURITIES
The amortized cost, gross gains and losses, and fair values of investment securities at December 31, 2023 and 2022 are as follows:
| 2023 | ||||||||||||||||||||||||||
| (In Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
| Available for sale (AFS): | ||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Mortgage-backed securities | ( | |||||||||||||||||||||||||
| State and political securities | ( | |||||||||||||||||||||||||
| Other debt securities | ( | |||||||||||||||||||||||||
| Total debt securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Investment equity securities: | ||||||||||||||||||||||||||
| Other equity securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Total equity securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||
| (In Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
| Available for sale (AFS): | ||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Mortgage-backed securities | ( | |||||||||||||||||||||||||
| State and political securities | ( | |||||||||||||||||||||||||
| Other debt securities | ( | |||||||||||||||||||||||||
| Total debt securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Investment equity securities: | ||||||||||||||||||||||||||
| Other equity securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Total equity securities | $ | $ | $ | ( | $ | |||||||||||||||||||||
The following tables show the Corporation’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2023 and 2022.
| 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 | ||||||||||||||||||||||||||||||||
| Available for sale (AFS) | ||||||||||||||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | $ | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||
| Mortgage-backed securities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| State and political securities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Other debt securities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Total Debt Securities AFS | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
49
| 2022 | ||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||
| Available for sale (AFS) | ||||||||||||||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | $ | ( | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||
| Mortgage-backed securities | ( | ( | ||||||||||||||||||||||||||||||||||||
| State and political securities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Other debt securities | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Total Debt Securities AFS | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
At December 31, 2023 there were 27 individual securities in a continuous unrealized loss position for less than twelve months and 177 individual securities in a continuous unrealized loss position for greater than twelve months.
The Corporation reviews its position quarterly and has asserted that at December 31, 2023 and 2022, the declines outlined in the above table do not represent credit losses and the Corporation does not intend to sell and does not believe they will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Corporation has concluded that no allowance for credit losses is necessary as the unrealized losses are the result of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at December 31, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| (In Thousands) | Amortized 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 | ||||||||||||||
| Total | $ | $ | ||||||||||||
Total gross proceeds from sales of securities available for sale were $24,702,000 , $5,557,000 , and $17,947,000 for 2023, 2022, and 2021, respectively. The following table represents gross realized gains and losses on those transactions:
| Year Ended December 31, | ||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| Gross realized gains: | ||||||||||||||||||||
| U.S. Government and agency securities | $ | $ | $ | |||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||
| State and political securities | ||||||||||||||||||||
| Other debt securities | ||||||||||||||||||||
| Total gross realized gains | $ | $ | $ | |||||||||||||||||
| Gross realized losses: | ||||||||||||||||||||
| U.S. Government and agency securities | $ | $ | $ | |||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||
| State and political securities | ||||||||||||||||||||
| Other debt securities | ||||||||||||||||||||
| Total gross realized losses | $ | $ | $ | |||||||||||||||||
There were no
50
Investment securities with a carrying value of approximately $107,800,000 and $154,946,000 at December 31, 2023 and 2022, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
Equity securities consist of Community Reinvestment Act funds along with other smaller investments in other exchange traded equities. At December 31, 2023 and December 31, 2022, we had $1,122,000 and $1,142,000 , respectively, 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 years ended December 31, 2023, 2022 and 2021:
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| Net gain (loss) recognized in equity securities during the period | $ | $ | ( | $ | ( | |||||||||||||||
| Less: Net (loss) gain realized on the sale of equity securities during the period | ( | |||||||||||||||||||
| Unrealized gain (loss) recognized in equity securities held at reporting date | $ | $ | ( | $ | ( | |||||||||||||||
NOTE 5 - FEDERAL HOME LOAN BANK STOCK
The Banks are members of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and as such, are required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment as necessary. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB.
Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management considered that the FHLB maintains regulatory capital ratios in excess of all regulatory capital requirements, liquidity appears adequate, new shares of FHLB stock continue to change hands at the $100 par value, and the payment of dividends.
NOTE 6 - LOAN CREDIT QUALITY AND RELATED ALLOWANCE FOR CREDIT LOSSES
Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial, financial, and agricultural, real estate, and installment loans. Real estate loans are further segmented into three categories: residential, commercial, and construction, while installment loans are classified as either consumer automobile loans or other installment loans.
51
The following table presents the related aging categories of loans, by class, as of December 31, 2023 and 2022:
| 2023 | ||||||||||||||||||||||||||
| (In Thousands) | Past Due 30 To 89 Days | Past Due 90 Days Or More | Current | Total | ||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | $ | $ | ||||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||
| Consumer automobile loans | ||||||||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||
| Net deferred loan fees and discounts | ||||||||||||||||||||||||||
| Allowance for credit losses | ( | |||||||||||||||||||||||||
| Loans, net | $ | |||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||
| (In Thousands) | Past Due 30 To 89 Days | Past Due 90 Days Or More | Current | Total | ||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | $ | $ | ||||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||
| Consumer automobile loans | ||||||||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||
| Net deferred loan fees and discounts | ||||||||||||||||||||||||||
| Allowance for loan losses | ( | |||||||||||||||||||||||||
| Loans, net | $ | |||||||||||||||||||||||||
The majority of the commercial real-estate segment is 1-4 family residential or owner occupied properties. The Banks have not historically focused on non-owner occupied office buildings. As of December 31, 2023, non-mixed use non-owner occupied office building exposure is less than $20,000,000 with no loans being past due or nonperforming.
The Allowance for Credit Losses ("ACL") related to loans consists of loans evaluated collectively and individually for expected credit losses. The ACL related to loans represents an estimate of expected credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. The ACL for off balance sheet credit exposure includes estimated losses on unfunded loan commitments, letters of credit and other off balance sheet credit exposures and is recorded in other liabilities. The total ACL is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The following table presents the components of the ACL as of December 31, 2023:
52
| December 31, | ||||||||
| (In Thousands) | 2023 | |||||||
| ACL - loans | $ | |||||||
| ACL - off balance sheet credit exposure | ||||||||
| Total ACL | $ | |||||||
Non-Accrual Loans
| December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Non-accrual Loans | ||||||||||||||||||||||||||
| (In Thousands) | With a Related ACL | Without a Related ACL | Total | Total Non-accrual loans | ||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | $ | $ | ||||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||
| Consumer automobile | ||||||||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
Total interest income recorded on non-accrual loans at December 31, 2023 totaled $117,000 .
Impaired Loans
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of December 31, 2022:
53
| 2022 | ||||||||||||||||||||
| (In Thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | $ | — | ||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | — | |||||||||||||||||||
| Commercial | — | |||||||||||||||||||
| Construction | — | |||||||||||||||||||
| Consumer automobile loans | — | |||||||||||||||||||
| Other consumer installment loans | — | |||||||||||||||||||
| — | ||||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial, financial, and agricultural | ||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Consumer automobile loans | ||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||
| Total: | ||||||||||||||||||||
| Commercial, financial, and agricultural | ||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Consumer automobile loans | ||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
The following table presents the average recorded investment in impaired loans and related interest income recognized for December 31, 2022 and 2021:
| 2022 | ||||||||||||||||||||
| (In Thousands) | Average Investment in Impaired Loans | Interest Income Recognized on an Accrual Basis on Impaired Loans | Interest Income Recognized on a Cash Basis on Impaired Loans | |||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | $ | |||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Consumer automobile loans | ||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
54
| 2021 | ||||||||||||||||||||
| (In Thousands) | Average Investment in Impaired Loans | Interest Income Recognized on an Accrual Basis on Impaired Loans | Interest Income Recognized on a Cash Basis on Impaired Loans | |||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | $ | |||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Consumer automobile loans | ||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
At December 31, 2023, additional funds totaling $2,000 are committed to be advanced in connection with individually evaluated loans.
The following table presents outstanding loan balances of collateral-dependent loans by class as of December 31, 2023:
| (In Thousands) | Real estate | Unsecured* | Total | |||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | $ | $ | $ | |||||||||||||||||
| Commercial | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
Loan Modifications
On January 1, 2023, the Corporation adopted ASU 2022-02. Loan modifications to borrowers experiencing financial difficulty reported below do not include modifications with insignificant payment delays. ASU 2022-02 lists the following factors when considering if the loan modification has insignificant payment delays: (1) the amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due, and (2) the delay in timing of the restructured payment period is insignificant relative to the frequency of payments due under the debt, the debt’s original contractual maturity or the debt’s original expected duration.
Prior to the adoption of ASU 2022-02 the loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months .
There were no loan modifications to borrowers experiencing financial difficulty completed during the twelve months ended December 31, 2023.
Of the one new TDRs that was granted for the year ended December 31, 2022, one loan totaling $220,000 was granted rate concessions.
Loans considered modifications amounted to $5,019,000 and $7,468,000 as of December 31, 2023 and December 31, 2022, respectively.
55
Loan modifications that are considered TDRs completed during the twelve months ended December 31, 2023, 2022, and 2021 were as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | ||||||||||||||||||||
| (In Thousands, Except Number of Contracts) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | ||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | ||||||||||||||||||||
| (In Thousands, Except Number of Contracts) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||
| Commercial, financial, and agricultural | $ | $ | ||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Other consumer installment loans | ||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||
Internal Credit Ratings
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated for Substandard classification. Loans in the Doubtful category exhibit the same weaknesses found in the Substandard loans, however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Loans classified Loss are considered uncollectible and charge-off is imminent.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 2023 loan review evaluated 59 % of the Bank's average outstanding commercial portfolio which can consist of outstanding loans, commercial real estate mortgages and outstanding commitments. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.
The following table presents the credit quality categories identified above as of December 31, 2023 and 2022:
56
| December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Current period gross write offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Real estate mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Current period gross write offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Current period gross write offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Current period gross write offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Consumer Automobile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Current period gross write offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Installment loans to individuals | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard or Lower | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Current period gross write offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
57
The information presented in the table above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, internal credit ratings for the report loan segments as of December 31, 2022:
| 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial, Finance, and Agricultural | Real Estate Mortgages | Consumer automobile | Other consumer installment | |||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | Residential | Commercial | Construction | Totals | ||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Activity in the allowance is presented for the twelve months ended December 31, 2023, 2022, and 2021:
| 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial, Finance, and Agricultural | Real Estate Mortgages | Consumer automobile | Other consumer installment | |||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | Residential | Commercial | Construction | Unallocated | Totals | |||||||||||||||||||||||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Impact of adopting ASC 326 | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial, Finance, and Agricultural | Real Estate Mortgages | Consumer automobile | Other consumer installment | |||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | Residential | Commercial | Construction | Unallocated | Totals | |||||||||||||||||||||||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial, Finance, and Agricultural | Real Estate Mortgages | Consumer automobile | Other consumer installment | |||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | Residential | Commercial | Construction | Unallocated | Totals | |||||||||||||||||||||||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
The shift in allocation and the changes in the provision for credit losses are primarily due to changes in the credit metrics within the loan portfolio coupled with the adoption of CECL on January 1, 2023.
The provision for commercial and agricultural loans decreased during 2023 due to an increase in the level of net recoveries which had a significant impact on the ACL model's PD assumption. The reserve for residential real estate loans decreased primarily due to the adoption of CECL. The provision for commercial real estate loans decreased primarily due to the adoption of CECL and improvement in portfolio credit metrics. The provision for consumer automobiles increased due to increased indirect loan volume and an increase in net charge-offs.
The provision for commercial and agricultural loans decreased during 2022 due to levels and trends of nonaccrual loans in our portfolio and a decline in net charge-offs. The provision for residential real estate loans remained flat as the portfolio size increased but was offset by a decline in the level of net charge-offs. The provision for this loan type is adjusted by national
58
indices as well as our historical losses. The provision for commercial real estate loans decreased primarily due to an improvement in portfolio credit metrics. The provision for consumer automobiles increased due to increased indirect loan volume and concerns regarding the impact of inflation on the customer base.
The Corporation grants commercial, industrial, residential, and installment loans to customers throughout north-east and central Pennsylvania. Although the Corporation has a diversified loan portfolio at December 31, 2023 and 2022, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.
The amount of foreclosed residential real estate held at December 31, 2023 and December 31, 2022, totaled $700,000 and $950,000 , respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2023 and December 31, 2022, totaled $601,000 and $890,000 , respectively.
The Corporation has a concentration of loans at December 31, 2023 and 2022 as follows:
| 2023 | 2022 | |||||||||||||
| Owners of residential rental properties | % | % | ||||||||||||
| Owners of commercial rental properties | % | % | ||||||||||||
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2022:
| 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial, Finance, and Agricultural | Real Estate Mortgages | Consumer automobile | Other consumer installment | Unallocated | Totals | |||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | Residential | Commercial | Construction | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total ending allowance balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total ending loans balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
NOTE 7 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at December 31, 2023 and 2022:
| (In Thousands) | 2023 | 2022 | ||||||||||||
| Land | $ | $ | ||||||||||||
| Premises | ||||||||||||||
| Furniture and equipment | ||||||||||||||
| Leasehold improvements | ||||||||||||||
| Finance lease right-of-use assets | ||||||||||||||
| Total | ||||||||||||||
| Less accumulated depreciation and amortization | ||||||||||||||
| Net premises and equipment | $ | $ | ||||||||||||
Depreciation and amortization related to premises and equipment for the years ended 2023, 2022, and 2021 was $1,990,000 , $2,107,000 , and $2,436,000 , respectively.
59
NOTE 8 - GOODWILL AND OTHER INTANGIBLES
As of December 31, 2023 and 2022, goodwill had a gross carrying value of $17,380,000 277,000 653,000 was recognized resulting in a net carrying amount of $16,450,000 at December 31, 2022. The impairment charge occurred due to a decline in revenue that was experienced during 2022 for The M Group.
The gross carrying amount of goodwill is tested for impairment annually. Based on the fair value of the reporting unit, estimated using the expected present value of future cash flows, there was no evidence of impairment of the carrying amount at December 31, 2023.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. Since the acquisition, no such adjustments were recorded. The identifiable intangible assets consist of two book of business intangibles that are being amortized on a straight-line basis over the useful life of such assets. The net carrying amount of the book of business intangibles at December 31, 2023 was $210,000 with $810,000 accumulated amortization as of that date.
As of December 31, 2023, the estimated future amortization expense for the core deposit and trade name intangible was:
| (In Thousands) | Book of Business Intangible | ||||||||||
| 2024 | $ | ||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| $ | |||||||||||
NOTE 9 - DEPOSITS
Time deposits of $250,000 or more totaled approximately $50,722,000 on December 31, 2023 and $31,501,000 on December 31, 2022.
Total time deposit maturities are as follows at December 31, 2023:
| (In Thousands) | 2023 | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
Total deposits at December 31, 2023 and 2022 are as follows:
60
| 2023 | 2022 | |||||||||||||
| (In Thousands) | Amount | Amount | ||||||||||||
| Noninterest-bearing | $ | $ | ||||||||||||
| Savings | ||||||||||||||
| Super Now | ||||||||||||||
| Money Market | ||||||||||||||
| Time | ||||||||||||||
| Brokered Time Deposits | ||||||||||||||
| Total deposits | $ | $ | ||||||||||||
NOTE 10 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase and primarily FHLB advances, which generally represent overnight or less than six month borrowings. In addition to the outstanding balances noted below, the Banks also have additional lines of credit totaling $100,000,000 available from correspondent banks other than the FHLB. The outstanding balances and related information for short-term borrowings are summarized as follows at December 31, 2023 and 2022:
| (In Thousands) | 2023 | 2022 | ||||||||||||
| Repurchase Agreements: | ||||||||||||||
| Balance at year end | $ | $ | ||||||||||||
| Maximum amount outstanding at any month end | ||||||||||||||
| Average balance outstanding during the year | ||||||||||||||
| Weighted-average interest rate: | ||||||||||||||
| At year end | % | % | ||||||||||||
| Paid during the year | % | % | ||||||||||||
| Overnight: | ||||||||||||||
| Balance at year end | $ | $ | ||||||||||||
| Maximum amount outstanding at any month end | ||||||||||||||
| Average balance outstanding during the year | ||||||||||||||
| Weighted-average interest rate: | ||||||||||||||
| At year end | % | % | ||||||||||||
| Paid during the year | % | % | ||||||||||||
| Short-Term: | ||||||||||||||
| Balance at year end | $ | $ | ||||||||||||
| Maximum amount outstanding at any month end | ||||||||||||||
| Average balance outstanding during the year | ||||||||||||||
| Weighted-average interest rate: | ||||||||||||||
| At year end | % | % | ||||||||||||
| Paid during the year | % | % | ||||||||||||
We utilize 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 December 31, 2023 and 2022 is presented in the following tables.
61
| 2023 | 2022 | |||||||||||||
| Remaining Contractual Maturity of the Agreements | ||||||||||||||
| (In Thousands) | Overnight and Continuous | Overnight and Continuous | ||||||||||||
| Repurchase Agreements: | ||||||||||||||
| State and political securities | $ | $ | ||||||||||||
| Other debt securities | ||||||||||||||
| Total carrying value of collateral pledged | $ | $ | ||||||||||||
| Total liability recognized for repurchase agreements | $ | $ | ||||||||||||
NOTE 11 - LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at December 31, 2023 and 2022:
| (In Thousands) | Weighted Average Interest Rate | Stated Interest Rate Range | ||||||||||||||||||||||||||||||||||||||||||
| Description | Maturity | 2023 | 2022 | From | To | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Fixed | 2023 | % | % | % | % | $ | $ | |||||||||||||||||||||||||||||||||||||
| Fixed | 2024 | % | % | % | % | |||||||||||||||||||||||||||||||||||||||
| Fixed | 2025 | % | % | % | % | |||||||||||||||||||||||||||||||||||||||
| Fixed | 2026 | % | % | % | % | |||||||||||||||||||||||||||||||||||||||
| Fixed | 2027 | % | % | % | % | |||||||||||||||||||||||||||||||||||||||
| Fixed | 2028 | % | % | % | % | |||||||||||||||||||||||||||||||||||||||
| Total Fixed | % | % | ||||||||||||||||||||||||||||||||||||||||||
| Total | % | % | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| (In Thousands) Year Ending December 31, | Amount | Weighted Average Rate | ||||||||||||
| 2024 | $ | % | ||||||||||||
| 2025 | % | |||||||||||||
| 2026 | % | |||||||||||||
| 2027 | % | |||||||||||||
| 2028 | % | |||||||||||||
| $ | % | |||||||||||||
The Banks maintain a credit arrangement which includes a revolving line of credit with the FHLB. Under this credit arrangement, at December 31, 2023, JSSB has a remaining borrowing capacity of $274,524,000 and Luzerne has a remaining capacity of $188,554,000 , which are subject to annual renewal and typically incur no service charges. Under terms of a blanket agreement, collateral for the FHLB borrowings must be secured by certain qualifying assets of each Bank which consist principally of first mortgage loans and state and political securities, along with other securities. Total outstanding letters of credit at December 31, 2023 with the FHLB for JSSB are $200,000 while Luzerne has $0 outstanding.
62
NOTE 12 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax asset position at December 31, 2023 and 2022:
| (In Thousands) | 2023 | 2022 | ||||||||||||
| Deferred tax assets: | ||||||||||||||
| Allowance for loan losses | $ | $ | ||||||||||||
| Deferred compensation | ||||||||||||||
| Lease liability | ||||||||||||||
| Fair value adjustment on equity securities | ||||||||||||||
| Unrealized loss on available for sale securities | ||||||||||||||
| Non-qualified Stock Options | ||||||||||||||
| Capital loss carryforward | ||||||||||||||
| Other | ||||||||||||||
| Total | ||||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Lease right of use asset | ||||||||||||||
| Defined pension | ||||||||||||||
| Investment security accretion | ||||||||||||||
| Deferred loan fees and discounts | ||||||||||||||
| Depreciation | ||||||||||||||
| Amortization | ||||||||||||||
| Valuation allowance | ||||||||||||||
| Total | ||||||||||||||
| Deferred tax asset, net | $ | $ | ||||||||||||
A valuation allowance was established on the $1,003,000 of capital loss carryforwards in 2021. The valuation allowance was increased by $807,000 to a total of $1,810,000 due to additional capital losses resulting when the Corporation's federal tax return was filed in October of 2022. There were no other valuation allowances established at December 31, 2021, because of the Corporation’s ability to carry back losses to recover taxes paid in previous years and certain tax strategies, together with the anticipated future taxable income as evidenced by the Corporation’s earning potential. The Corporation is no longer subject to federal, state, and local examinations by tax authorities for years before 2020.
The provision or benefit for income taxes is comprised of the following for the year ended December 31, 2023, 2022, and 2021:
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| Currently payable | $ | $ | $ | |||||||||||||||||
| Deferred expense (benefit) | ( | ( | ||||||||||||||||||
| Total provision | $ | $ | $ | |||||||||||||||||
A reconciliation between the expected income tax or benefit and the effective income tax rate on income before income tax provision or benefit follows for the year ended December 31, 2023, 2022, and 2021:
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||
| (In Thousands) | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||||
| Provision at expected rate | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| (Decrease) increase in tax resulting from: | ||||||||||||||||||||||||||||||||||||||
| Tax-exempt income | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Other, net | ( | ( | ||||||||||||||||||||||||||||||||||||
| Effective income tax provision and rate | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
63
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Corporation has a noncontributory defined benefit pension plan (the “Plan”) for all employees meeting certain age and length of service requirements that were hired prior to January 1, 2004, at which time entrance into the Plan was frozen. The benefit accrual for the Plan was subsequently frozen at December 31, 2014. Benefits are based primarily on years of service and the average annual compensation during the highest consecutive years within the final ten years of employment, until December 31, 2014 when the benefit accrual was frozen.
The following table sets forth the obligation and funded status as of December 31, 2023 and 2022:
| (In Thousands) | 2023 | 2022 | ||||||||||||
| Change in benefit obligation: | ||||||||||||||
| Benefit obligation at beginning of year | $ | $ | ||||||||||||
| Interest cost | ||||||||||||||
| Actuarial loss (gain) | ( | |||||||||||||
| Benefits paid | ( | ( | ||||||||||||
| Change in actuarial assumptions | ( | |||||||||||||
| Benefit obligation at end of year | $ | $ | ||||||||||||
| Change in plan assets: | ||||||||||||||
| Fair value of plan assets at beginning of year | $ | $ | ||||||||||||
| Actual return on plan assets | ( | |||||||||||||
| Benefits paid | ( | ( | ||||||||||||
| Adjustment to fair value of plan assets | ( | |||||||||||||
| Fair value of plan assets at end of year | ||||||||||||||
| Funded status | $ | $ | ||||||||||||
| Accounts recognized on balance sheet as: | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Amounts not yet recognized as a component of net periodic pension cost: | ||||||||||||||
| Amounts recognized in accumulated other comprehensive income (loss) consist of: | ||||||||||||||
| Net loss | $ | $ | ||||||||||||
The accumulated benefit obligation for the Plan was $16,858,000 and $16,544,000 at December 31, 2023 and 2022, respectively.
Components of Net Periodic Cost and Other Amounts Recognized in Other Comprehensive Income (Loss) as of December 31, 2023, 2022, and 2021 are as follows:
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| Net periodic pension cost: | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| ( | ( | ( | ||||||||||||||||||
| Net periodic (benefit) cost | $ | ( | $ | ( | $ | ( | ||||||||||||||
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31, 2023, 2022, and 2021:
64
| 2023 | 2022 | 2021 | |||||||||||||||
| Discount rate | % | % | % | ||||||||||||||
| Rate of compensation increase | N/A | N/A | N/A | ||||||||||||||
Weighted-average assumptions used to determine net periodic cost for years ended December 31, 2023, 2022, and 2021:
| 2023 | 2022 | 2021 | |||||||||||||||
| Discount rate | % | % | % | ||||||||||||||
| Expected long-term return on plan assets | % | % | % | ||||||||||||||
The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower future returns on similar investments compared to past periods.
Plan Assets
The Plan’s weighted-average asset allocations at December 31, 2023 and 2022 by asset category are as follows:
| Asset Category | 2023 | 2022 | ||||||||||||
| Cash | % | % | ||||||||||||
| Fixed income securities | % | % | ||||||||||||
| Equity | % | % | ||||||||||||
| Inflation Hedges/Real Assets | % | % | ||||||||||||
| Hedged Strategies | % | % | ||||||||||||
| Total | % | % | ||||||||||||
The investment objective for the Plan is to maximize total return with tolerance for slightly above average risk, meaning the fund is able to tolerate short-term volatility to achieve above-average returns over the long term.
Asset allocation favors equities, with target allocation of approximately 62 % equity securities, 15.0 % fixed income securities, 10 % inflation hedges/real assets, 10 % hedged strategies, and 3 % cash. Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between the acceptable ranges. The equity portfolio’s exposure is primarily in mid and large capitalization domestic equities with limited exposure to small capitalization and international stocks.
It is management’s intent to give the investment managers flexibility, within the overall guidelines, with respect to investment decisions and their timing. However, certain investments require specific review and approval by management. Management is also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives to execute investment strategies.
The following table sets forth by level, within the fair value hierarchy detailed in Note 20 - Fair Value Measurements, the Plan’s assets at fair value as of December 31, 2023 and 2022:
| 2023 | ||||||||||||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||||||||||||
| Mutual funds - taxable fixed income | ||||||||||||||||||||||||||
| Mutual funds - domestic equity | ||||||||||||||||||||||||||
| Mutual funds - international equity | ||||||||||||||||||||||||||
| Inflation Hedges/Real Assets | ||||||||||||||||||||||||||
| Hedged Strategies | ||||||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||||||||||||
65
| 2022 | ||||||||||||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||||||||||||
| Mutual funds - taxable fixed income | ||||||||||||||||||||||||||
| Mutual funds - domestic equity | ||||||||||||||||||||||||||
| Mutual funds - international equity | ||||||||||||||||||||||||||
| Inflation Hedges/Real Assets | ||||||||||||||||||||||||||
| Hedged Strategies | ||||||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||||||||||||
The following future benefit payments are expected to be paid:
| (In Thousands) | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029-2032 | |||||
| $ | |||||
The Corporation does not expect to contribute to its Pension Plan in 2024.
401(k) Savings Plan
The Corporation also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k), 404, and 415. The Corporation may make matching contributions equal to a discretionary percentage that is determined by the Board of Directors. Participants are at all times fully vested in their contributions and vest over a period of five years regarding the employer contribution. Contribution expense was approximately $540,000 , $548,000 , and $500,000 for the years ended December 31, 2023, 2022, and 2021, respectively.
Deferred Compensation Plan
The Corporation has a deferred compensation plan whereby participating directors elect to forego directors’ fees paid in cash. Under this plan, the Corporation will make payments for a ten-year period beginning at the later of age 65 or ceasing to be a director in most cases or at death, if earlier, at which time payments would be made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the Corporation has acquired bank-owned life insurance policies on the lives of the participating directors for which insurance benefits are payable to the Corporation. The Corporation incurred expenses related to the plan of $656,000 , $588,000 , and $463,000 for the years ended December 31, 2023, 2022, and 2021, respectively. Benefits paid under the plan were approximately $545,000 , $267,000 , and $57,000 in 2023, 2022, and 2021, respectively.
NOTE 14 - STOCK OPTIONS
In 2020, the Corporation adopted the 2020 Equity Incentive Plan which replaced the 2014 Equity Incentive Plan. The Equity Incentive Plans are designed to help the Corporation attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, and restricted stock may be granted as part of the plan.
A summary of stock option activity for the year ended December 31, 2023 is presented below:
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| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||||||
| Outstanding at January 1, 2023 | $ | $ | ||||||||||||||||||||||||
| Granted | ||||||||||||||||||||||||||
| Cash Settlement | ||||||||||||||||||||||||||
| Forfeited | ( | |||||||||||||||||||||||||
| Expired | ||||||||||||||||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||||||||||||
| Options exercisable at December 31, 2023 | $ | $ | ||||||||||||||||||||||||
On December 31, 2023, a total of 1,000,000 options were outstanding. Outstanding options at December 31, 2023 and the related vesting schedules are summarized below:
| Stock Options Granted | ||||||||||||||||||||||||||||||||||||||||||||
| Date | Shares | Forfeited | Cash Settlement | Outstanding | Strike Price | Vesting Period | Expiration | |||||||||||||||||||||||||||||||||||||
| January 20, 2023 | $ | |||||||||||||||||||||||||||||||||||||||||||
| January 20, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| January 18, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| January 18, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| April 9, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| April 9, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| March 11, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| March 11, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| March 15, 2019 | ( | |||||||||||||||||||||||||||||||||||||||||||
| March 15, 2019 | ( | |||||||||||||||||||||||||||||||||||||||||||
| August 27, 2015 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
The fair value of stock options is estimated using the Black-Scholes option pricing model. The following is a summary of the assumptions used in this model for the stock options granted during 2023, 2022, and 2021:
| 2023 | 2022 | 2021 | |||||||||||||||
| Risk-free interest rate | % | % | % | ||||||||||||||
| Expected volatility | % | % | % | ||||||||||||||
| Expected annual dividend | $ | $ | $ | ||||||||||||||
| Expected life | |||||||||||||||||
| Weighted average grant date fair value per option | $ | $ | $ | ||||||||||||||
The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straight line basis over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the value of the vested portion of the award at that date. The Corporation determines the fair value of options granted using the Black-Scholes option-pricing model. The risk-free interest rate is based on the United States Treasury bond with a similar term to the expected life of the options at the grant date. Expected volatility was estimated based on the adjusted historic volatility of the Corporation’s shares. The expected life was estimated to equal the contractual life of the options. The dividend yield rate was based upon recent historical dividends paid on shares.
For the years ended December 31, 2023, 2022, and 2021 there was $951,000 , $1,231,000 , and $960,000 in total share-based compensation expense, respectively. There was additional compensation expense of $183,000 (after-tax $145,000 ) associated with the voluntary cash settlement of 346,725 outstanding stock options that occurred in June of 2022. The compensation expense is recorded as part of the non-interest expenses in the Consolidated Statement of Income.
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As of December 31, 2023, total unrecognized compensation costs related to non-vested options was $1,190,000 . Exercisable stock awards at December 31, 2023 were 223,400 with a weighted average remaining exercisable contractual life of 5.68 years.
NOTE 15 - EMPLOYEE STOCK PURCHASE PLAN
The Corporation maintains the Penns Woods Bancorp, Inc. Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Corporation. The Plan allows for up to 1,500,000 shares to be purchased by employees. The purchase price of the shares is 95 % of fair value with an employee eligible to purchase up to the lesser of 15 % of base compensation or $12,000 in fair value annually. There were 3,894 , 3,617 and 3,850 shares issued under the plan for the years ended December 31, 2023, 2022 and 2021 respectively.
NOTE 16 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Corporation and the Banks, including their immediate families and companies in which they are principal owners (more than ten percent), are indebted to the Corporation. Such indebtedness was incurred in the ordinary course of business on the same terms and at those rates prevailing at the time for comparable transactions with others.
A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below for the years ended December 31, 2023 and 2022:
| (In Thousands) | Beginning Balance | New Loans | Other | Repayments | Ending Balance | |||||||||||||||||||||||||||
| 2022 | ( | ( | $ | |||||||||||||||||||||||||||||
| 2023 | ( | |||||||||||||||||||||||||||||||
Loan balances that are no longer considered part of a related party relationship are shown as other activity.
Deposits from related parties held by the Banks amounted to $21,290,000 at December 31, 2023 and $19,694,000 at December 31, 2022.
NOTE 17 - OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Corporation may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows at December 31, 2023 and 2022:
| (In Thousands) | 2023 | 2022 | ||||||||||||
| Commitments to extend credit | $ | $ | ||||||||||||
| Standby letters of credit | ||||||||||||||
| Credit exposure from the sale of assets with recourse | ||||||||||||||
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if
68
deemed necessary by the Corporation, on an extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
NOTE 18 - CAPITAL REQUIREMENTS
Federal regulations require the Corporation and the Banks to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Common Equity Tier 1, Total, and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.
As of December 31, 2023 and 2022, the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, common equity tier I risk-based, tier I risked-based, total risk-based, and tier I leverage capital ratios must be at least 6.5 %, 8 %, 10 %, and 5 %, respectively.
We expect to continue to emphasize growth in our commercial and consumer loan portfolios, and additional regulatory capital generated through retained earnings and other sources will be necessary to support any such continued growth. At December 31, 2023, each of the Banks were “well capitalized” as defined by applicable bank regulatory standards. Applicable regulatory capital requirements also require each Bank to maintain a “capital conservation buffer,” consisting solely of tier 1 common equity, of 2.5% above the regulatory minimum capital requirements for each of the tier 1 common equity (“CET1”), tier 1 (“Tier 1”), and total capital (“Total Capital”) ratios. As a result of the capital conservation buffer requirements, if a bank does not maintain CET1, Tier 1 and Total Capital ratios of at least 7 %, 8.5 %, and 10.5 %, respectively, determined as of the end of each calendar quarter, the bank’s ability to make certain discretionary payments, including discretionary dividend payments, are subject to a maximum payout ratio limitation unless the FDIC approves the distribution or payment. At December 31, 2023, each of Banks exceeded the capital conservation buffer requirements for applicable capital ratios.
The Corporation’s and the Banks' actual capital ratios (using the definitions from the prompt corrective action rules) are presented in the following tables, which shows that the Corporation and both Banks met all regulatory capital requirements.
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| Consolidated Corporation | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In Thousands) | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||
| Common Equity Tier I Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Total Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Tier I Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Tier I Capital (to Average Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Jersey Shore State Bank | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In Thousands) | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||
| Common Equity Tier I Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Total Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Tier I Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Tier I Capital (to Average Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
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| Luzerne Bank | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In Thousands) | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||
| Common Equity Tier I Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Total Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Tier I Capital (to Risk-weighted Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| Minimum To Maintain Capital Conservation Buffer | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
| Tier I Capital (to Average Assets) | ||||||||||||||||||||||||||
| Actual | $ | % | $ | % | ||||||||||||||||||||||
| For Capital Adequacy Purposes | % | % | ||||||||||||||||||||||||
| To Be Well Capitalized | % | % | ||||||||||||||||||||||||
During the twelve months ended December 31, 2023, the Company sold 420,069 shares of common stock in a registered at-the-market offering pursuant to the terms of an equity distribution agreement, dated September 13, 2023 (the “Distribution Agreement”), between D.A. Davidson & Co. (the “Distribution Agent”) and the Company. Under the terms of the Distribution Agreement, the Company paid the Distribution Agent a fee in the amount of 2.75 % of the gross proceeds from the sale of such shares, and realized net proceeds of $8,291,000 from the sales of shares under the Distribution Agreement for the year ended December 31, 2023.
NOTE 19 - REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks. Accordingly, at December 31, 2023, the balance in the additional paid in capital account totaling $16,107,000 for JSSB and $44,104,000 for Luzerne is unavailable for dividends.
The Banks are subject to regulatory restrictions, which limit the ability to loan funds to Penns Woods Bancorp, Inc. At December 31, 2023, the regulatory lending limit amounted to approximately $27,500,000 .
Cash and Due from Banks
JSSB and Luzerne had no
NOTE 20 - FAIR VALUE MEASUREMENTS
The following disclosures show the hierarchical disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows:
71
| 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 includes items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. | |||||||
| Level III: | Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. | |||||||
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the balance sheet at their fair value on a recurring basis as of December 31, 2023 and 2022, 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.
| 2023 | ||||||||||||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||||||||||||
| Assets measured on a recurring basis: | ||||||||||||||||||||||||||
| Investment securities, available for sale: | ||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||
| State and political securities | ||||||||||||||||||||||||||
| Other debt securities | ||||||||||||||||||||||||||
| Investment equity securities: | ||||||||||||||||||||||||||
| Other equity securities | ||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||||||||||||
| Assets measured on a recurring basis: | ||||||||||||||||||||||||||
| Investment securities, available for sale: | ||||||||||||||||||||||||||
| U.S. Government and agency securities | $ | $ | $ | $ | ||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||
| State and political securities | ||||||||||||||||||||||||||
| Other debt securities | ||||||||||||||||||||||||||
| Investment equity securities: | ||||||||||||||||||||||||||
| Other equity securities | ||||||||||||||||||||||||||
The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of December 31, 2023 and 2022, 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.
| 2023 | ||||||||||||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||||||||||||
| Assets measured on a non-recurring basis: | ||||||||||||||||||||||||||
| Collateral-dependent loans | $ | $ | $ | $ | ||||||||||||||||||||||
| Other real estate owned | ||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||||||||||||
| Assets measured on a non-recurring basis: | ||||||||||||||||||||||||||
| Collateral-dependent loans | $ | $ | $ | $ | ||||||||||||||||||||||
| Other real estate owned | ||||||||||||||||||||||||||
The following table provides a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of December 31, 2023 and 2022:
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| 2023 | ||||||||||||||||||||||||||||||||
| Quantitative Information About Level III Fair Value Measurements | ||||||||||||||||||||||||||||||||
| (In Thousands) | Fair Value | Valuation Technique(s) | Unobservable Inputs | Range | Weighted Average | |||||||||||||||||||||||||||
| Collateral-dependent loans | $ | Appraisal of collateral (1) | Appraisal of collateral (1) | ( | ( | |||||||||||||||||||||||||||
| Other real estate owned | $ | Appraisal of collateral (1) | Appraisal of collateral (1) | ( | ( | |||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||||||||
| Quantitative Information About Level III Fair Value Measurements | ||||||||||||||||||||||||||||||||
| (In Thousands) | Fair Value | Valuation Technique(s) | Unobservable Inputs | Range | Weighted Average | |||||||||||||||||||||||||||
| Impaired loans | $ | Appraisal of collateral (1) | Appraisal of collateral (1) | ( | ( | |||||||||||||||||||||||||||
| Other real estate owned | $ | Appraisal of collateral (1) | Appraisal of collateral (1) | ( | ( | |||||||||||||||||||||||||||
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
The significant unobservable inputs used in the fair value measurement of the Corporation’s collateral-dependent loans using the discounted cash flow valuation technique include temporary changes in payment amounts and the probability of default. Significant increases (decreases) in payment amounts would result in significantly higher (lower) fair value measurements. The probability of default is 0 % for collateral-dependent loans using the discounted cash flow valuation technique because all defaulted collateral-dependent loans are valued using the appraisal of collateral valuation technique.
The significant unobservable input used in the fair value measurement of the Corporation’s collateral-dependent loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses. The significant unobservable input used in the fair value measurement of the Corporation’s other real estate owned are the same inputs used to value collateral-dependent loans using the appraisal of collateral valuation technique.
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. These fair values do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Also, it is the Corporation’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities. Because no market exists for a significant portion of the Corporation’s financial instruments, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair values. The carrying amounts for cash and cash equivalents, restricted investments in bank stock, bank-owned life insurance, non-time deposits, accrued interest receivable and payable approximate fair value and are considered Level I measurements.
Fair values have been determined by the Corporation using historical data and an estimation methodology suitable for each category of financial instruments. The Corporation’s fair values, methods, and assumptions are set forth below for the Corporation’s other financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Corporation, are not considered financial instruments but have value, the fair value of financial instruments would not represent the full fair value of the Corporation.
The fair values of the Corporation’s financial instruments not required to be measured or reported at fair value are as follows at December 31, 2023 and 2022:
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| Fair Value Measurements at December 31, 2023 | ||||||||||||||||||||||||||||||||
| (In Thousands) | Carrying Value | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level I) | Significant Other Observable Inputs (Level II) | Significant Unobservable Inputs (Level III) | |||||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||||||||
| Loans held for sale | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loans, net | ||||||||||||||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||||||||
| Time deposits | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||||||||||||||
| Fair Value Measurements at December 31, 2022 | ||||||||||||||||||||||||||||||||
| (In Thousands) | Carrying Value | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level I) | Significant Other Observable Inputs (Level II) | Significant Unobservable Inputs (Level III) | |||||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||||||||
| Loans held for sale | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loans, net | ||||||||||||||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||||||||
| Time deposits | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Short-term borrowings | ||||||||||||||||||||||||||||||||
| Long-term borrowings | ||||||||||||||||||||||||||||||||
NOTE 22 - REVENUE RECOGNITION
On January 1, 2018, the Corporation adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 using the modified retrospective method, and applied the guidance to all contracts in scope that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
The core principle of Topic 606, Revenue from Contracts with Customers, is that an entity recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. Topic 606 requires entities to exercise more judgment when considering the terms of a contract than under Topic 605, Revenue Recognition. Topic 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope.
Topic 606 does not apply to revenue associated with interest income on financial instruments, including loans and securities. Additionally, certain noninterest income streams such as certain credit and debit card fees, income from bank owned life insurance, and gain and losses on sales of loans, equity, lending, and investment securities are out of scope of Topic 606.
Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, merchant income, wire transfer income, check cashing fees, check printing fees, safe deposit box rental fees, life insurance, broker fee's, and brokerage commissions. These revenue streams are largely transactional based and revenue is recognized upon completion of transaction.
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Principal versus Agent Considerations
When more than one party is involved in providing goods or services to a customer, Topic 606 requires the Corporation to determine whether it is the principal or an agent in these transactions by evaluating the nature of its promise to the customer. An entity is a principal and therefore records revenue on a gross basis if it controls a promised good or service before transferring that good or service to the customer. An entity is an agent and records as revenue the net amount it retains for its agency services if its role is to arrange for another entity to provide the goods or services. The Corporation most commonly acts as a principal and records revenue on a gross basis, except in certain circumstances. As an example, revenues earned from interchange fees, in which the Corporation acts as an agent, are recorded as non-interest income, net of the related expenses paid to the principal. Brokerage and insurance commissions are recognized when The M Group's services to the broker dealer and investment representative are complete.
Debit Card Fees
Interchange fees are one source of debit and credit card income that is comprised of an amount merchants pay card-issuing banks for the processing of their electronic transactions as a form of payment. ATM service charges, check card usage, and POS debit card transactions generate interchange and debit card income. Per Topic 606 interchange and debit card transaction fees are reported net of related network costs. See Note 1 - Recent Accounting Pronouncements. Prior to the adoption of Topic 606, non-interest expense included network costs. Interchange and debit card transaction fees at December 31, 2023, 2022, and 2021 are reported on a net basis of $1,328,000 $1,464,000 , and $1,511,000 , respectively. The below table compares gross interchange and debit card transaction fees net network costs for 2023, 2022, and 2021:
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| Debit card transaction fees | $ | $ | $ | |||||||||||||||||
| Other processing service fees | ||||||||||||||||||||
| Gross interchange and card based transaction fees | ||||||||||||||||||||
| Network costs | ||||||||||||||||||||
| Net interchange and card based transaction fees | $ | $ | $ | |||||||||||||||||
NOTE 23 - LEASES
The following table shows finance lease right of use assets and finance lease liabilities as of December 31, 2023:
| (In Thousands) | Statement of Financial Condition classification | December 31, 2023 | December 31, 2022 | |||||||||||||||||
| Finance lease right of use assets | $ | $ | ||||||||||||||||||
| Finance lease liabilities | ||||||||||||||||||||
The following table shows the components of finance and operating lease expense for the year ended December 31, 2023.
| (In Thousands) | 2023 | 2022 | 2021 | |||||||||||||||||
| Finance Lease Cost: | ||||||||||||||||||||
| Amortization of right-of-use asset | $ | $ | $ | |||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Operating lease cost | ||||||||||||||||||||
| Total Lease Cost | $ | $ | $ | |||||||||||||||||
A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
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| (In Thousands) | Operating | Finance | ||||||||||||
| 2024 | $ | $ | ||||||||||||
| 2025 | ||||||||||||||
| 2026 | ||||||||||||||
| 2027 | ||||||||||||||
| 2028 | ||||||||||||||
| 2029 and thereafter | ||||||||||||||
| Total undiscounted cash flows | ||||||||||||||
| Discount on cash flows | ( | ( | ||||||||||||
| Total lease liability | $ | $ | ||||||||||||
The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of December 31, 2023.
| Operating | Finance | |||||||||||||
| Weighted-average term (years) | ||||||||||||||
| Weighted-average discount rate | % | % | ||||||||||||
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
The Corporation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer along with the Corporation’s President and Chief Financial Officer, conducted an evaluation of the effectiveness as of December 31, 2023 of the design and operation of the Corporation’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based upon that evaluation, the Corporation’s Chief Executive Officer along with the Corporation’s President and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of December 31, 2023.
There have been no changes in the Corporation’s internal control over financial reporting during the fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Corporation’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2023. Management’s assessment did not identify any material weaknesses in the Corporation’s internal control over financial reporting.
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In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in "Internal Control-Integrated Framework" issued by COSO in May 2013. Because there were no material weaknesses discovered, management believes that, as of December 31, 2023, the Corporation’s internal control over financial reporting was effective.
| Date: | March 13, 2024 | /s/ Richard A. Grafmyre | /s/ Brian L. Knepp | |||||||||||
| Chief Executive Officer | President and Chief Financial Officer | |||||||||||||
| (Principal Financial Officer) | ||||||||||||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Penns Woods Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Penns Woods Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2023 and 2022; the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the each of the three years in the period ended December 31, 2023; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Codification (ASC) Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Basis for Opinion (Continued)
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involve our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses (ACL) – Qualitative Adjustments
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The Company’s loan portfolio totaled $1.8 billion as of December 31, 2023, and the associated ACL was $11.5 million. As discussed in Notes 1 and 6 to the consolidated financial statements, determining the amount of the ACL requires significant judgment about the expected future losses. The ACL calculation is based on a discounted cash flows model, to identify a baseline expected loss reserve, which is then adjusted for current qualitative conditions and reasonable and supportable forecasts. Management applies these qualitative adjustments to the baseline reserve, to reflect changes in the current and forecasted environment, both internal and external, that are different from the conditions that existed during the historical loss calculation period.
We identified these qualitative adjustments within the ACL as a critical audit matter because they involve a high degree of subjectivity. While the determination of these qualitative adjustments includes analysis of observable data over the historical loss period, the judgments required to assess the directionality and magnitude of adjustments are highly subjective.
The primary procedures we performed to address this critical audit matter included:
•Testing the design, implementation, and operating effectiveness of internal controls over the calculation of the allowance for credit losses, including the qualitative factor adjustments.
•Testing the completeness and accuracy of the significant data points that management uses in their evaluation of the qualitative adjustments.
•Testing the anchoring calculation that management completes to properly align the magnitude of the adjustments with the Company’s historical loss data.
•Evaluating the directional consistency and reasonableness of management’s conclusions regarding basis points applied (whether positive or negative), based on the trends identified in the underlying data.
•Testing the clerical accuracy of the application of the qualitative adjustments to the loan segments within the ACL calculation
We have served as the Company’s auditor since 1999.
March 13, 2024
ITEM 9B OTHER INFORMATION
Securities Trading Plans of Directors and Executive Officers
During the three months ended December 31, 2023, none of our directors or executive officers adopted terminated
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ITEM 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information appearing under the captions “The Board of Directors and its Committees,” “Election of Directors,” “Information as to Nominees and Directors,” “Principal Officers of the Corporation,” and “Certain Transactions” in the Corporation’s Proxy Statement for the Corporation’s 2024 annual meeting of shareholders (the “Proxy Statement”) is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
Information appearing under the captions “Compensation of Directors," “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards,” “Option Exercises and Stock Vested,” “Nonqualified Deferred Compensation,” “Retirement Plan,” “Potential Post-Employment Payments,” and "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information appearing under the caption “Beneficial Ownership and Other Information Regarding Directors, Executive Officers, and Certain Beneficial Owners” in the Proxy Statement is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following tables provide certain information regarding securities issued or issuable under the Corporation’s equity compensation plan as of December 31, 2023:
| Number of Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for issuance under equity plans (excluding securities reflected in first column) | ||||||||||||||||||
| Equity compensation plan approved by security holders | 1,000,000 | $ | 25.55 | 192,500 | ||||||||||||||||
| Equity compensation plan not approved by security holders | — | — | — | |||||||||||||||||
| Total | 1,000,000 | $ | 25.55 | 192,500 | ||||||||||||||||
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information appearing under the captions “Election of Directors” and “Certain Transactions” in the Proxy Statement is incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
The information appearing in the Proxy Statement under the captions, “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “Other Fees,” and “Pre-Approval of Audit and Permissible Non-Audit Services” is incorporated herein by reference.
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PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
The following consolidated financial statements and reports are set forth in Item 8:
2. Financial Statement Schedules
Financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.
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(b) Exhibits:
| Articles of Incorporation of the Registrant, (incorporated by reference to Exhibit 3(i) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2022). | |||||
Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020). | |||||
| Description of Capital Securities. | |||||
| Form of First Amendment to the Jersey Shore State Bank Amendment and Restatement of the Director Fee Agreement, dated as of October 1, 2004 (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K filed on June 29, 2006). | |||||
| Amended and Restated Employment Agreement, dated as of March 9,2021, between Penns Woods Bancorp, Inc. and Richard A. Grafmyre (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on March 10, 2021). | |||||
| Amended and Restated Employment Agreement, dated as of December 31, 2018, between Penns Woods Bancorp, Inc. and Brian L. Knepp (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on December 31, 2018). | |||||
| Amendment to Employment Agreement, dated July 15, 2022, between Penns Woods Bancorp, Inc. and Richard A. Grafmyre (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on July 21, 2022).* | |||||
| Amendment to Employment Agreement, dated July 15, 2022, between Penns Woods Bancorp, Inc. and Brian L. Knepp (incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K filed on July 21, 2022).* | |||||
| Employment Agreement, dated February 1, 2014, among Penns Woods Bancorp, Inc., Jersey Shore State Bank and Aron M. Carter (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2016).* | |||||
| Employment Agreement, dated February 1, 2014, among Penns Woods Bancorp, Inc., Jersey Shore State Bank and Michelle M. Karas (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2016).* | |||||
Supplemental Executive Retirement Plan dated as of September 25, 2020, effective September 1, 2020, between Jersey Shore State Bank and Brian Knepp (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on October 1, 2020).* | |||||
Supplemental Executive Retirement Plan dated as of September 25, 2020, effective September 1, 2020, between Jersey Shore State Bank and Aron Carter (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on October 1, 2020).* | |||||
Penns Woods Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Appendix A to the Registrant's definitive proxy statement filed on March 23, 2020).* | |||||
Penns Woods Bancorp, Inc. 2020 Non-Employee Director Compensation Plan (incorporated by reference to Appendix B to the Registrant's definitive proxy statement filed on March 23, 2020).* | |||||
| Amendment to Employment Agreement, dated December 12, 2023, between Penns Woods Bancorp, Inc. and Richard A. Grafmyre (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on December 12, 2023. | |||||
| Subsidiaries of the Registrant. | |||||
| Consent of Independent Certified Public Accountants. | |||||
| Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer. | |||||
| Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer. | |||||
| Section 1350 Certification of Chief Executive Officer. | |||||
| Section 1350 Certification of Principal Financial Officer. | |||||
| Clawback Policy | |||||
| Exhibit 101 | Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at December 31, 2023 and December 31, 2022; (ii) the Consolidated Statement of Income for the years ended December 31, 2023, 2022, and 2021; (iii) the Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2023, 2022, and 2021; (iv) the Consolidated Statement of Comprehensive Income for the years ended December 31, 2023, 2022, and 2021; (v) the Consolidated Statement of Cash Flows for the years ended December 31, 2023, 2022, and 2021; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections. | ||||
| * Denotes compensatory plan or arrangement. | ||
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EXHIBIT INDEX
| Description of Capital Securities | ||||||||
| Subsidiaries of the Registrant. | ||||||||
| Consent of Independent Certified Public Accountants. | ||||||||
| Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer. | ||||||||
| Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer. | ||||||||
| Section 1350 Certification of Chief Executive Officer. | ||||||||
| Section 1350 Certification of Principal Financial Officer. | ||||||||
| Clawback Policy | ||||||||
| Exhibit 101 | Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at December 31, 2023 and December 31, 2022; (ii) the Consolidated Statement of Income for the years ended December 31, 2023, 2022, and 2021; (iii) the Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2023, 2022, and 2021; (iv) the Consolidated Statement of Comprehensive Income for the years ended December 31, 2023, 2022, and 2021; (v) the Consolidated Statement of Cash Flows for the years ended December 31, 2023, 2022, and 2021; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections. | |||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| March 13, 2024 | PENNS WOODS BANCORP, INC. | ||||
| /s/ Richard A. Grafmyre | |||||
| Chief Executive Officer | |||||
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Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| /s/ Richard A. Grafmyre | ||||||||
| Richard A. Grafmyre, Chief Executive Officer and Director | March 13, 2024 | |||||||
| (Principal Executive Officer) | ||||||||
| /s/ Brian L. Knepp | ||||||||
| Brian L. Knepp, President and Chief Financial Officer and Director (Principal Financial and Accounting Officer) | March 13, 2024 | |||||||
| /s/ R. Edward Nestlerode, Jr. | ||||||||
| R. Edward Nestlerode, Jr., Chairman of the Board | March 13, 2024 | |||||||
| /s/ Daniel K. Brewer | ||||||||
| Daniel K. Brewer, Director | March 13, 2024 | |||||||
| /s/ Michael J. Casale, Jr. | ||||||||
| Michael J. Casale, Jr., Director | March 13, 2024 | |||||||
| /s/ William J. Edwards | ||||||||
| William J. Edwards, Director | March 13, 2024 | |||||||
| /s/ D. Michael Hawbaker | ||||||||
| D. Michael Hawbaker, Director | March 13, 2024 | |||||||
| /s/ Cameron W. Kephart | ||||||||
| Cameron W. Kephart, Director | March 13, 2024 | |||||||
| /s/ Leroy H. Keiler, III | ||||||||
| Leroy H. Keiler, III, Director | March 13, 2024 | |||||||
| /s/ Charles E. Kranich, II | ||||||||
| Charles E. Kranich, III, Director | March 13, 2024 | |||||||
| /s/ Robert Q. Miller | ||||||||
| Robert Q. Miller, Director | March 13, 2024 | |||||||
| /s/ John G. Nackley | ||||||||
| John G. Nackley, Director | March 13, 2024 | |||||||
| /s/ Jill F. Schwartz | ||||||||
| Jill F. Schwartz, Director | March 13, 2024 | |||||||
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