CITIZENS FINANCIAL SERVICES INC - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from_____________________ to ___________________
|
Commission file number
|
000-13222
|
|
CITIZENS FINANCIAL SERVICES, INC.
|
|
(Exact name of registrant as specified in its charter)
|
|
Pennsylvania
|
23-2265045
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
|
15 South Main Street, Mansfield, Pennsylvania
|
16933
|
|
(Address of principal executive offices)
|
(Zip Code)
|
|
Registrant’s telephone number, including area code:
|
(570) 662-2121
|
Securities registered pursuant to Section 12(b) of the Act:
|
Common Stock, Par value $1.0 per share
|
CZFS
|
The Nasdaq Stock Market, LLC
|
|
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 pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
|
Large accelerated filer ☐
|
Accelerated filer ☐
|
|
Non-accelerated filer ☒
|
Smaller reporting company ☒
|
|
Emerging growth company ☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended reporting transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) if 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 financial 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 Act).
☐ Yes ☒ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter; $261,264,000 as of June 30, 2022.
As of March 1, 2023, there were 3,971,210
shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III is incorporated by reference to the Registrant’s Definitive Proxy Statement for the 2023 Annual Meeting of
Shareholders.
Citizens Financial Services, Inc.
|
Page
|
|
|
PART I
|
|
|
1 – 9
|
|
|
9 – 17
|
|
|
17
|
|
|
17
|
|
|
18
|
|
|
18
|
|
|
PART II
|
|
|
18 – 19
|
|
|
19
|
|
|
20 – 48
|
|
|
49
|
|
|
50 – 104
|
|
|
105
|
|
|
105
|
|
|
105
|
|
|
105
|
|
|
PART III
|
|
|
106
|
|
|
106
|
|
|
106 – 107
|
|
|
107
|
|
|
107
|
|
|
PART IV
|
|
|
108 – 110
|
|
|
110
|
|
|
111
|
|
PART I
CITIZENS FINANCIAL SERVICES, INC.
Citizens Financial Services, Inc. (the “Company”), a Pennsylvania corporation, was incorporated on April 30, 1984 to be the holding company for First Citizens Community Bank (the “Bank”), a
Pennsylvania-chartered bank and trust company. During 2020, CZFS Acquisition Company, LLC (CZFS) was formed as a wholly owned subsidiary of the Company, and subsequently the Company’s interest in the Bank was transferred to CZFS to facilitate the
merger with MidCoast Community Bancorp, Inc. (MidCoast) and its wholly owned subsidiary, MidCoast Community Bank (“MC Bank”), which was completed on April 17, 2020. The Company is primarily engaged in the ownership and management of CZFS, its
subsidiary, the Bank and the Bank’s wholly owned subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1st Realty of PA LLC
(“Realty”). Realty was formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer, as well as other properties the Bank obtains in foreclosure.
PENDING ACQUISITION OF HV BANCORP, INC.
On October 18, 2022, the Company and HV Bancorp, Inc. (“HVBC”), the holding company for Huntingdon Valley Bank (“HVB”),) entered into an Agreement and Plan of Merger (the “Merger Agreement”)
pursuant to which HVBC will merge with and into the Company Concurrent with the merger, it is expected that HVB will merge with and into the Bank, with the Bank as the surviving institution.
Under the terms of the Merger Agreement, each outstanding share of HVBC common stock will be converted into either the right to receive $30.50 in cash or 0.40 shares of the Company’s common
stock. Not more than 20% of the outstanding shares of HVBC common stock (including for this purpose, dissenters’ shares) may be paid in cash and the remainder will be paid in the Company’s common stock. In the event of a greater than 20%
decline in market value of the Company’s common stock, HVBC may, in certain circumstances, be able to terminate the Merger Agreement unless the Company increases the number of shares into which HVB Bancorp, Inc. shares common stock may be
converted or increases in the cash component of the merger consideration.
The senior management of the Company and the Bank will be augmented by management team members from HVBC and HVB.
The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of HVBC. The merger is currently expected to be
completed in the first half of 2023.
Each of the directors of HVBC have agreed to vote their shares in favor of the approval of the Merger Agreement at the shareholders’ meeting to be held to vote on the proposed transaction. If the
merger is not consummated under certain circumstances, HVBC has agreed to pay the Company a termination fee of $2,800,000.
AVAILABLE INFORMATION
A copy of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current events reports on Form 8-K, and amendments to these reports, filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge through the Company’s web site at www.firstcitizensbank.com as soon as reasonably practicable after such reports are filed with or
furnished to the Securities and Exchange Commission. Copies of the reports the Company files electronically with the Securities and Exchange Commission are also available through the Securities and Exchange Commission’s website at www.sec.gov.
Information on our website shall not be considered as incorporated by reference into this Form 10-K.
FIRST CITIZENS COMMUNITY BANK
The Bank is a full-service bank engaged in a broad range of banking activities and services for individual, business, governmental and institutional customers. These activities and services
principally include checking, savings, and time deposit accounts; residential, commercial and agricultural real estate, commercial and industrial, state and political subdivision and consumer loans; and a variety of other specialized financial
services. The Trust and Investment division of the Bank offers a full range of client investment, estate, mineral management and retirement services.
The Bank’s main office is located at 15 South Main Street, Mansfield (Tioga County), Pennsylvania. In addition to the main office in Mansfield, the Bank operates 31 full service offices and one
limited branch office in its market areas. The Bank’s north central, Pennsylvania market area consists of the Pennsylvania Counties of Bradford, Clinton, Potter and Tioga in north central Pennsylvania. It also includes Allegany, Steuben, Chemung
and Tioga Counties in Southern New York. The south central Pennsylvania market consists of Lebanon county and portions of Berks, Lancaster and Schuylkill Counties in Pennsylvania. The Central Pennsylvania market consists of our offices in
Centre, Clinton and Union counties and the surrounding communities. Our Delaware market consists of Wilmington and Dover, Delaware and portions of Chester County, Pennsylvania and was due to the MidCoast acquisition, completed in April 2020,
which added two offices in Wilmington, Delaware and one office in Dover, Delaware. In November of 2020, the Bank opened a full-service branch in Chester County, Pennsylvania. During 2022, we opened two offices, one in Ephrata, Pennsylvania and
one in Greenville, Delaware. We also received regulatory approval to open a full service branch in Williamsport, Pennsylvania, which is expected to open in the second half of 2023.
The economy of the Bank’s market areas are diversified and include manufacturing industries, wholesale and retail trade, service industries, agricultural and the production of natural resources
of gas and timber. We are dependent geographically upon the economic conditions in north central, central and south central Pennsylvania, the southern tier of New York and the cities and surrounding areas of Wilmington and Dover, Delaware.
COMPETITION
The banking industry in the Bank’s service areas are intensely competitive, with competitors including local community banks, larger regional banks, and financial service providers such as
consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions, mortgage banking firms, financial companies, financial affiliates of industrial companies, FinTech and internet entities, and government
sponsored agencies, such as Freddie Mac, Fannie Mae and Farm Credit. Competitive pressures continue to increase in our service areas as entities seek both loan and deposit growth, as well as geographic expansion. The Bank is generally
competitive with all competing financial institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.
Additional information related to our business and competition is included in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and
Results of Operations.”
HUMAN CAPITAL RESOURCES
At December 31, 2022, we had a total of 328 employees, including 22 part-time employees and of which approximately 76% are women. The full-time equivalent of our total employees at December 31,
2022 was 312. As a financial institution, approximately 49% of our employees are employed at our branch and loan production offices, and another 1.5% are employed at our customer care call center. The success of our business is highly dependent
on our employees, who provide value to our customers and communities through their dedication to our mission. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.
We encourage and support the growth and development of our associates and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning
and career development are advanced through internally developed training programs and specialty education within banking and using universities that offer Banking Management programs. We believe our ability to attract and retain employees is a
key to our success. Accordingly, we strive to offer competitive salaries and employee benefits to all employees and monitor salaries in our market areas. At December 31, 2022, 23% of our current staff had been with us for fifteen years or more.
The safety, health and wellness of our employees is a top priority. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness. On an
ongoing basis, we further promote the health and wellness of our associates by strongly encouraging work-life balance and sponsoring various wellness programs, whereby associates are compensated for incorporating healthy habits into their daily
routines.
SUPERVISION AND REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by the Pennsylvania Department of Banking (“PDB”) and, as a member of the Federal Reserve System, by the Board of
Governors of the Federal Reserve System (the “FRB”). Federal and state banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain,
terms of deposit accounts, loans a bank makes, the interest rates a bank charges and collateral a bank takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches. The Company is registered as a
bank holding company and is subject to supervision and regulation by the FRB under the Bank Holding Company Act of 1956, as amended (the “BHCA”).
PENNSYLVANIA BANKING LAWS
The Pennsylvania Banking Code (“Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as
well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the PDB so that the supervision and regulation of
state chartered banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.
Pennsylvania law also provides Pennsylvania state chartered institutions elective parity with the power of national banks, federal thrifts, and state-chartered institutions in other states as
authorized by the FDIC, subject to a required notice to the PDB. The Federal Deposit Insurance Corporation Act (“FDIA”), however, prohibits state chartered banks from making new investments, loans, or becoming involved in activities as principal
and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund and (2) the bank meets all applicable capital
requirements. Accordingly, the additional operating authority provided to the Bank by the Banking Code is restricted by the FDIA.
In April 2008, banking regulators in the States of New Jersey, New York, and Pennsylvania entered into a Memorandum of Understanding (the “Interstate MOU”) to clarify their respective roles, as
home and host state regulators, regarding interstate branching activity on a regional basis pursuant to the Riegle-Neal Amendments Act of 1997. The Interstate MOU establishes the regulatory responsibilities of the respective state banking
regulators regarding bank regulatory examinations and is intended to reduce the regulatory burden on state chartered banks branching within the region by eliminating duplicative host state compliance exams. Under the Interstate MOU, the
activities of branches we established in New York would be governed by Pennsylvania state law to the same extent that federal law governs the activities of the branch of an out-of-state national bank in such host states. Issues regarding whether
a particular host state law is preempted are to be determined in the first instance by the PDB. In the event that the PDB and the applicable host state regulator disagree regarding whether a particular host state law is pre-empted, the PDB and
the applicable host state regulator would use their reasonable best efforts to consider all points of view and to resolve the disagreement.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act, (“CRA”), as implemented by FRB regulations, provides that the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to
develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FRB, in connection with its examination of the Bank, to assess the institution’s record of
meeting the credit needs of its community and to take such record into account in its evaluation of certain corporate applications by such institution, such as mergers and branching. The Bank’s most recent rating was “Satisfactory.” Various
consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the FRB as it attempts to control the money supply and credit
availability in order to influence the economy.
Current Capital requirements
Federal regulations require FDIC-insured depository institutions, including state-chartered, FRB-member banks, to meet several minimum capital standards. These capital standards were effective
January 1, 2015, and result from a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”).
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6.0% and 8.0%, respectively, and a
leverage ratio of at least 4% of Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital.
Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1
capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred
stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions
that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The
Company has exercised the AOCI opt-out option and therefore AOCI is not incorporated into common equity Tier 1 capital. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, assets, including certain off-balance sheet assets (e.g., recourse obligations, direct
credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present
greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-family residential mortgages, a risk weight of 100%
is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if
an institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
The FRB has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of
the particular risks or circumstances.
As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy, as discussed above. If a
qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal
Prompt Corrective Action capital categories will apply. At December 31, 2022, the Bank’s leverage ratio was 8.77%, which is less than the ratio required to be considered “well-capitalized” under the CBLR framework.
Prompt Corrective Action Rules
Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. The law requires that certain supervisory actions be taken against
undercapitalized institutions, the severity of which depends on the degree of undercapitalization. The FRB has adopted regulations to implement the prompt corrective action legislation as to state member banks. The regulations were amended to
incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1
risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a
Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio
of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of
tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
Subject to a narrow exception, a receiver or conservator must be appointed for an institution that is “critically undercapitalized” within specified time frames. The regulations also provide
that a capital restoration plan must be filed with the FRB within 45 days of the date an institution is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance
with the capital restoration plan must be guaranteed by any parent holding company up to the lesser of 5% of the depository institution’s total assets when it was deemed to be undercapitalized or the amount necessary to achieve compliance with
applicable capital requirements. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution including, but not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The FRB could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly
and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.
STANDARDS FOR SAFETY AND SOUNDNESS
The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness in various areas such as internal controls and information systems, internal audit,
loan documentation and credit underwriting, interest rate exposure, asset growth and quality, earnings and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before capital becomes impaired. If the FRB determines that a state member bank fails to meet any standard prescribed by the guidelines, the FRB may require the institution to
submit an acceptable plan to achieve compliance with the standard.
ENFORCEMENT
The PDB maintains enforcement authority over the Bank, including the power to issue cease and desist orders and civil money penalties and remove directors, officers or employees. The PDB also
has the power to appoint a conservator or receiver for a bank upon insolvency, imminent insolvency, unsafe or unsound condition or certain other situations. The FRB has primary federal enforcement responsibility over FRB-member state banks and
has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on the bank. Formal enforcement
action may range from the issuance of a capital directive or a cease and desist order, to removal of officers and/or directors. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in
especially egregious cases. The FDIC, as deposit insurer, has the authority to recommend to the FRB that enforcement action be taken with respect to a member bank. If the FRB does not take action, the FDIC has authority to take such action
under certain circumstances. In general, regulatory enforcement actions occur with respect to situations involving unsafe or unsound practices or conditions, violations of law or regulation or breaches of fiduciary duty. Federal and
Pennsylvania law also establish criminal penalties for certain violations.
Regulatory Restrictions on bank Dividends
The Bank may not declare a dividend without approval of the FRB, unless the dividend to be declared by the Bank's Board of Directors does not exceed the total of: (i) the Bank's net profits for
the current year to date, plus (ii) its retained net profits for the preceding two years, less any required transfers to surplus.
Under Pennsylvania law, the Bank may only declare and pay dividends from its accumulated net earnings. In addition, the Bank may not declare and pay dividends from the surplus funds that
Pennsylvania law requires that it maintain. Under these policies and subject to the restrictions applicable to the Bank, the Bank could have declared, during 2022, without prior regulatory approval, aggregate dividends of approximately $30.4
million, plus net profits earned to the date of such dividend declaration.
BANK SECRECY ACT
Under the Bank Secrecy Act (BSA), banks and other financial institutions are required to retain records to assure that the details of financial transactions can be traced if investigators need to
do so. Banks are also required to report most cash transactions in amounts exceeding $10,000 made by or on behalf of their customers. Failure to meet BSA requirements may expose the Bank to statutory penalties, and a negative compliance record
may affect the willingness of regulating authorities to approve certain actions by the Bank requiring regulatory approval, including acquisition and opening new branches.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (DIF) of the FDIC. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one
of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is
assigned, and certain adjustments specified by FDIC regulations.
As required by the Dodd-Frank Act, the FDIC has issued final rules implementing changes to the assessment rules. The rules change the assessment base used for calculating deposit insurance
assessments from deposits to total assets, less tangible (Tier 1) capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue
collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base. The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for funding, and
shift more of the burden for supporting the insurance fund to larger institutions, which are thought to have greater access to nondeposit funding. No institution may pay a dividend if it is in default of its assessments. As a result of the
Dodd-Frank Act, deposit insurance per account owner is $250,000 for all types of accounts.
The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% to 1.35% of estimated insured deposits. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the
discretion of the FDIC to establish a maximum fund ratio. The FDIC has exercised that discretion by establishing a long range fund ratio of 2%.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of
the Bank. Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or
has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
Under FRB regulations, the Bank is required to maintain reserves against its transaction accounts (primarily NOW and regular checking accounts). These reserve requirements are subject to annual
adjustment by the FRB. For 2022, the Bank would have been required to maintain average daily reserves equal to 3% on aggregate transaction accounts of up to and including $640.6 million, plus 10% on the remainder, and the first $32.4 million of
otherwise reservable balances will be exempt. In March 2020, the FRB reduced all reserve requirements to zero in response to the COVID-19 pandemic.
PROHIBITIONS AGAINST TYING ARRANGEMENTS
State-chartered banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or
service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
OTHER REGULATIONS
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal
and state laws applicable to credit transactions, such as the:
|
•
|
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
|
|
•
|
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves;
|
|
•
|
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
|
|
•
|
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
|
|
•
|
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
|
|
•
|
Truth in Savings Act; and
|
|
•
|
Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such laws.
|
The Bank’s operations also are subject to the:
|
•
|
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial
records;
|
|
•
|
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from
the use of automated teller machines and other electronic banking services;
|
|
•
|
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the
original paper check;
|
|
•
|
The USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the
detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of
Foreign Assets Control regulations; and
|
|
•
|
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the
Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the
opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
|
HOLDING COMPANY REGULATION
The Company, as a bank holding company, is subject to examination, supervision, regulation, and periodic reporting under the BHCA, as administered by the FRB. The Company is required to obtain
the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval is also required for the Company to acquire direct or indirect ownership or control of any voting
securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.
A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in nonbanking
activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that
the FRB has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or
financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association.
A bank holding company that meets specified conditions, including that its depository institutions subsidiaries are “well capitalized” and “well managed,” can opt to become a “financial holding
company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. The Company does not
anticipate opting for “financial holding company” status at this time.
The Company is exempt from the FRB’s consolidated capital adequacy guidelines for bank holding companies because the Company’s consolidated assets are less than $3.0 billion. The FRB
consolidated capital adequacy guidelines are at least as stringent as those required for the subsidiary depository institutions.
A bank holding company is generally required to give the FRB prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase
or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The FRB may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. The FRB has adopted an
exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions.
The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current
earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FRB’s policies also require that a bank
holding company serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective action
laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital
distributions.
The Federal Deposit Insurance Act makes depository institutions liable to the Federal Deposit Insurance Corporation for losses suffered or anticipated by the insurance fund in connection with the
default of a commonly controlled depository institution or any assistance provided by the Federal Deposit Insurance Corporation to such an institution in danger of default. That law would have potential applicability if the Company ever held as
a separate subsidiary a depository institution in addition to the Bank.
The status of the Company as a registered bank holding company under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations
generally, including, without limitation, certain provisions of the federal securities laws.
ACQUISITION OF THE HOLDING COMPANY
Under the Change in Bank Control Act (the “CIBCA”), a federal statute, a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10%
or more of the Company’s shares of outstanding common stock, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the CIBCA, the FRB generally has 60 days within which to act on such notices,
taking into consideration certain factors, including the financial and managerial resources of the acquirer, the convenience and needs of the communities served by the Company and the Bank, and the anti-trust effects of the acquisition. Under the
BHCA, any company would be required to obtain prior approval from the FRB before it may obtain “control” of the Company within the meaning of the BHCA. Control generally is defined to mean the ownership or power to vote 25% or more of any class
of voting securities of the Company or the ability to control in any manner the election of a majority of the Company’s directors. An existing bank holding company would be required to obtain the FRB’s prior approval under the BHCA before
acquiring more than 5% of the Company’s voting stock.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the Federal Reserve System. An important function of the Federal Reserve
System is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market activities
in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These operations are used in varying combinations to influence overall economic growth and
indirectly, bank loans, securities, and deposits. These variables may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve authorities have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to have such an effect in the future.
In view of the changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities including the Federal Reserve System, no
prediction can be made as to possible changes in interest rates, deposit levels, loan demand or their effect on the business and earnings of the Company and the Bank. Additional information is included under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in this Annual Report on Form 10-K.
The following discussion sets forth the material risk factors that could affect the Company’s consolidated financial condition and results of operations. Readers should not consider any
descriptions of these factors to be a complete set of all potential risks that could affect the Company. Any risk factor discussed below could by itself, or combined with other factors, materially and adversely affect the Company’s business,
results of operations, financial condition, capital position, liquidity, competitive position or reputation, including by materially increasing expenses or decreasing revenues, which could result in material losses or a decrease in earnings.
RISKS RELATED TO THE COVID-19 PANDEMIC
The economic impact of the COVID-19 pandemic could adversely affect our financial condition and results of operations.
The COVID-19 pandemic caused significant economic dislocation in the United States and worldwide. Although the domestic and global economies have begun to recover from the COVID-19 pandemic as
many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages
and disruptions of global supply chains. The growth in economic activity and in the demand for goods and services, coupled with labor shortages and supply chain disruptions, has also contributed to inflation and the risk of recession. As a
result of the COVID-19 pandemic and the related adverse economic consequences, we could be subject to the following risks, among others, any of which individually or in combination with others could have a material, adverse effect on our
business, financial condition, liquidity, and results of operations:
|
•
|
demand for our products and services may decline, making it difficult to grow assets and income;
|
|
•
|
if we have high levels of unemployment for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
|
|
•
|
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
|
|
•
|
limitations may be placed on our ability to foreclose on properties we hold as collateral;
|
|
•
|
our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
|
|
•
|
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
|
|
•
|
our cybersecurity risks are increased if employees work remotely;
|
|
•
|
we rely on third-party vendors for certain services and the unavailability of a critical service due to the COVID-19 pandemic could have an adverse effect on us; and
|
|
•
|
Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
|
RISKS RELATED TO CHANGES IN MARKET INTEREST RATES
Changing interest rates may decrease our earnings and asset values.
Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we
earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we
earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be
shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest
margin to contract until the asset yields catch up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping,
meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost
of funds increases relative to the yield we can earn on our assets.
Changes in interest rates also affect the value of the Bank’s interest-earning assets, and in particular the Bank’s securities portfolio. Generally, the value of fixed-rate securities fluctuates
inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of shareholder equity, net of tax, while unrealized gains and losses on equity securities directly impact
earnings. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders’ equity or net income.
Impact of Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it believes that it
is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the CPI coincides with changes in interest rates. The price of
one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of
high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher
short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the opposite may occur. In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and
other utilities, which increases our noninterest expenses. Our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to
repay their loans with us.
RISKS RELATED TO OUR LENDING ACTIVITIES
Activities related to the drilling for natural gas in the in the Marcellus and Utica Shale formations impacts certain customers of the Bank.
Our north central Pennsylvania market area is predominately centered in the Marcellus and Utica Shale natural gas exploration and drilling area, and as a result, the economy in north central
Pennsylvania is influenced by the natural gas industry. Loan demand, deposit levels and the market value of local real estate are impacted by this activity. While the Company does not lend to the various entities directly engaged in
exploration, drilling or production activities, many of our customers provide transportation and other services and products that support natural gas exploration and production activities. Therefore, our customers are impacted by changes in the
market price for natural gas, as a significant downturn in this industry could impact the ability of our borrowers to repay their loans in accordance with their terms. Additionally, exploration and drilling activities may be affected by federal,
state and local laws and regulations such as restrictions on production, permitting, changes in taxes and environmental protection. Regulatory and market pricing of natural gas could also impact and/or reduce demand for loans and deposit levels
or loan collateral values. These factors could have a material adverse effect on our business, prospects, financial condition and results of operations.
Higher loan losses could require us to increase our allowance for loan losses through a charge to earnings.
When we loan money, we incur the risk that our borrowers do not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this
allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the
future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount
reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in
the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured
loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. A decline in the national economy and the local economies of the areas in which the loans are concentrated could result in an increase in
loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. In addition, bank regulators may require us to make a provision for loan losses or
otherwise recognize further loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures, and our loan loss allowance. Any increase in our allowance for loan losses or loan charge-offs as required by such
regulatory authorities could have a material adverse effect on our financial condition and results of operations.
Our allowance for loan losses amounted to $18.6 million, or 1.08% of total loans outstanding and 267.1% of nonperforming loans, at December 31, 2022. Our allowance for loan losses at December 31,
2022 may not be sufficient to cover future loan losses. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would decrease our earnings. In addition, at December 31, 2022 the top 40
relationships of the Bank had an outstanding balance of $530.5 million. These loans represent approximately 30.7% of our entire outstanding loan portfolio as of December 31, 2022 and the deterioration of one or more of these loans could result in
a significant increase in our nonperforming loans and our provision for loan losses, which would negatively impact our results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes
the impairment model for most financial assets. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that
is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be
affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The standard was implemented effective January
1, 2023 with a On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December
15, 2022, and interim periods within those fiscal years. The implementation of this standard did result in a decrease to the Company’s allowance for loan losses effective January 1, 2023.
Our emphasis on commercial real estate, agricultural real estate, construction and state and political subdivision lending may expose us to increased lending risks.
At December 31, 2022, we had $876.6 million in loans secured by commercial real estate, $313.6 million in agricultural real estate loans, $80.7 million in construction loans and $59.2 million in
municipal loans. Commercial real estate loans, agricultural real estate, construction and municipal loans represented 50.8%, 18.2%, 4.7% and 3.4%, respectively, of our loan portfolio. At December 31, 2022, we had $15.8 million of reserves
specifically allocated to these loan types. While commercial real estate, agricultural real estate, construction and municipal loans are generally more interest rate sensitive and carry higher yields than do residential mortgage loans, these
types of loans generally expose a lender to greater risk of non-payment and loss than single-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property, the income stream of the
borrowers and, for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of
related borrowers compared to single-family residential mortgage loans. We monitor loan concentrations on an individual relationship and industry wide basis to monitor the amount of risk we have in our loan portfolio.
Agricultural loans are dependent for repayment on the successful operation and management of the farm property, the health of the agricultural industry broadly, and on the location of the
borrower in particular, and other factors outside of the borrower’s control.
At December 31, 2022, our agricultural loans, consisting primarily of agricultural real estate loans and other agricultural loans totaled $348.4 million, representing 20.2% of our total loan
portfolio. The primary activities of our agricultural customers include dairy and beef farms, poultry and swine operations, crops and support businesses. Agricultural markets are highly sensitive to real and perceived changes in the supply and
demand of agricultural products. Weaker prices could reduce the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land, animals and equipment
that serves as collateral for certain of our loans. At December 31, 2022, the Company had a loan concentration to the dairy industry totaling $120,100,000, or 7.0% of total loans and 34.5% of total agricultural loans compared to 8.8% of total
loans and 36.2% of total agricultural loans at December 31, 2021.
Our agricultural loans are dependent on the profitable operation and management of the farm property securing the loan and its cash flows. The success of a farm property may be affected by many
factors outside the control of the borrower, including:
|
•
|
the COVID-19 pandemic and its impact to supply and demand constraints
|
|
•
|
adverse weather conditions (such as hail, drought and floods), restrictions on water supply or other conditions that prevent the planting or harvesting of a crop or limit crop yields;
|
|
•
|
loss of crops or livestock due to disease or other factors;
|
|
•
|
declines in the market prices or demand for agricultural products (both domestically and internationally), for any reason;
|
|
•
|
increases in production costs (such as the costs of labor, rent, feed, fuel and fertilizer);
|
|
•
|
the impact of domestic and international government policies and regulations (including changes in price supports, subsidies, government-sponsored crop insurance, minimum ethanol content requirements
for gasoline, tariffs, trade barriers, trade agreements and health and environmental regulations);
|
|
•
|
access to technology and the successful implementation of production technologies; and
|
|
•
|
changes in the general economy that could affect the availability of off-farm sources of income and prices of real estate for borrowers.
|
|
•
|
Disruptions in the supply chain and the processing of product and delivery to the final retail channel
|
Lower prices for agricultural products may cause farm revenues to decline and farm operators may be unable to reduce expenses as quickly as their revenues decline. In addition, many farms are
dependent on a limited number of key individuals whose injury or death could significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be
impaired. Consequently, agricultural loans may involve a greater degree of risk than residential mortgage lending, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment (some of
which is highly specialized with a limited or no market for resale) or perishable assets such as livestock or crops. In such cases, any repossessed collateral for a defaulted agricultural operating loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value.
Loan participations comprise a portion of our loan portfolio and a decline in loan participation volume could hurt profits and slow loan growth.
We have actively engaged in loan participations whereby we are invited to participate in loans, primarily commercial real estate and municipal loans, originated by another financial institution
known as the lead lender. We have participated with other financial institutions in both our primary markets and out of market areas. We underwrite any loan we participate in as if we are originating the loan. The primary difference is that
financial information is received from the participating financial institution and not the borrower. The loans we participate in totaled $65.3 million and $58.3 million at December 31, 2022 and 2021, respectively. As a percent of total loans,
participation purchased loans were 3.8%, and 4.0% as of December 31, 2022 and 2021, respectively. Our profits and loan growth could be significantly and adversely affected if the volume of loan participations would materially decrease, whether
because loan demand declines, loan payoffs, lead lenders may come to perceive us as a potential competitor in their respective market areas, or otherwise.
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.
RISKS RELATED TO OUR INVESTMENT SECURITIES
If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.
We review our investment securities portfolio monthly and at each quarter-end reporting period to determine whether the fair value is below the current carrying value. Generally, the fair value
of our investment securities decrease during periods of rising market interest rates and increase during periods of declining market interest rates. When the fair value of any of our investment securities has declined below its carrying value, we
are required to assess whether the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings. As of December 31, 2022, our
investment portfolio included available for sale investment securities with an amortized cost of $487.0 million and a fair value of $439.5 million, which included unrealized losses on 361 securities totaling $47,537,000. Changes in the expected
cash flows of these securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down these securities
to their fair value. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.
RISKS RELATED TO OUR SECONDARY MORTGAGE OPERATIONS
Income from secondary mortgage market operations is volatile, and we may incur losses or charges with respect to our secondary mortgage market operations which would negatively affect our earnings.
We generally sell in the secondary market the longer term fixed-rate residential mortgage loans that we originate, earning non-interest income in the form of gains on sale. When interest rates
rise, the demand for mortgage loans tends to fall and may reduce the number of loans available for sale. In addition to interest rate levels, weak or deteriorating economic conditions also tend to reduce loan demand. Although we sell loans in the
secondary market without recourse, we are required to give customary representations and warranties to the buyers. If we breach those representations and warranties, the buyers can require us to repurchase the loans and we may incur a loss on the
repurchase. Because we generally retain the servicing rights on the loans we sell in the secondary market, we are required to record a mortgage servicing right asset, which we test annually for impairment. The value of mortgage servicing rights
tends to increase with rising interest rates, which occurred in 2022, and to decrease with falling interest rates, with refinance activity increasing in falling rate environments. If we are required to take an impairment charge on our mortgage
servicing rights our earnings would be adversely affected.
As a result an acquisition in 2015, the Bank acquired a portfolio of loans sold to the FHLB, which were sold under the Mortgage Partnership Finance Program ("MPF"). While the Bank was not an
active participant in the MPF program in 2022, we continue to evaluate the program to see if it would be beneficial to our customers and our performance. The MPF portfolio balance was $10,179,000 at December 31, 2022. The FHLB maintains a
first-loss position for the MPF portfolio that totals $161,000. Should the FHLB exhaust its first-loss position, recourse to the Bank's credit enhancement would be up to the next $348,000 of losses. The Bank has not experienced any losses for the
MPF portfolio.
RISKS RELATED TO OUR MARKET AREA
The Company’s financial condition and results of operations are dependent on the economy in the Bank’s market area.
The Bank’s primary market area consists of the Pennsylvania Counties of Bradford, Clinton, Potter, and Tioga in north central Pennsylvania, Lebanon, Schuylkill, Berks and Lancaster in south
central, Pennsylvania, Centre and Clinton in central Pennsylvania, and Allegany, Steuben, Chemung and Tioga Counties in southern New York. With the acquisition of MidCoast, we consider the cities and surrounding areas of Wilmington and Dover,
Delaware, as well as Kennett Square, Pennsylvania in Chester County, as primary market areas. The majority of the Bank’s loan and deposits come from households and businesses whose primary address is located in the Bank’s primary market areas.
Because of the Bank’s concentration of business activities in its market area, the Company’s financial condition and results of operations depend upon economic conditions in its market areas. Adverse economic conditions in our market areas could
reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates and short money
supply and other factors beyond our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any
sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the States of Pennsylvania, New York and Delaware could adversely affect the value of our assets, revenues, results of
operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.
RISKS RELATED TO LAWS AND REGULATIONS
Regulation of the financial services industry is significant, and future legislation could increase our cost of doing business or harm our
competitive position.
We are subject to extensive regulation, supervision and examination by the FRB and the PDB, our primary regulators, and by the FDIC, as insurer of our deposits. Such regulation and supervision
governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of our common stock.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for
loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our profitability and operations. Future legislative changes could
require changes to business practices or force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.
Our ability to pay dividends is limited by law.
Our ability to pay dividends to our shareholders largely depends on our receipt of dividends from the Bank. The amount of dividends that the Bank may pay
to us is limited by federal and state laws and regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business.
Federal and state banking laws, our articles of incorporation and our by-laws may have an anti-takeover effect.
Federal law imposes restrictions, including regulatory approval requirements, on persons seeking to acquire control over us. Pennsylvania law also has provisions that may have an anti-takeover
effect. These provisions may serve to entrench management or discourage a takeover attempt that shareholders consider to be in their best interest or in which they would receive a substantial premium over the current market price.
RISKS RELATED TO COMPETITION
Strong competition within the Bank’s market areas could hurt profits and slow growth.
The Bank faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for the Bank to make new loans and at times has forced the Bank to
offer higher deposit rates. Price competition for loans and deposits might result in the Bank earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to increase the
volume of our loan and deposit portfolios. As of June 30, 2022, which is the most recent date for which information is available, we held 34.4% of the FDIC insured deposits in Bradford, Potter and Tioga Counties, Pennsylvania, which was the
largest share of deposits out of eight financial institutions with offices in the area, and 7.2% of the FDIC insured deposits in Allegany County, New York, which was the third largest share of deposits out of three financial institutions with
offices in this area. As of June 30, 2022, we held 9.1% of the FDIC insured deposits in Lebanon County, Pennsylvania, which was the fourth largest share out of the 14 financial institutions with offices in the County. As of June 30, 2022, we held
4.3% of the FDIC insured deposits in Clinton County, Pennsylvania, which was the sixth largest share out of the eight financial institutions with offices in the County. Our offices in Berks, Centre, Chester, Lancaster and Schuylkill Counties of
Pennsylvania and our offices in Wilmington and Dover, Delaware all have less than 3% of the FDIC insured deposits of the corresponding County as of June 30, 2022. This data does not include deposits held by credit unions. Competition also makes
it more difficult to hire employees and more expensive to retain experienced employees. Some of the institutions with which the Bank competes have substantially greater resources and lending limits than the Bank has and may offer services that
the Bank does not provide. Management expects competition to increase in the future as a result of legislative, regulatory and technological changes (fintech) and the continuing trend of consolidation in the financial services industry. The
Bank’s profitability depends upon its continued ability to compete successfully in its market area.
RISKS RELATED TO OUR OPERATIONS
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 and
agricultural loan officers. The unexpected loss of services of any key management personnel or commercial and agricultural 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.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make
adjustments to our business that could adversely affect us.
Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a banking
agency was to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk or other aspects of any of our operations has become
unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to
require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the
composition of our assets or liabilities, to assess civil monetary penalties against us and/or our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent
risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.
We are subject to certain risks in connection with our use of technology.
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits, our loans, and
to deliver on-line and electronic banking services. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and
endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have
a security impact.
In addition, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our confidential or other information or the
confidential or other information of our customers, clients, or counterparties. If one or more of such events were to occur, the confidential and other information processed and stored in, and transmitted through, our computer systems and
networks could potentially be jeopardized, or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers, clients, or counterparties. This could cause us significant reputational damage or result in
our experiencing significant losses from fraud or otherwise.
Furthermore, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures arising from
operational and security risks. Also, we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance we maintain.
We routinely transmit and receive personal, confidential, and proprietary information by e-mail and other electronic means. We have discussed and worked with our customers, clients, and
counterparties to develop secure transmission capabilities, but we do not have, and may be unable to put in place, secure capabilities with all of these constituents, and we may not be able to ensure that these third parties have appropriate
controls in place to protect the confidentiality of such information. Any interception, misuse, or mishandling of personal, confidential, or proprietary information being sent to or received from a customer, client, or counterparty could result
in legal liability, regulatory action, and reputational harm, and could have a significant adverse effect on our competitive position, financial condition, and results of operations.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
We have implemented a risk management framework to manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk
to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies which involve management assumptions and judgment. There is no
assurance that our risk management framework will be effective under all circumstances or that it will adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial
condition, results of operations or prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
RISKS RELATED TO LIBOR
Changes in the method pursuant to which benchmark rates, including LIBOR, are calculated and their potential discontinuance could adversely impact our business operations and financial results.
Many of our lending products, securities and derivatives utilize a benchmark rate to determine the applicable interest rate or payment amount. As the Company has grown and developed relationships
with larger and more sophisticated borrowers, the benchmarks utilized by the Company have changed with an increased usage of LIBOR. The U.K. Financial Conduct Authority (“FCA”) has announced that the FCA intends to stop persuading or compelling
banks to submit rates for the calculation of LIBOR after 2021. This announcement indicates that the continuation of LIBOR cannot and will not be guaranteed. Instruments associated with LIBOR have been identified by the Company, and transition
procedures to a revised benchmark are being developed.
The discontinuation of a benchmark rate, changes in a benchmark rate, or changes in market perceptions of the acceptability of a benchmark rate, including LIBOR, could, among other things,
adversely affect the value of and return on certain of our financial instruments or products, result in changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such discontinuation or changes, whether
actual or anticipated, could result in market volatility, adverse tax or accounting effects, increased compliance, legal and operational costs, and risks associated with customer disclosures and contract negotiations. The transition to using a
new rate could also expose us to risks associated with disputes with customers and other market participants in connection with interpreting and implementing fallback provisions.
Various regulators, industry bodies and other market participants in the U.S. are engaged in initiatives to develop, introduce and encourage the use of alternative rates to replace certain
benchmarks. Despite progress made to date by regulators and industry participants, such as us, to prepare for the anticipated discontinuation of LIBOR, significant uncertainties still remain. Such uncertainties relate to, for example, whether
replacement benchmark rates may become accepted alternatives to LIBOR for different types of transactions and financial instruments, how the terms of any transaction or financial instrument may be adjusted to account for differences between LIBOR
and any alternative rate selected, how any replacement would be implemented across the industry, and the effect any changes in industry views or movement to alternative benchmarks would have on the markets for LIBOR-linked financial instruments.
RISKS RELATED TO OUR MERGER AND ACQUISITION ACTIVITY
Impairment of goodwill could require charges to earnings, which could result in a negative impact on our results of operations.
Our goodwill could become impaired in the future. If goodwill were to become impaired, it could limit the ability of the Bank to pay dividends to the Company, adversely impacting the Company’s
liquidity and ability to pay dividends. The most significant assumptions affecting our goodwill impairment evaluation are variables including the market price of our Common Stock, projections of earnings, and the control premium above our current
stock price that an acquirer would pay to obtain control of us. We are required to test goodwill for impairment at least annually or when impairment indicators are present. If an impairment determination is made in a future reporting period, our
earnings and book value of goodwill will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our Common Stock, or our regulatory capital levels, but such an
impairment loss could significantly reduce the Bank’s earnings and thereby restrict the Bank's ability to make dividend payments to us without prior regulatory approval, because Federal Reserve policy states the bank holding company dividends
should be paid from current earnings. At December 31, 2022, the book value of our goodwill was $31.4 million, all of which was recorded at the Bank.
We may fail to realize all of the anticipated benefits of entering new markets.
As a result of completed and proposed acquisitions and the hiring of additional agricultural and commercial lending teams, the Company enters new banking market areas. The success of entering
these new markets depends upon, in part, the Company’s ability to realize the anticipated benefits and cost savings from combining the businesses of the Company and the acquisition, as well as organically growing loans and deposits. To realize
these anticipated benefits and cost savings, the businesses and individuals must be successfully combined and operated. If the Company is not able to achieve these objectives, the anticipated benefits, including growth and cost savings related
to the combined businesses, may not be realized at all or may take longer to realize than expected. If the Company fails to realize the anticipated benefits of the acquisitions and the new employee hiring’s, the Company’s results of operations
could be adversely affected.
Not applicable.
The headquarters of the Company and Bank are located at 15 South Main Street, Mansfield, Pennsylvania. The building contains the central offices of the Company and Bank. The Bank owns twenty four
banking facilities and leases thirteen other facilities.
The net book value of owned banking facilities and leasehold improvements totaled $16,734,000 as of December 31, 2022. The properties are adequate to meet the needs of the employees and
customers. We have equipped all of our facilities with current technological improvements for data processing.
The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate
are believed by management to be immaterial to the Company's consolidated financial condition or results of operations.
Not applicable.
PART II
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Since June 3, 2022, the Company’s common stock has been listed on the Nasdaq Stock Market under the symbol “CZFS”. Before that date, the Company’s common stock was quoted on the OTC Pink Market
under the same symbol. The prices in the table below are for the full quarters during which the Company’s common stock was quoted on the OTC Pink Market and reflect bid prices between broker-dealers published by the OTC Pink Market and the Pink
Sheets Electronic Quotation Service. The prices do not include retail markups or markdowns or any commission to the broker-dealer. The bid prices do not necessarily reflect prices in actual transactions. For 2022 and 2021, cash dividends were
declared on a quarterly basis and are summarized in the table below:
|
2022
|
Dividends
declared |
2021
|
Dividends
declared |
|||||||||||||||||||||
|
High
|
Low
|
per share
|
High
|
Low
|
per share
|
|||||||||||||||||||
|
First quarter
|
$
|
62.97
|
$
|
59.46
|
$
|
0.475
|
$
|
58.42
|
$
|
53.96
|
$
|
0.465
|
||||||||||||
|
Second quarter
|
N/A
|
N/A
|
0.475
|
62.50
|
58.42
|
0.465
|
||||||||||||||||||
|
Third quarter
|
N/A
|
N/A
|
0.480
|
64.00
|
61.10
|
0.470
|
||||||||||||||||||
|
Fourth quarter
|
N/A
|
N/A
|
0.480
|
61.50
|
59.00
|
0.470
|
||||||||||||||||||
The Company has paid dividends since April 30, 1984, the effective date of our formation as a bank holding company. The Company's Board of Directors expects that comparable cash dividends will
continue to be paid by the Company in the future; however, future dividends necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors in existence at the time the Board of Directors considers a
dividend distribution. Cash available for dividend distributions to stockholders of the Company comes primarily from dividends paid to the Company by the Bank. Therefore, restrictions on the ability of the Bank to make dividend payments are
directly applicable to the Company. Under the Pennsylvania Business Corporation Law of 1988, the Company may pay dividends only if, after payment, the Company would be able to pay debts as they become due in the usual course of our business and
total assets will be greater than the sum of total liabilities. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions. Also see “Supervision and Regulation – Regulatory
Restrictions on Bank Dividends,” “Supervision and Regulation – Holding Company Regulation,” and “Note 15 – Regulatory Matters” to the consolidated financial statements.
As of March 1, 2023, the Company had 1,838 stockholders of record. The computation of stockholders of record excludes investors whose shares were held for them by a bank or broker at that date.
The following table presents information regarding the Company’s stock repurchases during the three months ended December 31, 2022:
|
Period
|
Total Number of Shares (or units Purchased)
|
Average Price Paid per Share (or Unit)
|
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans of Programs
|
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
|
||||||||||||
|
10/1/22 to 10/31/22
|
-
|
$
|
0.00
|
-
|
116,392
|
|||||||||||
|
11/1/22 to 11/30/22
|
3
|
$
|
68.23
|
3
|
116,389
|
|||||||||||
|
12/1/22 to 12/31/22
|
-
|
$
|
0.00
|
-
|
116,389
|
|||||||||||
|
Total
|
3
|
$
|
68.23
|
3
|
116,389
|
|||||||||||
|
(1)
|
On April 21, 2020, the Company announced that the Board of Directors authorized the Company to repurchase up to an additional 150,000 shares at an aggregate purchase price not to exceed $12.0 million
over a period of 36 months. The repurchases will be conducted through open-market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors. No time limit was
placed on the duration of the share repurchase program. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.
|
CAUTIONARY STATEMENT
We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations of the Company, the Bank, First Citizens Insurance, Realty or the Company on a consolidated basis. When we use words such as “believes,” “expects,” “anticipates,” or similar
expressions, we are making forward-looking statements. Forward-looking statements may prove inaccurate. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements:
|
•
|
The continuing impact of the COVID-19 pandemic may have an adverse effect on our business and operations, our customers, including their ability to make timely loan payments, our service providers,
and on the economy and financial markets more significant that we expect.
|
|
•
|
Interest rates could change more rapidly or more significantly than we expect.
|
|
•
|
The economy could change significantly in an unexpected way, which would cause the demand for new loans and the ability of borrowers to repay outstanding loans to change in ways that our models do not
anticipate.
|
|
•
|
The financial markets could suffer a significant disruption, which may have a negative effect on our financial condition and that of our borrowers, and on our ability to raise money by issuing new
securities.
|
|
•
|
It could take us longer than we anticipate implementing strategic initiatives, including expansions, designed to increase revenues or manage expenses, or we may be unable to implement those
initiatives at all.
|
|
•
|
Acquisitions and dispositions of assets and companies could affect us in ways that management has not anticipated.
|
|
•
|
We may become subject to new legal obligations or the resolution of litigation may have a negative effect on our financial condition or operating results.
|
|
•
|
We may become subject to new and unanticipated accounting, tax, regulatory or compliance practices or requirements. Failure to comply with any one or more of these requirements could have an adverse
effect on our operations.
|
|
•
|
We could experience greater loan delinquencies than anticipated, adversely affecting our earnings and financial condition.
|
|
•
|
We could experience greater losses than expected due to the ever increasing volume of information theft and fraudulent scams impacting our customers and the banking industry.
|
|
•
|
We could lose the services of some or all of our key personnel, which would negatively impact our business because of their business development skills, financial expertise, lending experience,
technical expertise and market area knowledge.
|
|
•
|
The agricultural economy is subject to extreme swings in both the costs of resources and the prices received from the sale of products as a result of weather, government regulations, international
trade agreements and consumer tastes, which could negatively impact certain of our customers.
|
|
•
|
Loan concentrations in certain industries could negatively impact our results, if financial results or economic conditions deteriorate.
|
|
•
|
Companies providing support services related to the exploration and drilling of the natural gas reserves in our market area may be affected by federal, state and local laws and regulations such as
restrictions on production, permitting, changes in taxes and environmental protection, which could negatively impact our customers and, as a result, negatively impact our loan and deposit volume and loan quality. Additionally, the
activities the companies providing support services related to the exploration and drilling of the natural gas reserves may be dependent on the market price of natural gas. As a result, decreases in the market price of natural gas
could also negatively impact these companies, our customers.
|
Additional factors are discussed in this Annual Report on Form 10-K under “Item 1A. Risk Factors.” These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to
reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or
trends.
INTRODUCTION
The following is management’s discussion and analysis of the significant changes in financial condition, the results of operations, capital resources and liquidity presented in the accompanying
consolidated financial statements for the Company. The Company’s consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Management’s discussion and analysis
should be read in conjunction with the audited consolidated financial statements and related notes. Except as noted, tabular information is presented in thousands of dollars.
The Company currently engages in the general business of banking throughout its service area of Bradford, Tioga, Clinton, Potter and Centre counties in north central Pennsylvania, Lebanon, Berks,
Schuylkill and Lancaster counties in south central Pennsylvania and Allegany County in southern New York. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural customers in the central
Pennsylvania market. We maintain our main office in Mansfield, Pennsylvania. Presently we operate 36 banking facilities, 33 of which operate as bank branches. In addition, we have leased an additional facility in Williamsport, Pennsylvania that
will be opened as a full service branch in 2023. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the
Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Fivepointville, Kennett Square, State College and two branches near the city of Lebanon, Pennsylvania. In November of 2022, we
opened a full service branch in Ephrata, Pennsylvania. We also have a limited branch office in Winfield, Pennsylvania. In New York, our office is in Wellsville. As part of the MidCoast acquisition in 2020, we aquired two branches in Wilmington
Delaware, one branch in Dover Delaware, and a corporate administration building in Wilmington, Delaware. In November of 2022, we opened a full service branch in Greenville, Delaware.
Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk,
including interest rate, credit, liquidity, reputational and regulatory risk.
Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk results
from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company. The Company uses its asset/liability and funds management policies to control and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from loans with customers and the purchasing of securities. The
Company’s primary credit risk is in the loan portfolio. The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for loan losses. Also, the investment
policy limits the amount of credit risk that may be taken in the investment portfolio.
Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Company has established
guidelines within its asset/liability and funds management policy to manage liquidity risk. These guidelines include, among other things, contingent funding alternatives.
Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion, could result from our actual or alleged conduct in a variety of areas, including
legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information, which could include identify theft, or theft of customer information through third parties. We
expend significant resources to comply with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new
customers, and adversely impact our earnings and liquidity.
Regulatory risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company and its subsidiary. We cannot predict
what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.
Readers should carefully review the risk factors described in other documents the Company files with the SEC, including the annual reports on Form 10-K, the quarterly reports on Form 10-Q and any
current reports on Form 8-K filed by us.
SELECTED FINANCIAL DATA
The following table sets forth certain financial data as of and for each of the years in the five year period ended December 31, 2022:
|
(in thousands, except per share data)
|
2022
|
2021
|
2020
|
2019
|
2018
|
|||||||||||||||
|
Interest and dividend income
|
$
|
83,357
|
$
|
73,217
|
$
|
70,296
|
$
|
61,980
|
$
|
56,758
|
||||||||||
|
Interest expense
|
11,223
|
7,105
|
8,105
|
12,040
|
9,574
|
|||||||||||||||
|
Net interest income
|
72,134
|
66,112
|
62,191
|
49,940
|
47,184
|
|||||||||||||||
|
Provision for loan losses
|
1,683
|
1,550
|
2,400
|
1,675
|
1,925
|
|||||||||||||||
|
Net interest income after provision
for loan losses
|
70,451
|
64,562
|
59,791
|
48,265
|
45,259
|
|||||||||||||||
|
Non-interest income
|
9,999
|
11,754
|
11,158
|
8,242
|
7,754
|
|||||||||||||||
|
Investment securities gains (losses), net
|
(261
|
)
|
551
|
264
|
144
|
(19
|
)
|
|||||||||||||
|
Non-interest expenses
|
44,694
|
41,550
|
40,847
|
33,341
|
31,557
|
|||||||||||||||
|
Income before provision for income taxes
|
35,495
|
35,317
|
30,366
|
23,310
|
21,437
|
|||||||||||||||
|
Provision for income taxes
|
6,435
|
6,199
|
5,263
|
3,820
|
3,403
|
|||||||||||||||
|
Net income
|
$
|
29,060
|
$
|
29,118
|
$
|
25,103
|
$
|
19,490
|
$
|
18,034
|
||||||||||
|
Per share data:
|
||||||||||||||||||||
|
Net income - Basic (1)
|
$
|
7.32
|
$
|
7.31
|
$
|
6.46
|
$
|
5.36
|
$
|
4.93
|
||||||||||
|
Net income - Diluted (1)
|
7.32
|
7.31
|
6.46
|
5.36
|
4.93
|
|||||||||||||||
|
Cash dividends declared (1)
|
1.90
|
1.84
|
1.88
|
1.73
|
1.67
|
|||||||||||||||
|
Stock dividend
|
1
|
%
|
1
|
%
|
1
|
%
|
1
|
%
|
1
|
%
|
||||||||||
|
Book value (1) (2)
|
58.74
|
53.39
|
47.93
|
42.68
|
39.17
|
|||||||||||||||
|
End of Period Balances:
|
||||||||||||||||||||
|
Total assets
|
$
|
2,333,393
|
$
|
2,143,863
|
$
|
1,891,674
|
$
|
1,466,339
|
$
|
1,430,712
|
||||||||||
|
Available for sale securities
|
439,506
|
412,402
|
295,189
|
240,706
|
241,010
|
|||||||||||||||
|
Loans
|
1,724,999
|
1,441,533
|
1,405,281
|
1,115,569
|
1,081,883
|
|||||||||||||||
|
Allowance for loan losses
|
18,552
|
17,304
|
15,815
|
13,845
|
12,884
|
|||||||||||||||
|
Total deposits
|
1,844,208
|
1,836,511
|
1,588,858
|
1,211,118
|
1,185,156
|
|||||||||||||||
|
Total borrowings
|
257,278
|
73,977
|
88,838
|
85,117
|
91,194
|
|||||||||||||||
|
Stockholders' equity
|
200,147
|
212,492
|
194,259
|
157,774
|
139,229
|
|||||||||||||||
|
Key Ratios
|
||||||||||||||||||||
|
Return on assets (net income to average total assets)
|
1.29
|
%
|
1.45
|
%
|
1.46
|
%
|
1.34
|
%
|
1.29
|
%
|
||||||||||
|
Return on equity (net income to average total equity)
|
12.98
|
%
|
14.26
|
%
|
14.21
|
%
|
13.00
|
%
|
13.00
|
%
|
||||||||||
|
Equity to asset ratio (average equity to average total assets,
excluding other comprehensive income)
|
9.93
|
%
|
10.20
|
%
|
10.27
|
%
|
10.31
|
%
|
9.90
|
%
|
||||||||||
|
Net interest margin (tax equivalent) (3)
|
3.41
|
%
|
3.52
|
%
|
3.92
|
%
|
3.72
|
%
|
3.66
|
%
|
||||||||||
|
Efficiency (4)
|
52.55
|
%
|
51.57
|
%
|
53.62
|
%
|
54.27
|
%
|
55.04
|
%
|
||||||||||
|
Dividend payout ratio (dividends declared divided by net income)
|
26.11
|
%
|
25.36
|
%
|
29.32
|
%
|
32.40
|
%
|
34.08
|
%
|
||||||||||
|
Tier 1 leverage (5)
|
9.03
|
%
|
9.31
|
%
|
9.16
|
%
|
9.77
|
%
|
9.15
|
%
|
||||||||||
|
Common equity risk based capital (5)
|
10.92
|
%
|
12.03
|
%
|
11.22
|
%
|
12.11
|
%
|
11.47
|
%
|
||||||||||
|
Tier 1 risk-based capital (5)
|
11.32
|
%
|
12.53
|
%
|
11.75
|
%
|
12.79
|
%
|
12.18
|
%
|
||||||||||
|
Total risk-based capital (5)
|
12.87
|
%
|
14.35
|
%
|
12.86
|
%
|
14.04
|
%
|
13.42
|
%
|
||||||||||
|
Nonperforming assets/total loans
|
0.43
|
%
|
0.61
|
%
|
0.93
|
%
|
1.38
|
%
|
1.33
|
%
|
||||||||||
|
Nonperforming loans/total loans
|
0.40
|
%
|
0.53
|
%
|
0.80
|
%
|
1.08
|
%
|
1.27
|
%
|
||||||||||
|
Allowance for loan losses/total loans
|
1.08
|
%
|
1.20
|
%
|
1.13
|
%
|
1.24
|
%
|
1.19
|
%
|
||||||||||
|
Net (recoveries)charge-offs/average loans
|
0.03
|
%
|
0.00
|
%
|
0.03
|
%
|
0.06
|
%
|
0.02
|
%
|
||||||||||
| (1) |
Amounts were adjusted to reflect stock dividends.
|
| (2) |
Calculation excludes accumulated other comprehensive income (loss).
|
| (3) |
Tax adjusted net interest income to average interest-earning assets. Tax adjusted net Interest income is a non-gaap measure and is reconciled to the GAAP equivalent measure on page 25 of this 10-K.
|
| (4) |
Bank non-interest expenses to tax adjusted net interest income and non-interest income, excluding security gains. Tax adjusted net Interest income is a non-gaap measure and is reconciled to the GAAP
equivalent measure on page 30 of this 10k. The efficiency ratio calculated using non-tax effected net interest income was 53.22% 52.21%, 54.50%, 55.36% and 56.26%, for the years ended 2022, 2021, 2020, 2019 and 2018, respectively.
|
| (5) |
Ratio calculated on consolidated level
|
TRUST AND INVESTMENT SERVICES; OIL AND GAS SERVICES
Our Investment and Trust Division is committed to helping our customers meet their financial goals. The Trust Division offers professional trust administration, investment management services,
estate planning and administration, custody of securities and individual retirement accounts. In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from
lease negotiations to establishing a successful approach to personal wealth management. Assets held by the Bank in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not
assets of the Bank. As of December 31, 2022 and 2021, assets owned and invested by customers of the Bank through the Bank’s investment representatives totaled $283.5 million and $282.1 million, respectively. Additionally, as summarized in the
table below, the Trust Department had assets under management as of December 31, 2022 and 2021 of $150.0 million and $154.8 million, respectively. During the year ended December 31, 2022, $12.9 million of new trust accounts were opened, $10.2
million of additional contributions to trust accounts, $12.8 million distributed from trust accounts, and $700,000 of accounts were closed. As a result of market fluctuations, the fair value of the trust accounts decreased approximately $14.4
million during the year ended December 31, 2022. The following table reflects trust accounts by investment type and structure:
|
(market values - in thousands)
|
2022
|
2021
|
||||||
|
INVESTMENTS:
|
||||||||
|
Bonds
|
$
|
13,497
|
$
|
8,640
|
||||
|
Stock
|
33,659
|
22,099
|
||||||
|
Savings and Money Market Funds
|
14,813
|
11,587
|
||||||
|
Mutual Funds
|
75,700
|
105,233
|
||||||
|
Mineral interests
|
8,465
|
2,959
|
||||||
|
Mortgages
|
783
|
856
|
||||||
|
Real Estate
|
1,965
|
2,099
|
||||||
|
Miscellaneous
|
847
|
942
|
||||||
|
Cash
|
302
|
425
|
||||||
|
TOTAL
|
$
|
150,031
|
$
|
154,840
|
||||
|
ACCOUNTS:
|
||||||||
|
Trusts
|
47,762
|
46,953
|
||||||
|
Guardianships
|
400
|
443
|
||||||
|
Employee Benefits
|
50,883
|
62,149
|
||||||
|
Investment Management
|
50,985
|
45,293
|
||||||
|
Custodial
|
1
|
2
|
||||||
|
TOTAL
|
$
|
150,031
|
$
|
154,840
|
||||
Our financial consultants offer full service brokerage and financial planning services throughout the Bank’s market areas. Appointments can be made at any Bank branch. Products such as mutual
funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 2022 was $29,060,000, which represents a decrease of $58,000, or 0.2%, when compared to 2021. Net income for the year ended December 31, 2021 was
$29,118,000, which represents an increase of $4,015,000, or 16.0%, when compared to 2020. Basic and diluted earnings per share were $7.32, $7.31 and $6.46 for 2022, 2021 and 2020, respectively.
Net income is influenced by five key components: net interest income, provision for loan losses, non-interest income, non-interest expenses, and the provision for income taxes.
Net Interest Income
The most significant source of revenue is net interest income; the amount by which interest earned on interest-earning assets exceeds interest paid on interest-bearing liabilities. Factors that
influence net interest income are changes in volume of interest-earning assets and interest-bearing liabilities as well as changes in the associated interest rates.
The following table sets forth the Company’s average balances of, and the interest earned or incurred on, each principal category of assets, liabilities and stockholders’ equity, the related
rates, net interest income and rate “spread” created.
|
Analysis of Average Balances and Interest Rates
|
|||||||||||||||||||||||||||||||||||
|
2022
|
2021
|
2020
|
|||||||||||||||||||||||||||||||||
|
(dollars in thousands)
|
Average
Balance
(1)$
|
Interest
$
|
|
Average
Rate
%
|
|
Average
Balance (1)
$
|
Interest
$
|
|
Average
Rate
%
|
|
Average
Balance (1) |
Interest
$ |
|
Average
Rate
%
|
|||||||||||||||||||||
|
ASSETS
|
|||||||||||||||||||||||||||||||||||
|
Short-term investments:
|
|||||||||||||||||||||||||||||||||||
|
Interest-bearing deposits at banks
|
52,655
|
171
|
0.32
|
108,872
|
124
|
0.11
|
41,330
|
37
|
0.09
|
||||||||||||||||||||||||||
|
Total short-term investments
|
52,655
|
171
|
0.32
|
108,872
|
124
|
0.11
|
41,330
|
37
|
0.09
|
||||||||||||||||||||||||||
|
Interest bearing time deposits at banks
|
8,352
|
229
|
2.75
|
12,527
|
323
|
2.57
|
14,139
|
364
|
2.57
|
||||||||||||||||||||||||||
|
Investment securities:
|
|||||||||||||||||||||||||||||||||||
|
Taxable
|
372,430
|
6,238
|
1.68
|
252,470
|
4,198
|
1.66
|
188,241
|
4,488
|
2.38
|
||||||||||||||||||||||||||
|
Tax-exempt (3)
|
120,592
|
3,106
|
2.58
|
104,379
|
2,786
|
2.67
|
80,131
|
2,366
|
2.95
|
||||||||||||||||||||||||||
|
Total investment securities (3)
|
493,022
|
9,344
|
1.90
|
356,849
|
6,984
|
1.96
|
268,372
|
6,854
|
2.55
|
||||||||||||||||||||||||||
|
Loans:
|
|||||||||||||||||||||||||||||||||||
|
Residential mortgage loans
|
204,063
|
9,712
|
4.76
|
203,062
|
9,867
|
4.86
|
210,696
|
11,161
|
5.30
|
||||||||||||||||||||||||||
|
Construction loans
|
73,214
|
3,298
|
4.50
|
56,315
|
2,292
|
4.07
|
26,343
|
1,288
|
4.89
|
||||||||||||||||||||||||||
|
Commercial Loans
|
854,460
|
41,155
|
4.82
|
739,000
|
36,215
|
4.90
|
590,469
|
31,087
|
5.26
|
||||||||||||||||||||||||||
|
Agricultural Loans
|
347,420
|
15,387
|
4.43
|
349,951
|
15,079
|
4.31
|
357,201
|
16,022
|
4.49
|
||||||||||||||||||||||||||
|
Loans to state & political subdivisions (3)
|
56,004
|
1,863
|
3.33
|
52,804
|
1,871
|
3.54
|
86,143
|
3,458
|
4.01
|
||||||||||||||||||||||||||
|
ConsumerOther loans
|
58,715
|
3,201
|
5.45
|
24,125
|
1,385
|
5.74
|
20,986
|
1,185
|
5.65
|
||||||||||||||||||||||||||
|
Loans, net of discount (2)(3)(4)
|
1,593,876
|
74,616
|
4.68
|
1,425,257
|
66,709
|
4.68
|
1,291,838
|
64,201
|
4.97
|
||||||||||||||||||||||||||
|
Total interest-earning assets
|
2,147,905
|
84,360
|
3.93
|
1,903,505
|
74,140
|
3.89
|
1,615,679
|
71,456
|
4.42
|
||||||||||||||||||||||||||
|
Cash and due from banks
|
6,708
|
6,525
|
7,487
|
||||||||||||||||||||||||||||||||
|
Bank premises and equipment
|
17,287
|
17,194
|
17,286
|
||||||||||||||||||||||||||||||||
|
Other assets
|
84,066
|
75,410
|
79,305
|
||||||||||||||||||||||||||||||||
|
Total non-interest earning assets
|
108,061
|
99,129
|
104,078
|
||||||||||||||||||||||||||||||||
|
Total assets
|
2,255,966
|
2,002,634
|
1,719,757
|
||||||||||||||||||||||||||||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
|||||||||||||||||||||||||||||||||||
|
NOW accounts
|
520,895
|
2,425
|
0.47
|
457,189
|
1,387
|
0.30
|
383,931
|
1,102
|
0.29
|
||||||||||||||||||||||||||
|
Savings accounts
|
323,939
|
421
|
0.13
|
290,376
|
322
|
0.11
|
241,429
|
476
|
0.20
|
||||||||||||||||||||||||||
|
Money market accounts
|
343,288
|
2,004
|
0.58
|
257,937
|
684
|
0.27
|
205,142
|
1,012
|
0.49
|
||||||||||||||||||||||||||
|
Certificates of deposit
|
299,110
|
2,466
|
0.82
|
351,265
|
3,444
|
0.98
|
345,397
|
4,261
|
1.23
|
||||||||||||||||||||||||||
|
Total interest-bearing deposits
|
1,487,232
|
7,316
|
0.49
|
1,356,767
|
5,837
|
0.43
|
1,175,899
|
6,851
|
0.58
|
||||||||||||||||||||||||||
|
Other borrowed funds
|
149,661
|
3,907
|
2.61
|
84,621
|
1,268
|
1.50
|
93,237
|
1,254
|
1.34
|
||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
1,636,893
|
11,223
|
0.69
|
1,441,388
|
7,105
|
0.49
|
1,269,136
|
8,105
|
0.64
|
||||||||||||||||||||||||||
|
Demand deposits
|
374,675
|
341,604
|
257,285
|
||||||||||||||||||||||||||||||||
|
Other liabilities
|
20,443
|
15,420
|
16,662
|
||||||||||||||||||||||||||||||||
|
Total non-interest-bearing liabilities
|
95,118
|
357,024
|
273,947
|
||||||||||||||||||||||||||||||||
|
Stockholders' equity
|
223,955
|
204,222
|
176,674
|
||||||||||||||||||||||||||||||||
|
Total liabilities & stockholders' equity
|
2,255,966
|
2,002,634
|
1,719,757
|
||||||||||||||||||||||||||||||||
|
Net interest income
|
73,137
|
67,035
|
63,351
|
||||||||||||||||||||||||||||||||
|
Net interest spread (5)
|
3.24
|
%
|
3.40
|
%
|
3.78
|
%
|
|||||||||||||||||||||||||||||
|
Net interest income as a percentage
of average interest-earning assets
|
3.41
|
%
|
3.52
|
%
|
3.92
|
%
|
|||||||||||||||||||||||||||||
|
Ratio of interest-earning assets
to interest-bearing liabilities
|
131.00
|
132.00
|
127.00
|
||||||||||||||||||||||||||||||||
|
(1)
|
Averages are based on daily averages.
|
|
(2)
|
Includes loan origination and commitment fees.
|
|
(3)
|
Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 21% for 2022, 2021 and 2020.
|
|
(4)
|
Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
|
|
(5)
|
Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
|
For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income
by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Federal statutory rate for the corresponding year. Accordingly, tax equivalent adjustments for investments and loans have been made
accordingly to the previous table for the years ended December 31, 2022, 2021 and 2020, respectively (in thousands):
|
2022
|
2021
|
2020
|
||||||||||
|
Interest and dividend income from investment securities,
interest bearing time deposits and short-term investments (non-tax adjusted) (GAAP)
|
$
|
9,092
|
$
|
6,846
|
$
|
6,758
|
||||||
|
Tax equivalent adjustment
|
652
|
585
|
497
|
|||||||||
|
Interest and dividend income from investment securities,
interest bearing time deposits and short-term investments (tax equivalent basis) (Non-GAAP)
|
$
|
9,744
|
$
|
7,431
|
$
|
7,255
|
||||||
|
2022
|
2021
|
2020
|
||||||||||
|
Interest and fees on loans (non-tax adjusted) (GAAP)
|
$
|
74,265
|
$
|
66,371
|
$
|
63,538
|
||||||
|
Tax equivalent adjustment
|
351
|
338
|
663
|
|||||||||
|
Interest and fees on loans (tax equivalent basis) (Non-GAAP)
|
$
|
74,616
|
$
|
66,709
|
$
|
64,201
|
||||||
|
2022
|
2021
|
2020
|
||||||||||
|
Total interest income
|
$
|
83,357
|
$
|
73,217
|
$
|
70,296
|
||||||
|
Total interest expense
|
11,223
|
7,105
|
8,105
|
|||||||||
|
Net interest income (GAAP)
|
72,134
|
66,112
|
62,191
|
|||||||||
|
Total tax equivalent adjustment
|
1,003
|
923
|
1,160
|
|||||||||
|
Net interest income (tax equivalent basis) (Non-GAAP)
|
$
|
73,137
|
$
|
67,035
|
$
|
63,351
|
||||||
The following table shows the tax-equivalent effect of changes in volume and rates on interest income and expense (in thousands):
Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis
|
2022 vs. 2021 (1)
|
2021 vs. 2020 (1)
|
|||||||||||||||||||||||
|
Change in
Volume |
Change
in Rate |
Total
Change |
Change in
Volume |
Change
in Rate |
Total
Change |
|||||||||||||||||||
|
Interest Income:
|
||||||||||||||||||||||||
|
Short-term investments:
|
||||||||||||||||||||||||
|
Interest-bearing deposits at banks
|
$
|
(18
|
)
|
$
|
65
|
$
|
47
|
$
|
73
|
$
|
14
|
$
|
87
|
|||||||||||
|
Interest bearing time deposits at banks
|
(118
|
)
|
24
|
(94
|
)
|
(41
|
)
|
-
|
(41
|
)
|
||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
Taxable
|
2,010
|
30
|
2,040
|
1,287
|
(1,577
|
)
|
(290
|
)
|
||||||||||||||||
|
Tax-exempt
|
414
|
(94
|
)
|
320
|
615
|
(195
|
)
|
420
|
||||||||||||||||
|
Total investment securities
|
2,424
|
(64
|
)
|
2,360
|
1,902
|
(1,772
|
)
|
130
|
||||||||||||||||
|
Total investment income
|
2,288
|
25
|
2,313
|
1,934
|
(1,758
|
)
|
176
|
|||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Residential mortgage loans
|
49
|
(204
|
)
|
(155
|
)
|
(394
|
)
|
(900
|
)
|
(1,294
|
)
|
|||||||||||||
|
Construction loans
|
742
|
264
|
1,006
|
1,177
|
(173
|
)
|
1,004
|
|||||||||||||||||
|
Commercial Loans
|
5,549
|
(609
|
)
|
4,940
|
7,074
|
(1,946
|
)
|
5,128
|
||||||||||||||||
|
Agricultural Loans
|
(108
|
)
|
416
|
308
|
(321
|
)
|
(622
|
)
|
(943
|
)
|
||||||||||||||
|
Loans to state & political subdivisions
|
110
|
(118
|
)
|
(8
|
)
|
(1,218
|
)
|
(369
|
)
|
(1,587
|
)
|
|||||||||||||
|
Other loans
|
1,882
|
(66
|
)
|
1,816
|
180
|
20
|
200
|
|||||||||||||||||
|
Total loans, net of discount
|
8,224
|
(317
|
)
|
7,907
|
6,498
|
(3,990
|
)
|
2,508
|
||||||||||||||||
|
Total Interest Income
|
10,512
|
(292
|
)
|
10,220
|
8,432
|
(5,748
|
)
|
2,684
|
||||||||||||||||
|
Interest Expense:
|
||||||||||||||||||||||||
|
Interest-bearing deposits:
|
||||||||||||||||||||||||
|
NOW accounts
|
215
|
823
|
1,038
|
219
|
66
|
285
|
||||||||||||||||||
|
Savings accounts
|
40
|
59
|
99
|
133
|
(287
|
)
|
(154
|
)
|
||||||||||||||||
|
Money Market accounts
|
285
|
1,035
|
1,320
|
410
|
(738
|
)
|
(328
|
)
|
||||||||||||||||
|
Certificates of deposit
|
(473
|
)
|
(505
|
)
|
(978
|
)
|
73
|
(890
|
)
|
(817
|
)
|
|||||||||||||
|
Total interest-bearing deposits
|
67
|
1,412
|
1,479
|
835
|
(1,849
|
)
|
(1,014
|
)
|
||||||||||||||||
|
Other borrowed funds
|
1,343
|
1,296
|
2,639
|
(60
|
)
|
74
|
14
|
|||||||||||||||||
|
Total interest expense
|
1,410
|
2,708
|
4,118
|
775
|
(1,775
|
)
|
(1,000
|
)
|
||||||||||||||||
|
Net interest income
|
$
|
9,102
|
$
|
(3,000
|
)
|
$
|
6,102
|
$
|
7,657
|
$
|
(3,973
|
)
|
$
|
3,684
|
||||||||||
|
(1)
|
The portion of the total change attributable to both volume and rate changes during the year has been allocated to volume and rate components based upon the absolute dollar amount of the change in
each component prior to allocation.
|
2022 vs. 2021
Tax equivalent net interest income for 2022 was $73,137,000 compared to $67,035,000 for 2021, an increase of $6,102,000 or 9.1%. Total interest income increased $10,220,000, as loan interest
income increased $7,907,000, and total investment income increased $2,313,000. Interest expense increased $4,118,000 from 2021.
Total tax equivalent interest income from investment securities increased $2,360,000 in 2022 from 2021. The average balance of investment securities increased $136.2 million, which had an effect
of increasing interest income by $2,424,000 due to volume. The majority of the increase in volume was in taxable securities, which experienced an increase in the average balance of $120.0 million. The average tax-effected yield on our investment
portfolio decreased from 1.96% in 2021 to 1.90% in 2022. The decrease in the tax-effected yield is attributable to purchases made prior to 2022, which were made in a lower rate environment. As a result of the yield on investment securities
decreasing 6 basis points (bps) to 1.90%, interest income on investment securities decreased $64,000, with the decrease related to tax-exempt securities. The investment strategy for 2022 was to utilize excess cash, cashflows from the investment
portfolio and deposit inflows to purchase U.S. treasury securities, due to a limited spread between US treasuries and agencies, mortgage backed securities issued by government sponsored entities and obligations of state and political securities.
The increase in the investment portfolio was in response to the deposit inflows that occurred in 2021 and the first half of 2022. We continually monitor interest rate trading ranges and try to focus purchases to times when rates are in the top of
the trading range. The Bank believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, while providing sufficient cashflows to meet liquidity needs.
In total, loan interest income increased $7,907,000 in 2022 from 2021. The average balance of our loan portfolio increased by $168.6 million in 2022 compared to 2021, which resulted in an
increase in interest income of $8,224,000 due to volume. The increase in the average balance of loans was driven by in large part by growth in the Delaware market during 2022. While the Bank’s other markets experienced loan growth, it was not to
the extent experienced in Delaware. The average tax-effected yield on our loan portfolio was 4.68% for both 2022 and 2021 and a small decrease in loan interest income of $317,000 was due to rate. The tax-effected yield remained steady due to 2021
benefitting from additional PPP amortization of $2,061,000 compared to 2022, otherwise the yield on loans 2022 would have exceeded 2021.
|
•
|
Interest income on residential mortgage loans decreased $155,000. The average balance of residential mortgage loans increased $1.0 million, resulting in an increase of $49,000 due to volume. The
change due to rate was a decrease of $204,000 as the average yield on residential mortgages decreased from 4.86% in 2021 to 4.76% in 2022 as a result of the lower rate environment prior to 2022. The increase in market interest rates
during 2022 resulted in a significant slowdown in residential lending activity.
|
|
•
|
The average balance of construction loans increased $16.9 million from 2021 to 2022 as a result of projects in our south central Pennsylvania market and Delaware market, which resulted in an increase
of $742,000 in interest income. The average yield on construction loans increased from 4.07% to 4.50%, which correlated to a $264,000 increase in interest income.
|
|
•
|
Interest income on commercial loans increased $4,940,000 from 2021 to 2022. The increase in the average balance of commercial loans of $115.5 million is attributable to the Delaware market. The
increase in the average balance of these loans resulted in an increase in interest income due to volume of $5,549,000. Our lenders have been able to attract and retain loan relationships in their markets by providing excellent
customer service and having attractive products. We believe our lenders are adept at customizing and structuring loans to customers that meet their needs and satisfy our commitment to credit quality. In many cases, the Bank works
with the Small Business Administration (SBA) guaranteed loan programs to offset credit risk and to further promote economic growth in our market area. The average yield on commercial loans decreased 8 basis points to 4.82% in 2022,
resulting in a decrease in interest income due to rate of $609,000. The decrease in yield on commercial loans was due to PPP amortization decreasing $2,061,000 in 2022 compared to 2021.
|
|
•
|
Interest income on agricultural loans increased $308,000 from 2021 to 2022. The decrease in the average balance of agricultural loans of $2.5 million is primarily attributable to the south central
Pennsylvania market. The decrease in the average balance of these loans resulted in a decrease in interest income due to volume of $108,000. The average yield on agricultural loans increased from 4.31% in 2021 to 4.43% in 2022 due
to a general increase in market rates, resulting in an increase in interest income due to rate of $416,000. We believe our lenders are adept at customizing, understanding and have the expertise to structure loans for customers that
meet their needs and satisfy our commitment to credit quality. In many cases, the Bank works with the United States Department of Agriculture’s (USDA) guaranteed loan programs to offset credit risk and to further promote economic
growth in our market area.
|
|
•
|
The average balance of loans to state and political subdivisions increased $3.2 million from 2021 to 2022 which had a positive impact of $110,000 on total interest income due to volume was due to
customers issuing debt for various public service projects that the Bank was able to finance. The average tax equivalent yield on loans to state and political subdivisions decreased from 3.54% in 2021 to 3.33% in 2022, decreasing
interest income by $118,000.
|
|
•
|
The average balance of other loans increased $34.6 million as a result of an increase in outstanding student loans. This resulted in an increase of $1,882,000 on total interest income due to volume.
The average tax equivalent yield on other loans decreased from 5.74% in 2021 to 5.45% in 2022, decreasing interest income by $66,000 in other loans
|
Total interest expense increased $4,118,000 in 2022 compared to 2021. The majority of the increase was due to an increase in the average rate paid on interest bearing liabilities of 20 basis
points to 0.69%. This increase resulted in an increase in interest expense of $2,708,000. The increase in rates was driven by the Federal Reserve’s response to inflation during 2022 by increasing interest rates. The average rate on money markets
increased from 0.27% to 0.58% resulting in an increase in interest expense of $1,035,000. The average rate paid on savings accounts increased 2 bps and resulted in an increase in interest expense of $59,000. The average rate paid on NOW accounts
increased from 0.30% to 0.47% resulting in an increase in interest expense of $823,000. The average rate paid on other borrowed funds increased from 1.50% to 2.61% resulting in an increase in interest expense of $1,296,000. The average rate on
certificates of deposit decreased from 0.98% to 0.82% resulting in a decrease in interest expense of $505,000.
Average interest-bearing liabilities increased $195.5 million in 2022, with average interest-bearing deposits increasing $130.5 million and average other borrowings increasing $65.0 million. As a
result of the increase in average deposits, interest expense increased $1,410,000 as result of the change in volume. Increases in average deposits, which were primarily driven by organic growth across all markets of the Bank, included NOW
accounts of $63.7 million, savings accounts of $33.6 million and money market accounts of $85.4 million. Certificates of deposits decreased $52.2 million as maturing balances were not placed into term products. The combined impact to interest
expense of these increases in deposits was a $67,000 increase. The average balance of other borrowed funds increased $60.5 million due to funding loan growth, which corresponds to an increase in interest expense of $1,343,000.
Our tax equivalent net interest margin for 2022 was 3.41% compared to 3.52% for 2021, with the change attributable to the yield of interest-earning assets increasing less than the cost from
interest-bearing liabilities during 2022. Interest rates increased dramatically in 2022 in response to historically high inflation forcing the Federal Reserve to aggressively tighten monetary policy at a pace and levels not seen in decades. The
year began with accelerating inflation that was exacerbated by the Russian invasion of Ukraine driving energy prices higher with crude oil peaking at $130 a barrel in early March. Other commodities prices followed oils lead reaching extremely
high levels and adding to inflationary fears. The Federal Reserve completely abandoned their belief that inflation would prove transitory and began to tighten monetary policy by both reducing the size of its balance sheet and increasing
over-night borrowing rates. Coming into the year the Central Bank’s official forecast was for a total increase in rates by 0.75%, but inflation continued to climb to levels not seen since the early 1980’s pushing the Fed Reserve into a series of
75-basis point increases then ending the year with a 50-basis point hike in December for a total increase of 4.25%. The result of these moves created an inverted Treasury yield curve with every maturity from 1 month T-Bills to 7 year Treasuries
all yielding more than the 10 year Treasury. The closely followed 2-year to 10-year Treasury spread started the year at a positive 88-basis points and ended the year at a negative 55-basis points. The 2-year Treasury started the year at 0.78%
and ended the year at 4.43% while the 10-year Treasury’s move was from 1.56% to 3.88%. Commodities prices eased in the second half of the year and inflation measures fell as a result, but a strong labor market kept wage inflation high pressuring
the Federal Reserve to remain resolute in maintaining an aggressive tightening monetary policy. Treasury yields ended the year well below the peak as the inverted yield curve increased concerns the Federal Reserve’s would make a policy error.
2021 vs. 2020
Tax equivalent net interest income for 2021 was $67,035,000 compared to $63,351,000 for 2020, an increase of $3,684,000 or 5.8%. Total interest income increased $2,684,000, as loan interest
income increased $2,508,000, and total investment income increased $176,000. Interest expense decreased $1,000,000 from 2020.
Total tax equivalent interest income from investment securities increased $130,000 in 2021 from 2020. The average balance of investment securities increased $88.5 million, which had an effect of
increasing interest income by $1,902,000 due to volume. The majority of the increase in volume was in tax-exempt securities, which experienced an increase in the average balance of $64.2 million. The average tax-effected yield on our investment
portfolio decreased from 2.55% in 2020 to 1.96% in 2021. The decrease in the tax-effected yield is attributable to purchases made in a lower rate environment. As a result of the yield on investment securities decreasing 59 basis points (bps) to
1.96%, interest income on investment securities decreased $1,772,000, with the decrease primarily related to taxable securities. The investment strategy for 2021 was to utilize cashflows from the investment portfolio and deposit inflows to
purchase U.S. treasury securities, mortgage backed securities issued by government sponsored entities and obligations of state and political securities. The increase in the investment portfolio was in response to the deposit inflows that occurred
in 2021.
In total, loan interest income increased $2,508,000 in 2021 from 2020. The average balance of our loan portfolio increased by $133.4 million in 2021 compared to 2020, which resulted in an
increase in interest income of $6,498,000 due to volume. The increase in the average balance of loans was driven by the MidCoast acquisition from 2020, which was outstanding for the entire year and loan growth that occurred primarily in the
Delaware market. The average tax-effected yield on our loan portfolio decreased 29 basis points to 4.68% in 2021, resulting in a decrease in loan interest income of $3,990,000. The decrease in the tax-effected yield was due to the lower rate
environment promoted by the Federal Reserve in response to the COVID-19 pandemic.
|
•
|
Interest income on residential mortgage loans decreased $1,294,000. The average balance of residential mortgage loans decreased $7.6 million, resulting in a decrease of $394,000 due to volume. The
decrease in loans was due to loans being refinanced and sold on the secondary market. The change due to rate was a decrease of $900,000 as the average yield on residential mortgages decreased from 5.30% in 2020 to 4.86% in 2021 as a
result of the lower rate environment during the year as a result of COVID-19 pandemic.
|
|
•
|
The average balance of construction loans increased $30.0 million from 2020 to 2021 as a result of projects in our south central Pennsylvania market and Delaware market, which resulted in an increase
of $1,177,000 in interest income. The average yield on construction loans decreased from 4.89% to 4.07%, which correlated to a $173,000 decrease in interest income.
|
|
•
|
Interest income on commercial loans increased $5,128,000 from 2020 to 2021. The increase in the average balance of commercial loans of $148.5 million is attributable to the MidCoast acquisition and
growth in the Delaware market. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $7,074,000. The average yield on commercial loans decreased 36 basis points to 4.90% in
2021, resulting in a decrease in interest income due to rate of $1,946,000.
|
|
•
|
Interest income on agricultural loans decreased $943,000 from 2020 to 2021. The decrease in the average balance of agricultural loans of $7.3 million was primarily attributable to the south central
Pennsylvania market. The decrease in the average balance of these loans resulted in a decrease in interest income due to volume of $321,000. The average yield on agricultural loans decreased from 4.49% in 2020 to 4.31% in 2021 due
to a general decrease in rates, resulting in a decrease in interest income due to rate of $622,000.
|
|
•
|
The average balance of loans to state and political subdivisions decreased $33.3 million from 2020 to 2021 which had a negative impact of $1,218,000 on total interest income due to volume was due to
customers refinancing through the municipal bond market. The average tax equivalent yield on loans to state and political subdivisions decreased from 4.01% in 2020 to 3.54% in 2021, decreasing interest income by $369,000.
|
|
•
|
The average balance of other loans increased $3.1 million as a result of an increase in outstanding student loans. This resulted in an increase of $180,000 on total interest income due to volume. The
average tax equivalent yield on other loans increased from 5.65% in 2020 to 5.74% in 2021, increasing interest income by $20,000 in other loans
|
Total interest expense decreased $1,000,000 in 2021 compared to 2020. The majority of the decrease was due to a decrease in the average rate paid on interest bearing deposits of 15 basis points
to 0.43%. This decrease resulted in a decrease in interest expense of $1,849,000. The decrease in rates was driven by the Federal Reserve’s response to the COVID-19 pandemic. The average rate on certificates of deposit decreased from 1.23% to
0.98% resulting in a decrease in interest expense of $890,000. The average rate on money markets decreased from 0.49% to 0.27% resulting in a decrease in interest expense of $738,000. The average rate paid on savings accounts decreased 9 bps and
resulted in a decrease in interest expense of $287,000. The average rate paid on other borrowed funds increased from 1.34% to 1.50% resulting in an increase in interest expense of $74,000 and was due to interest expense on debt issued in 2021.
Average interest-bearing liabilities increased $172.3 million in 2021, with average interest-bearing deposits increasing $180.9 million and average other borrowings decreasing $8.6 million. As a
result of the increase in average deposits, interest expense increased $835,000 as result of the change in volume. Increases in average deposits, which were primarily driven by organic growth across all markets of the Bank, included NOW accounts
of $73.3 million, savings accounts of $48.9 million, money market accounts of $52.8 million and certificates of deposits of $5.9 million. The combined impact to interest expense of these increases was $835,000. The average balance of other
borrowed funds decreased $8.6 million, which corresponds to a decrease in interest expense of $60,000.
Our tax equivalent net interest margin for 2021 was 3.52% compared to 3.92% for 2020, with the change attributable to the yield of interest-earning assets decreasing more than the cost from
interest-bearing liabilities during 2021. Interest rates rose in 2021 in response to shifting expectations for fiscal policy and an enduring pandemic that continued to hamper economic activity, strengthening and prolonging unusually strong
inflationary pressures and altering the expected path of monetary policy.
PROVISION FOR LOAN LOSSES
For the year ended December 31, 2022, we recorded a provision for loan losses of $1,683,000. The provision for 2022 was $133,000, or 8.6%, higher than the provision in 2021. The increase in the
provision for loan losses was primarily due to organic loan growth in 2022 compared to 2021 offset by the improved economic outlook compared to 2021 that was impacted more by the Covid-19 pandemic. (see also “Financial Condition – Allowance for
Loan Losses and Credit Quality Risk”).
For the year ended December 31, 2021, we recorded a provision for loan losses of $1,550,000. The provision for 2021 was $850,000, or 35.4%, lower than the provision in 2020. The decrease in the
provision for loan losses was primarily the result of the impact the COVID-19 pandemic had on the economy in 2020 and limited organic growth in 2021 compared to 2020. (see also “Financial Condition – Allowance for Loan Losses and Credit Quality
Risk”).
NON-INTEREST INCOME
The following table reflects non-interest income by major category for the years ended December 31 (dollars in thousands):
|
2022
|
2021
|
2020
|
||||||||||
|
Service charges
|
5,346
|
4,755
|
$
|
4,221
|
||||||||
|
Trust
|
803
|
865
|
803
|
|||||||||
|
Brokerage and insurance
|
1,895
|
1,625
|
1,297
|
|||||||||
|
Equity security gains (losses), net
|
(247
|
)
|
339
|
(41
|
)
|
|||||||
|
Available for sale security gains (losses), net
|
(14
|
)
|
212
|
305
|
||||||||
|
Gains on loans sold
|
258
|
1,283
|
2,168
|
|||||||||
|
Earnings on bank owned life insurance
|
852
|
1,828
|
695
|
|||||||||
|
Other
|
845
|
1,398
|
1,974
|
|||||||||
|
Total
|
$
|
9,738
|
$
|
12,305
|
$
|
11,422
|
||||||
|
2022/2021
Change
|
2021/2020
Change
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Service charges
|
$
|
591
|
12.4
|
$
|
534
|
12.7
|
||||||||||
|
Trust
|
(62
|
)
|
(7.2
|
)
|
62
|
7.7
|
||||||||||
|
Brokerage and insurance
|
270
|
16.6
|
328
|
25.3
|
||||||||||||
|
Equity security gains (losses), net
|
(586
|
)
|
(172.9
|
)
|
380
|
(926.8
|
)
|
|||||||||
|
Available for sale security gains (losses), net
|
(226
|
)
|
(106.6
|
)
|
(93
|
)
|
(30.5
|
)
|
||||||||
|
Gains on loans sold
|
(1,025
|
)
|
(79.9
|
)
|
(885
|
)
|
(40.8
|
)
|
||||||||
|
Earnings on bank owned life insurance
|
(976
|
)
|
(53.4
|
)
|
1,133
|
163.0
|
||||||||||
|
Other
|
(553
|
)
|
(39.6
|
)
|
(576
|
)
|
(29.2
|
)
|
||||||||
|
Total
|
$
|
(2,567
|
)
|
(20.9
|
)
|
$
|
883
|
7.7
|
||||||||
2022 vs. 2021
Non-interest income decreased $2,567,000 in 2022 from 2021, or 20.9%. We experienced a $14,000 net loss on available for sale securities in 2022 compared to net gains totaling $212,000 in 2021.
During 2022, we sold $7.5 million of US Agency securities for a pre-tax loss of $14,000. During 2021, we sold $17.2 million of US treasury securities for a pre-tax gain of $177,000 and $12.0 million of US Agency securities for a pre-tax gain of
$35,000 to take advantage of market conditions at the time of the sales. During 2022, net equity security losses amounted to $247,000 as a result of market conditions experienced in 2022 compared to gains of $339,000 last year.
Gains on loans sold decreased $1,025,000 compared to last year. The decrease in gains on loans sold is attributable to a $41.6 million, or 74.8% decrease in the proceeds from the sale of
residential mortgages loans as a result of the increase in mortgage interest rates. The increase in service charges of $591,000 for 2022 is attributable to an increase in customer spending in 2022 compared to 2021. The decrease in other income is
due to fees on offering derivative contracts for certain customers, that provided the customer with fixed rate loans, which generated fee income of $88,000 in 2022 compared to $494,000 in 2021. The decrease in earnings on bank owned life
insurance is due to two former employees of the Company passing during the first quarter of 2021, which generated a death benefit payable to the Company of $1,155,000. The increase in brokerage and insurance commissions was attributable to growth
in our south central and north central, Pennsylvania markets.
2021 vs. 2020
Non-interest income increased $883,000 in 2021 from 2020, or 7.7%. We experienced a $212,000 net gain on available for sale securities in 2021 compared to net gains totaling $305,000 in 2020.
During 2021, we sold $17.2 million of US treasury securities for a pre-tax gain of $177,000 and $12.0 million of US Agency securities for a pre-tax gain of $35,000 to take advantage of market conditions at the time of the sales. During 2020, we
sold 19 mortgage backed securities for a net gain of $305,000 to lock in gains that benefitted from the Federal Reserve investment purchase program in response to the COVID-19 pandemic. During 2021, net equity security gains amounted to $339,000
as a result of market gains experienced in 2021 compared to losses of $41,000 in 2020 associated with the Covid-19 pandemic.
Gains on loans sold decreased $885,000 compared to 2020. The decrease in gains on loans sold was attributable to a $20.2 million, or 26.6% decrease in the proceeds from the sale of residential
mortgages loans. The increase in service charges of $534,000 for 2021 was attributable to the Bank’s response to the COVID-19 pandemic in 2020 and an increase in customer spending in 2021 compared to 2020 which was impacted by mandatory stay at
home orders as customers ate out less and spent less on discretionary items. The decrease in other income was due to fees on offering derivative contracts for certain customers, that provided the customer with fixed rate loans, which generated
fee income of $494,000 in 2021 compared to $1,373,000 in 2020. The increase in earnings on bank owned life insurance was due to two former employees of the Company passing during the first quarter of 2021, which generated a death benefit payable
to the Company of $1,155,000. The increase in brokerage and insurance commissions was attributable to growth in our south central and north central, Pennsylvania markets.
Non-interest Expenses
The following tables reflect the breakdown of non-interest expense by major category for the years ended December 31 (dollars in thousands):
|
2022
|
2021
|
2020
|
||||||||||
|
Salaries and employee benefits
|
27,837
|
25,902
|
$
|
24,190
|
||||||||
|
Occupancy
|
3,138
|
2,966
|
2,557
|
|||||||||
|
Furniture and equipment
|
565
|
519
|
757
|
|||||||||
|
Professional fees
|
1,891
|
1,526
|
1,517
|
|||||||||
|
FDIC insurance
|
676
|
522
|
476
|
|||||||||
|
Pennsylvania shares tax
|
907
|
880
|
868
|
|||||||||
|
Amortization of intangibles
|
156
|
192
|
216
|
|||||||||
|
Merger and acquisition
|
-
|
-
|
2,179
|
|||||||||
|
ORE expenses
|
17
|
439
|
451
|
|||||||||
|
Software expenses
|
1,446
|
1,321
|
1,155
|
|||||||||
|
Other
|
8,061
|
7,283
|
6,481
|
|||||||||
|
Total
|
$
|
44,694
|
$
|
41,550
|
$
|
40,847
|
||||||
|
2022/2021
Change
|
2021/2020
Change
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Salaries and employee benefits
|
$
|
1,935
|
7.5
|
$
|
1,712
|
7.1
|
||||||||||
|
Occupancy
|
172
|
5.8
|
409
|
16.0
|
||||||||||||
|
Furniture and equipment
|
46
|
8.9
|
(238
|
)
|
(31.4
|
)
|
||||||||||
|
Professional fees
|
365
|
23.9
|
9
|
0.6
|
||||||||||||
|
FDIC insurance
|
154
|
29.5
|
46
|
9.7
|
||||||||||||
|
Pennsylvania shares tax
|
27
|
3.1
|
12
|
1.4
|
||||||||||||
|
Amortization of intangibles
|
(36
|
)
|
(18.8
|
)
|
(24
|
)
|
(11.1
|
)
|
||||||||
|
Merger and acquisition
|
-
|
NA
|
(2,179
|
)
|
(100.0
|
)
|
||||||||||
|
ORE expenses
|
(422
|
)
|
(96.1
|
)
|
(12
|
)
|
(2.7
|
)
|
||||||||
|
Software expenses
|
125
|
9.5
|
166
|
14.4
|
||||||||||||
|
Other
|
778
|
10.7
|
802
|
12.4
|
||||||||||||
|
Total
|
$
|
3,144
|
7.6
|
$
|
703
|
1.7
|
||||||||||
2022 vs. 2021
Non-interest expenses for 2022 totaled $44,694,000, which represents an increase of $3,144,000, compared to 2021 expenses of $41,550,000. Salaries and employee benefits increased $1,935,000 or
7.5%. The increase was due to merit increases effective at the beginning of 2022, additional headcount 14.7 FTEs added during 2022 and increased health care related expenses due to actual claims of employees. Employee commissions related to
brokerage and insurance commissions increased due to the increased sales in 2022 compared to 2021.
The increase in occupancy expenses is due to the additional branches opened during 2022 and higher utility and maintenance expenses. The increase in professional fees was due to $250,000 of fees
associated with the recently announced HVB merger that is expected to close in the first half of 2023. The increase in other expenses is additional marketing expenses, primarily in the Delaware market, charge-offs associated with fraudulent
customer account activity, appraisal fees, travel related expenses as the economy reopens from pandemic related issues and the Delaware franchise tax due to growth in that market. The decrease in ORE expenses is due to gains on sales of ORE
properties experienced during 2022.
2021 vs. 2020
Non-interest expenses for 2021 totaled $41,550,000, which represents an increase of $703,000, compared to 2020 expenses of $40,847,000. Salaries and employee benefits increased $1,712,000 or
7.1%. The increase was due to merit increases effective at the beginning of 2021, additional headcount as part of the MidCoast acquisition and servicing the Delaware market and increased profit sharing expenses due to increased profitability of
the Company. Employee commissions related to brokerage and insurance commissions increased due to the increased sales in 2021 compared to 2020.
The increase in occupancy expenses was due to the additional branches acquired as part of the MidCoast acquisition and the Kennett Square branch as they are included for a full year in 2021. The
decrease in merger and acquisition costs was due to costs associated with the MidCoast acquisition that closed in April 2020. The decrease in furniture and fixtures was due to a decrease in non-capitalized items that were purchased in 2020 to
support the acquisition. The increase in other expenses was due to charitable contributions made in our south central Pennsylvania and Delaware markets and the Delaware franchise tax due to the performance of the Delaware market, advertising and
promotions associated with the Delaware markets.
PROVISION FOR INCOME TAXES
The provision for income taxes was $6,435,000, $6,199,000 and $5,263,000 for 2022, 2021 and 2020, respectively. The effective tax rates for 2022, 2021 and 2020 were 18.1%, 17.6% and 17.3%,
respectively.
The increase in income tax expense of $236,000 in 2022 was due earnings on bank owned life insurance being excluded from taxable income, which was higher in 2021 than 2022, which accounts for an
increase in income taxes of $205,000 at a 21% tax rate.
The increase in income tax expense of $936,000 in 2021 was due to the increase of $4,951,000 in income before the provision for income taxes, which accounts for an increase in tax expense of
$1,040,000 at a 21% tax rate.
We are involved in seven limited partnership agreements that operate low-income housing projects in our market areas, two of which we entered into during 2022. During 2022, 2021 and 2020, we
recognized tax credits related to one of the seven partnerships. Tax credits associated with four of the partnerships were fully utilized by December 2022. We expect to start recognizing credits on the remaining three projects in 2023. We
anticipate recognizing an aggregate of $9.6 million of tax credits over the next thirteen years.
FINANCIAL CONDITION
The following table presents ending balances (dollars in millions), the dollar amount of change and the percentage change during the past year:
|
2022
Balance |
Increase
|
%
Change |
2021
Balance
|
|||||||||||||
|
Total assets
|
$
|
2,333.4
|
$
|
189.5
|
8.8
|
$
|
2,143.9
|
|||||||||
|
Total investments
|
439.5
|
27.1
|
6.6
|
412.4
|
||||||||||||
|
Total loans, net
|
1,706.4
|
282.2
|
19.8
|
1,424.2
|
||||||||||||
|
Total deposits
|
1,844.2
|
8.0
|
0.4
|
1,836.2
|
||||||||||||
|
Total borrowings
|
257.3
|
183.3
|
247.7
|
74.0
|
||||||||||||
|
Total stockholders' equity
|
200.1
|
(12.4
|
)
|
(5.8
|
)
|
212.5
|
||||||||||
Cash and Cash Equivalents
Cash and cash equivalents totaled $26.2 million at December 31, 2022 compared to $172.8 million at December 31, 2021. Management actively measures and evaluates the Company’s liquidity through
our Asset – Liability committee and believes its liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, Federal Home Loan Bank financing, federal funds lines
with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance
sheet commitments as they come due.
Investments
The following table shows the year-end composition of the investment portfolio, at fair value, for the two years ended December 31 (dollars in thousands):
|
2022
Amount |
% of
Total |
2021
Amount
|
% of
Total |
|||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
U. S. Agency securities
|
$
|
70,677
|
16.0
|
$
|
73,945
|
17.8
|
||||||||||
|
U.S. Treasuries
|
148,570
|
33.6
|
115,347
|
27.8
|
||||||||||||
|
Obligations of state & political subdivisions
|
110,300
|
25.0
|
112,021
|
27.0
|
||||||||||||
|
Corporate obligations
|
9,383
|
2.1
|
10,333
|
2.5
|
||||||||||||
|
Mortgage-backed securities
|
100,576
|
22.8
|
100,756
|
24.3
|
||||||||||||
|
Equity securities
|
2,208
|
0.5
|
2,270
|
0.6
|
||||||||||||
|
Total
|
$
|
441,714
|
100.0
|
$
|
414,672
|
100.0
|
||||||||||
The Company’s investment portfolio increased during 2022 by $27.0 million. This growth was fueled by purchases made in the first half of 2022 to utilize portions of the cash position. During
2022, we purchased $53.8 million of U.S. Treasuries, $12.3 million of U.S. agencies, $33.4 million of mortgage backed securities, $18.4 million of state and local obligations and $218,000 of equity securities, which helped to offset the $19.5
million of principal repayments and $14.1 million of calls and maturities that occurred during the year. We also sold $7.5 million of bonds at a net loss of $14,000. The fair value of our investment portfolio decreased approximately $47.9 million
in 2022 due to increases in market interest rates. Excluding our short term investments consisting of monies held primarily at the Federal Reserve, the effective yield on our investment portfolio for 2022 was 1.90% compared to 1.96% for 2021 on a
tax equivalent basis.
Interest rates increased dramatically in 2022 in response to historically high inflation forcing the Federal Reserve to aggressively tighten monetary policy at a pace and levels not seen in
decades. The year began with accelerating inflation that was exacerbated by the Russian invasion of Ukraine driving energy prices higher with crude oil peaking at $130 a barrel in early March. Other commodities prices followed oils lead reaching
extremely high levels and adding to inflationary fears. The Federal Reserve completely abandoned their belief that inflation would prove transitory and began to tighten monetary policy by both reducing the size of its balance sheet and
increasing over-night borrowing rates. Coming into the year the Central Bank’s official forecast was for a total increase in rates by 0.75%, but inflation continued to climb to levels not seen since the early 1980’s pushing the Fed Reserve into a
series of 75-basis point increases then ending the year with a 50-basis point hike in December for a total increase of 4.25%. The result of these moves created an inverted Treasury yield curve with every maturity from 1 month T-Bills to 7 year
Treasuries all yielding more than the 10 year Treasury. The closely followed 2-year to 10-year Treasury spread started the year at a positive 88-basis points and ended the year at a negative 55-basis points. The 2-year Treasury started the year
at 0.78% and ended the year at 4.43% while the 10-year Treasury’s move was from 1.56% to 3.88%. Commodities prices eased in the second half of the year and inflation measures fell as a result, but a strong labor market kept wage inflation high
pressuring the Federal Reserve to remain resolute in maintaining an aggressive tightening monetary policy. Treasury yields ended the year well below the peak as the inverted yield curve increased concerns the Federal Reserve would make a policy
error and tighten to much. The investment strategy for 2022 has been to utilize excess cash, cashflows from the investment portfolio and deposit inflows to purchase U.S. treasury securities, due to a limited spread between US treasuries and
agencies, mortgage backed securities issued by government sponsored entities and obligations of state and political securities. The increase in the investment portfolio was in response to the deposit inflows that occurred in 2021 and the first
half of 2022. We continually monitor interest rate trading ranges and try to focus purchases to times when rates are in the top of the trading range. The Bank believes its investment strategy has appropriately mitigated its interest rate risk
exposure for various rate environments, while providing sufficient cashflows to meet liquidity needs.
At December 31, 2022, the Company did not own any securities, other than government-sponsored and government-guaranteed mortgage-backed securities, that had an aggregate book value in excess of
10% of its consolidated stockholders’ equity at that date.
The expected principal repayments at amortized cost and average weighted yields for the investment portfolio (excluding equity securities) as of December 31, 2022, are shown below (dollars in
thousands). Expected principal repayments, which include prepayment speed assumptions for mortgage-backed securities, are significantly different than the contractual maturities detailed in Note 4 of the consolidated financial statements. Yields
on tax-exempt securities are presented on a fully taxable equivalent basis, assuming a 21% tax rate, which was the rate in effect at December 31, 2022.
|
One Year or Less
|
After One Year
to Five years |
After Five Years
to Ten Years |
After Ten Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Amortized
Cost |
Yield
% |
Amortized
Cost |
Yield
% |
Amortized
Cost
|
Yield
% |
Amortized
Cost
|
Yield
% |
Amortized
Cost
|
Yield
% |
|||||||||||||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. agency securities
|
$
|
16,660
|
3.4
|
$
|
32,447
|
1.9
|
$
|
23,354
|
1.8
|
$
|
6,095
|
1.5
|
$
|
78,556
|
2.2
|
|||||||||||||||||||||||||
|
U.S. treasuries
|
9,972
|
1.0
|
139,459
|
1.1
|
12,805
|
1.6
|
-
|
-
|
162,236
|
1.1
|
||||||||||||||||||||||||||||||
|
Obligations of state & political
Subdivisions
|
4,635
|
3.7
|
14,549
|
2.5
|
26,558
|
1.8
|
74,820
|
1.9
|
120,562
|
2.0
|
||||||||||||||||||||||||||||||
|
Corporate obligations
|
-
|
-
|
10,335
|
3.6
|
-
|
-
|
-
|
-
|
10,335
|
3.6
|
||||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
19,121
|
1.0
|
36,394
|
1.5
|
42,271
|
1.4
|
17,518
|
1.4
|
115,304
|
1.4
|
||||||||||||||||||||||||||||||
|
Total available-for-sale
|
$
|
50,388
|
2.0
|
$
|
233,184
|
1.5
|
$
|
104,988
|
1.6
|
$
|
98,433
|
1.8
|
$
|
486,993
|
1.6
|
|||||||||||||||||||||||||
At December 31, 2022, approximately 58.2% of the amortized cost of debt securities is expected to mature, call or pre-pay within five years or less. The Company expects that earnings from
operations, the levels of cash held at the Federal Reserve and other correspondent banks, the high liquidity level of the available-for-sale securities, growth of deposits and the availability of borrowings from the Federal Home Loan Bank and
other third party banks will be sufficient to meet future liquidity needs.
Loans Held for Sale
Loans held for sale decreased $3.8 million to $725,000 as of December 31, 2022 from December 31, 2021. The decrease in loans held for sale was due to the reduced amount of refinancings occurring
in 2022 compared to 2021 due to the higher rate environment.
Loans
The Bank’s lending efforts have historically focused on north central Pennsylvania and southern New York. With the acquisition of FNB and the opening of offices in Lancaster County, this focus
has grown to include Lebanon, Schuylkill, Berks and Lancaster County markets of south central, Pennsylvania. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities and
offices in State College and Mill Hall to support commercial opportunities in central Pennsylvania, especially Centre and Clinton Counties. In April 2020, we completed the MidCoast acquisition, which expanded our markets into the State of
Delaware with activity centered around the cities of Wilmington and Dover, Delaware. In November of 2020, we opened a branch in Kennett Square, Pennsylvania, to further serve customers obtained as part of the MidCoast acquisition, as well as to
expand operations into Chester County, Pennsylvania. During 2022, expansion efforts continued in both Lancaster, Pennsylvania with the opening of an office in Ephrata, Pennsylvania and in Delaware with the opening of an office in Greenville,
Delaware, which is near Wilmington, Delaware. The Bank has also received approval to open a full service branch in Williamsport, Pennsylvania that is expected to open during the summer of 2023.
We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships that our lending teams have with their customers, as
well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank’s website. The Bank offers a variety of loans, although historically most of our
lending has focused on real estate loans including residential, commercial, agricultural, and construction loans. As of December 31, 2022, approximately 85.9% of our loan portfolio consisted of real estate loans. All lending is governed by a
lending policy that is developed and administered by management and approved by the Board of Directors.
The Bank primarily offers fixed rate residential mortgage loans with terms of up to 25 years and adjustable rate mortgage loans (with amortization schedules up to 30 years) with interest rates
and payments that adjust based on one, three, five and 15 year fixed periods. Loan to value ratios are usually 80% or less with exceptions for individuals with excellent credit and low debt to income and/or high net worth. Adjustable rate
mortgages are tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate. Home equity loans are written with terms of up to 15 years at fixed rates. Home equity lines of credit are variable rate loans tied to the
Prime Rate generally with a ten year draw period followed by a ten year repayment period. Home equity loans are typically written with a maximum 80% loan to value.
Commercial real estate loan terms are generally 20 years or less, with one to five year adjustable interest rates. The adjustable rates are typically tied to a margin above the comparable
Federal Home Loan Bank of Pittsburgh borrowing rate with a typical loan to value ratio of 80% or less. During 2022 and 2021, the Bank offered certain customers derivative contracts that allowed the customer to obtain a fixed interest rate for a
period up to 10 years. Where feasible, the Bank participates in the United States Department of Agriculture’s (USDA) and Small Business Administration (SBA) guaranteed loan programs to offset credit risk and to further promote economic growth in
our market area.
Agriculture is an important industry throughout our market areas. Therefore, the Bank has not only developed an agriculture lending team with significant experience that has a thorough
understanding of this industry, but also continually looks for additional employees with a thorough understanding of agriculture. We have an agricultural loan policy to assist in underwriting agricultural loans. Agricultural loans are made to a
diversified customer base that include dairy, swine and poultry farmers and their support businesses. Agricultural loans focus on character, cash flow and collateral, while also considering the particular risks of the industry. Loan terms are
generally 20 years or less, with one to five year adjustable interest rates. The adjustable rates are typically tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate with a typical loan to value of less than
80%. We evaluate the financial strength of the integrators we have exposure to with our poultry and swine agricultural customers. The Bank is a preferred lender under the USDA’s Farm Service Agency (FSA) and participates in the FSA guaranteed
loan program.
The Bank, as part of its commitment to the communities it serves, is an active lender for projects by our local municipalities and school districts. These loans range from short term bridge
financing to 20 year term loans for specific projects. These loans are typically written at rates that adjust at least every five years. Due to the size of certain municipal loans, we have developed participation lending relationships with other
community banks that allow us to meet regulatory compliance issues, while meeting the needs of the customer. At December 31, 2022, the aggregate balance of our participation loans, in which a portion was sold to other lender’s totaled $195.95
million, of which $102.6 million was sold.
Activity associated with exploration for natural gas in 2022 was higher than 2021. Certain entities drilled new wells and created new pad sites and pipelines, while other companies only
maintained their existing wells. Natural gas prices increased during 2022, but still experienced significant volatility in 2022. While the Bank has loaned to companies that service the exploration activities, the Bank has not originated any loans
to companies performing the actual drilling and exploration activities. Loans made by the Company were to service industry customers which included trucking companies, stone quarries and other support businesses. We also originated loans to
businesses and individuals for restaurants, hotels and apartment rentals that were developed and expanded to meet the housing and living needs of the gas workers. Due to our understanding of the industry and its cyclical nature, the loans made
for natural gas-related activities were originated in a prudent and cautious manner and were subject to specific policies and procedures for lending to these entities, which included lower loan to value thresholds, shortened amortization periods,
and expansion of our monitoring of loan concentrations associated with this activity.
The following table shows the year-end composition of the loan portfolio as of December 31, 2022 and 2021 (dollars in thousands):
|
2022
|
2021
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Real estate:
|
||||||||||||||||
|
Residential
|
$
|
210,213
|
12.2
|
$
|
201,097
|
14.0
|
||||||||||
|
Commercial
|
876,569
|
50.8
|
687,338
|
47.7
|
||||||||||||
|
Agricultural
|
313,614
|
18.2
|
312,011
|
21.6
|
||||||||||||
|
Construction
|
80,691
|
4.7
|
55,036
|
3.8
|
||||||||||||
|
Consumer
|
86,650
|
5.0
|
25,858
|
1.8
|
||||||||||||
|
Other commercial loans
|
63,222
|
3.7
|
74,585
|
5.2
|
||||||||||||
|
Other agricultural loans
|
34,832
|
2.0
|
39,852
|
2.8
|
||||||||||||
|
State & political subdivision loans
|
59,208
|
3.4
|
45,756
|
3.1
|
||||||||||||
|
Total loans
|
1,724,999
|
100.0
|
1,441,533
|
100.0
|
||||||||||||
|
Less allowance for loan losses
|
18,552
|
17,304
|
||||||||||||||
|
Net loans
|
$
|
1,706,447
|
$
|
1,424,229
|
||||||||||||
|
2022/2021
Change
|
||||||||
|
Amount
|
%
|
|||||||
|
Real estate:
|
||||||||
|
Residential
|
$
|
9,116
|
4.5
|
|||||
|
Commercial
|
189,231
|
27.5
|
||||||
|
Agricultural
|
1,603
|
0.5
|
||||||
|
Construction
|
25,655
|
46.6
|
||||||
|
Consumer
|
60,792
|
235.1
|
||||||
|
Other commercial loans
|
(11,363
|
)
|
(15.2
|
)
|
||||
|
Other agricultural loans
|
(5,020
|
)
|
(12.6
|
)
|
||||
|
State & political subdivision loans
|
13,452
|
29.4
|
||||||
|
Total loans
|
$
|
283,466
|
19.7
|
|||||
Total loans grew $283.5 million in 2022 and total $1.72 billion at the end of 2022. The primary driver of growth during 2022 was growth in commercial and construction real estate in the Delaware
market, student loans and state and political loans. This growth was offset by a decrease in other commercial and other agricultural loans of $11.4 million and $5.0 million, respectively, due to a decrease in PPP loans and other loan paydowns
during the year.
Residential real estate loans increased $9.1 million even as refinancing activity decreased during 2022 due to higher rates During 2022, $10.0 million of residential real estate loans were
originated for sale on the secondary market, which compares to $44.7 million for 2021. For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income.
The following table presents the maturity distribution of our loan portfolio as of December 31, 2022 (in thousands). The table does not include any estimate of prepayments which significantly
shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
|
Due in One year or less
|
After one year through five years
|
After five years through fifteen years
|
After fifteen years
|
Total
|
||||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Residential
|
$
|
736
|
$
|
8,003
|
$
|
74,912
|
$
|
126,562
|
$
|
210,213
|
||||||||||
|
Commercial
|
86,776
|
267,583
|
357,755
|
164,455
|
876,569
|
|||||||||||||||
|
Agricultural
|
20,260
|
17,031
|
156,043
|
120,280
|
313,614
|
|||||||||||||||
|
Construction
|
2,193
|
29,675
|
33,395
|
15,428
|
80,691
|
|||||||||||||||
|
Consumer
|
18,336
|
65,279
|
2,903
|
132
|
86,650
|
|||||||||||||||
|
Other commercial loans
|
28,933
|
28,483
|
5,806
|
-
|
63,222
|
|||||||||||||||
|
Other agricultural loans
|
19,232
|
13,257
|
2,343
|
-
|
34,832
|
|||||||||||||||
|
State & political subdivision loans
|
768
|
1,461
|
27,687
|
29,292
|
59,208
|
|||||||||||||||
|
$
|
177,234
|
$
|
430,772
|
$
|
660,844
|
$
|
456,149
|
$
|
1,724,999
|
|||||||||||
The following table presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of loans in accordance with changes in the interest rate
index that mature after December 31, 2023.
|
Sensitivity of loans to changes in interest rates - loans due after December 31, 2023:
|
Predetermined interest rate
|
Floating or adjustable interest rate
|
Total
|
|||||||||
|
Real estate:
|
||||||||||||
|
Residential
|
$
|
116,160
|
$
|
93,317
|
$
|
209,477
|
||||||
|
Commercial
|
383,030
|
406,763
|
789,793
|
|||||||||
|
Agricultural
|
13,923
|
279,431
|
293,354
|
|||||||||
|
Construction
|
32,657
|
45,841
|
78,498
|
|||||||||
|
Consumer
|
4,823
|
63,491
|
68,314
|
|||||||||
|
Other commercial loans
|
19,711
|
14,578
|
34,289
|
|||||||||
|
Other agricultural loans
|
10,736
|
4,864
|
15,600
|
|||||||||
|
State & political subdivision loans
|
35,770
|
22,670
|
58,440
|
|||||||||
|
$
|
616,810
|
$
|
930,955
|
$
|
1,547,765
|
|||||||
Allowance for Loan Losses and Credit Quality Risk
The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable future loan losses inherent in the loan portfolio. The provision for loan
losses is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for loan losses was $18,552,000 or 1.08% of total loans as of
December 31, 2022 as compared to $17,304,000 or 1.20% of loans as of December 31, 2021. The $1,248,000 increase is a result of a $1,683,000 provision for loan losses less net charge-offs of $435,000. During 2022, net charge-offs were low with the
majority related to one charge-off. The following table shows the distribution of the allowance for loan losses and the percentage of loans compared to total loans by loan category (dollars in thousands) as of December 31:
|
2022
|
2021
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Residential
|
$
|
1,056
|
12.2
|
$
|
1,147
|
14.0
|
||||||||||
|
Commercial
|
10,120
|
50.8
|
8,099
|
47.7
|
||||||||||||
|
Agricultural
|
4,589
|
18.2
|
4,729
|
21.6
|
||||||||||||
|
Construction
|
801
|
4.7
|
434
|
3.8
|
||||||||||||
|
Consumer
|
135
|
5.0
|
262
|
1.8
|
||||||||||||
|
Other commercial loans
|
1,040
|
3.7
|
1,023
|
5.2
|
||||||||||||
|
Other agricultural loans
|
489
|
2.0
|
558
|
2.8
|
||||||||||||
|
State & political subdivision loans
|
322
|
3.4
|
281
|
3.1
|
||||||||||||
|
Unallocated
|
-
|
N/A
|
771
|
N/A
|
||||||||||||
|
Total allowance for loan losses
|
$
|
18,552
|
100.0
|
$
|
17,304
|
100.0
|
||||||||||
The following table provides information related to credit loss experience and net (charge-offs) recoveries for 2022, 2021 and 2020.
|
2022
|
Credit Loss Expense (Benefit)
|
Net (charge-offs) Recoveries
|
Average Loans
|
Ratio of net (charge-offs) recoveries to Average loans
|
Allowance to total loans
|
Non-accrual loans as a percent of loans
|
Allowance to total non-accrual loans
|
|||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
(91
|
)
|
-
|
$
|
204,063
|
0.00
|
%
|
0.50
|
%
|
0.28
|
%
|
178.68
|
%
|
||||||||||||||
|
Commercial
|
2,018
|
3
|
782,016
|
0.00
|
%
|
1.15
|
%
|
0.32
|
%
|
364.29
|
%
|
|||||||||||||||||
|
Agricultural
|
(140
|
)
|
-
|
312,999
|
0.00
|
%
|
1.46
|
%
|
1.03
|
%
|
142.43
|
%
|
||||||||||||||||
|
Construction
|
367
|
-
|
73,214
|
0.00
|
%
|
0.99
|
%
|
0.00
|
%
|
NA
|
||||||||||||||||||
|
Consumer
|
(111
|
)
|
(16
|
)
|
58,715
|
-0.03
|
%
|
0.16
|
%
|
0.00
|
%
|
NA
|
||||||||||||||||
|
Other commercial loans
|
439
|
(422
|
)
|
72,444
|
-0.58
|
%
|
1.64
|
%
|
0.10
|
%
|
1677.42
|
%
|
||||||||||||||||
|
Other agricultural loans
|
(69
|
)
|
-
|
34,421
|
0.00
|
%
|
1.40
|
%
|
0.82
|
%
|
171.58
|
%
|
||||||||||||||||
|
State & political subdivision loans
|
41
|
-
|
56,004
|
0.00
|
%
|
0.54
|
%
|
0.00
|
%
|
NA
|
||||||||||||||||||
|
Unallocated
|
(771
|
)
|
-
|
-
|
NA
|
NA
|
NA
|
NA
|
||||||||||||||||||||
|
Total
|
$
|
1,683
|
$
|
(435
|
)
|
$
|
1,593,876
|
-0.03
|
%
|
1.08
|
%
|
0.40
|
%
|
267.40
|
%
|
|||||||||||||
|
2021
|
||||||||||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
(27
|
)
|
-
|
$
|
203,062
|
0.00
|
%
|
0.57
|
%
|
0.30
|
%
|
192.77
|
%
|
||||||||||||||
|
Commercial
|
1,848
|
35
|
639,161
|
0.01
|
%
|
1.18
|
%
|
0.43
|
%
|
275.01
|
%
|
|||||||||||||||||
|
Agricultural
|
(224
|
)
|
-
|
312,770
|
0.00
|
%
|
1.52
|
%
|
1.00
|
%
|
150.94
|
%
|
||||||||||||||||
|
Construction
|
312
|
-
|
56,315
|
0.00
|
%
|
0.79
|
%
|
0.00
|
%
|
NA
|
||||||||||||||||||
|
Consumer
|
(53
|
)
|
(6
|
)
|
24,125
|
-0.02
|
%
|
1.01
|
%
|
0.00
|
%
|
NA
|
||||||||||||||||
|
Other commercial loans
|
(113
|
)
|
(90
|
)
|
99,839
|
-0.09
|
%
|
1.37
|
%
|
0.19
|
%
|
730.71
|
%
|
|||||||||||||||
|
Other agricultural loans
|
(306
|
)
|
-
|
37,181
|
0.00
|
%
|
1.40
|
%
|
2.01
|
%
|
69.49
|
%
|
||||||||||||||||
|
State & political subdivision loans
|
(198
|
)
|
-
|
52,804
|
0.00
|
%
|
0.61
|
%
|
0.00
|
%
|
NA
|
|||||||||||||||||
|
Unallocated
|
311
|
-
|
-
|
NA
|
NA
|
NA
|
NA
|
|||||||||||||||||||||
|
Total
|
$
|
1,550
|
$
|
(61
|
)
|
$
|
1,425,257
|
0.00
|
%
|
1.20
|
%
|
0.53
|
%
|
227.21
|
%
|
|||||||||||||
|
2020
|
||||||||||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
46
|
14
|
$
|
210,696
|
0.01
|
%
|
0.58
|
%
|
0.40
|
%
|
144.58
|
%
|
|||||||||||||||
|
Commercial
|
2,065
|
(398
|
)
|
478,415
|
-0.08
|
%
|
1.04
|
%
|
0.76
|
%
|
137.25
|
%
|
||||||||||||||||
|
Agricultural
|
(84
|
)
|
15
|
311,100
|
0.00
|
%
|
1.57
|
%
|
0.99
|
%
|
158.09
|
%
|
||||||||||||||||
|
Construction
|
79
|
0
|
26,343
|
0.00
|
%
|
0.34
|
%
|
0.00
|
%
|
NA
|
||||||||||||||||||
|
Consumer
|
238
|
(29
|
)
|
20,986
|
-0.14
|
%
|
1.06
|
%
|
0.00
|
%
|
NA
|
|||||||||||||||||
|
Other commercial loans
|
3
|
(32
|
)
|
112,054
|
-0.03
|
%
|
1.07
|
%
|
1.12
|
%
|
95.48
|
%
|
||||||||||||||||
|
Other agricultural loans
|
(97
|
)
|
-
|
46,101
|
0.00
|
%
|
1.77
|
%
|
2.00
|
%
|
88.71
|
%
|
||||||||||||||||
|
State & political subdivision loans
|
(57
|
)
|
-
|
86,143
|
0.00
|
%
|
0.76
|
%
|
0.00
|
%
|
NA
|
|||||||||||||||||
|
Unallocated
|
207
|
-
|
-
|
NA
|
NA
|
NA
|
NA
|
|||||||||||||||||||||
|
Total
|
$
|
2,400
|
$
|
(430
|
)
|
$
|
1,291,838
|
-0.03
|
%
|
1.13
|
%
|
0.76
|
%
|
147.36
|
%
|
|||||||||||||
The Company believes it utilizes a disciplined and thorough loan review process based upon its internal loan policy approved by the Company’s Board of Directors. The purpose of the review is to
assess loan quality, analyze delinquencies, identify problem loans, evaluate potential charge-offs and recoveries, and assess general overall economic conditions in the markets served. An external independent loan review is performed on our
commercial portfolio at least semi-annually for the Company. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) new loans originated for over $1.0
million in the last year, 3) a majority of borrowers with commitments greater than or equal to $1.0 million, 4) selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or
Loss, and 5) such other loans which management or the consultant deems appropriate. As part of this review, our underwriting process and loan grading system is evaluated.
Management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate as of December 31, 2022. However, future adjustments
could be required if circumstances differ substantially from assumptions and estimates used in making the initial determination. A prolonged downturn in the economy, changes in the economies of various segments of our agricultural and commercial
portfolios, high unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, loan loss provisions and
reduction in income. Additionally, bank regulatory agencies periodically examine the Bank’s allowance for loan losses. The banking agencies could require the recognition of additions to the allowance for loan losses based upon their judgment of
information available to them at the time of their examination.
On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports. Based on data surrounding the collection process of each identified loan, the
loan may be added or deleted from the monthly watch list. The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may choose to include. Watch list loans are continually
monitored going forward until satisfactory conditions exist that allow management to upgrade and remove the loan from the watchlist. In certain cases, loans may be placed on non-accrual status or charged-off based upon management’s evaluation of
the borrower’s ability to pay. All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans, other commercial loans and other agricultural loans, on non-accrual are evaluated
quarterly for impairment.
The adequacy of the allowance for loan losses is subject to a formal, quarterly analysis by management of the Company. In order to better analyze the risks associated with the loan portfolio,
the entire portfolio is divided into several categories. As stated above, loans on non-accrual status are specifically reviewed for impairment and given a specific reserve, if appropriate. Loans evaluated and not found to be impaired are
included with other performing loans, by category, by their respective homogenous pools. Three year average historical loss factors were calculated for each pool and applied to the performing portion of the loan category for each year presented.
The historical loss factors for both reviewed and homogeneous pools are adjusted based upon the following qualitative factors:
|
•
|
Level of and trends in delinquencies, impaired/classified loans
|
|
■
|
Change in volume and severity of past due loans
|
|
■
|
Volume of non-accrual loans
|
|
■
|
Volume and severity of classified, adversely or graded loans
|
|
•
|
Level of and trends in charge-offs and recoveries
|
|
•
|
Trends in volume, terms and nature of the loan portfolio
|
|
•
|
Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices
|
|
•
|
Changes in the quality of the Bank’s loan review system
|
|
•
|
Experience, ability and depth of lending management and other relevant staff
|
|
•
|
National, state, regional and local economic trends and business conditions
|
|
■
|
General economic conditions
|
|
■
|
Unemployment rates
|
|
■
|
Inflation / CPI
|
|
■
|
Changes in values of underlying collateral for collateral-dependent loans
|
|
•
|
Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses.
|
|
•
|
Existence and effect of any credit concentrations, and changes in the level of such concentrations
|
|
•
|
Any change in the level of board oversight
|
See also “Note 5 – Loans and Related Allowance for Loan Losses” to the consolidated financial statements.
As a result of previous loss experiences and other risk factors utilized in determining the allowance, the Bank’s allocation of the allowance does not directly correspond to the actual balances
of the loan portfolio. While commercial and agricultural real estate loans total 69.0% of the loan portfolio at December 31 2022, 79.3% of the allowance is assigned to these portions of the loan portfolio as these loans have more inherent risks
than residential real estate or loans to state and political subdivisions. Residential real estate loans comprise 12.2% of the loan portfolio as of December 31, 2022 and 5.7% of the allowance is assigned to this segment as generally there are
less inherent risks then commercial and agricultural loans.
The following table is a summary of our non-performing assets for the years ended December 31, 2022 and 2021. All non-accruing troubled debt restructurings (TDRs) are also included the
non-accruing loans totals.
|
2022
|
2021
|
|||||||
|
Non-performing assets:
|
||||||||
|
Non-accruing loans
|
$
|
6,938
|
$
|
7,616
|
||||
|
Accrual loans - 90 days or more past due
|
7
|
46
|
||||||
|
Total non-performing loans
|
$
|
6,945
|
$
|
7,662
|
||||
|
Foreclosed assets held for sale
|
543
|
1,180
|
||||||
|
Total non-performing assets
|
$
|
7,488
|
$
|
8,842
|
||||
|
Troubled debt restructurings (TDR)
|
||||||||
|
Non-accruing TDRs
|
$
|
3,333
|
$
|
4,295
|
||||
|
Accrual TDRs
|
4,358
|
6,810
|
||||||
|
Total troubled debt restructurings
|
$
|
7,691
|
$
|
11,105
|
||||
The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2021 to December 31, 2022
in non-performing loans (in thousands). Non-performing loans include those accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans. Subsequent cash payments received
are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.
|
December 31, 2022
|
December 31, 2021
|
|||||||||||||||||||||||||||||||
|
Non-Performing Loans
|
Non-Performing Loans
|
|||||||||||||||||||||||||||||||
|
30 - 89 Days
Past Due |
90 Days Past
Due Accruing |
Non-
accrual |
Total Non-
Performing |
30 - 89 Days
Past Due |
90 Days Past
Due Accruing |
Non-
accrual |
Total Non-
Performing |
|||||||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||||||||||
|
Residential
|
$
|
469
|
$
|
-
|
$
|
591
|
$
|
591
|
$
|
492
|
$
|
46
|
$
|
595
|
$
|
641
|
||||||||||||||||
|
Commercial
|
1,018
|
-
|
2,778
|
2,778
|
243
|
-
|
2,945
|
2,945
|
||||||||||||||||||||||||
|
Agricultural
|
-
|
-
|
3,222
|
3,222
|
31
|
-
|
3,133
|
3,133
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
|
Consumer
|
147
|
7
|
-
|
7
|
163
|
-
|
-
|
-
|
||||||||||||||||||||||||
|
Other commercial loans
|
1,695
|
-
|
62
|
62
|
28
|
-
|
140
|
140
|
||||||||||||||||||||||||
|
Other agricultural loans
|
-
|
-
|
285
|
285
|
10
|
-
|
803
|
803
|
||||||||||||||||||||||||
|
Total nonperforming loans
|
$
|
3,329
|
$
|
7
|
$
|
6,938
|
$
|
6,945
|
$
|
967
|
$
|
46
|
$
|
7,616
|
$
|
7,662
|
||||||||||||||||
|
Change in Non-Performing Loans
|
||||||||
| 2022 / 2021 | ||||||||
|
Amount
|
%
|
|||||||
|
Real estate:
|
||||||||
|
Residential
|
$
|
(17
|
)
|
(2.8
|
)
|
|||
|
Commercial
|
(200
|
)
|
(6.7
|
)
|
||||
|
Agricultural
|
89
|
2.8
|
||||||
|
Construction
|
-
|
-
|
||||||
|
Consumer
|
7
|
NA
|
||||||
|
Other commercial loans
|
(78
|
)
|
(55.7
|
)
|
||||
|
Other agricultural loans
|
(518
|
)
|
(64.5
|
)
|
||||
|
Total nonperforming loans
|
$
|
(717
|
)
|
(9.4
|
)
|
|||
The Company worked with customers directly affected by the COVID-19 pandemic. The Company offered assistance in accordance with regulator guidelines. As a result of the COVID-19 pandemic, the
Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could
experience increases in non-performing loans and further increases in its required allowance for loan losses and record additional provision expense. It is possible that the Company's asset quality measures could worsen at future measurement
periods if the effects of the COVID-19 pandemic are prolonged.
For the year ended December 31, 2022, we recorded a provision for loan losses of $1,683,000 which compares to $1,550,000 for the same period in 2021, an increase of $133,000. The increase is
primarily attributable to the organic loan growth that occurred during 2022 offset by the improved economic conditions in relation to the COVID-19 pandemic in 2022 compared to 2021. Non-performing loans decreased $717,000 from December 31, 2021
to December 31, 2022 with the decrease being primarily due to two customer relationships that made payments on the outstanding loans balances during 2022. At December 31, 2022, approximately 55.2% of the Bank’s non-performing loans are associated
with the following three customer relationships:
|
•
|
A commercial loan relationship with $804,000 outstanding, and additional letters of credit of $1.2 million available, secured by undeveloped land, stone quarries and equipment, was on non-accrual
status as of December 31, 2022. The Company services the natural gas industry, as well as local municipalities. As a result, the reduced exploration for natural gas in north central Pennsylvania has significantly impacted the cash
flows of the customer, who provides excavation services and stone for pad construction related to these activities. During 2020, the Company had the underlying equipment collateral appraised and in the first quarter of 2022, the
Company had the quarry appraised. The appraisals indicated a decrease in collateral values compared to the appraisal ordered for the loan origination, however, the loan was still considered well secured on a loan to value basis at
December 31, 2022. In 2021 and 2022, the customer has liquidated some excess equipment and the funds have been utilized to pay down a portion of the loans. Management determined that no specific reserve was required as of December
31, 2022.
|
|
•
|
An agricultural loan customer with a total loan relationship of $1.9 million, secured by real estate, equipment and cattle, was on non-accrual status as of December 31, 2022. The customer declared
bankruptcy during the fourth quarter of 2018 and developed a workout plan that was approved by the bankruptcy court in the fourth quarter of 2019 and resulted in monthly payments resuming in late 2019 that have continued through
2022. Included within these loans to this customer are $758,000 of loans which are subject to Farm Service Agency guarantees. Absent a sizable and sustained increase in milk prices, which is not assured, we will need to rely upon
the collateral for repayment of interest and principal. During 2020, the Company had the underlying collateral appraised. Management determined that no specific reserve was required as of December 31, 2022.
|
|
•
|
An agricultural loan customer with a total loan relationship of $1.2 million, secured by real estate was on non-accrual status as of December 31, 2022. The COVID-19 pandemic has escalated the cash
flow difficulties this customer was experiencing. We expect that we will need to rely upon the collateral for repayment of interest and principal. Management reviewed the collateral and determined that no specific reserve was
required as of December 31, 2022.
|
Management believes that the allowance for loan losses at December 31, 2022 was adequate at that date, which was based on the following factors:
|
•
|
Three loan relationships comprise 55.2% of the non-performing loan balance, which did not require any specific reserves as of December 31, 2022.
|
|
•
|
The Company has a history of low charge-offs, which were 0.03% and 0.00% of average loans for 2022 and 2021, respectively.
|
Bank Owned Life Insurance
The Company holds bank owned life insurance policies to offset current and future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset
the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits. As of December 31, 2022 and 2021, the cash surrender value of the life insurance was $39.4
million and $38.5 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $852,000,
$1,828,000 and $695,000 in 2022, 20210 and 2020, respectively with the decrease due to the death benefits received in 2021 upon the passing of two former employees. The Company evaluates annually the risks associated with the life insurance
policies, including limits on the amount of coverage and an evaluation of the various carriers’ credit ratings.
Effective January 1, 2015, the Company restructured its agreements so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with
the beneficiary of the policy. Under the restructured agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The policies acquired as part of the acquisition of MidCoast are only for
the benefit of the Bank. The net amount at risk is the total death benefit payable less the cash surrender value of the policy as of the date of death. The policies acquired as part of the acquisition of FNB, provide a fixed dollar benefit for
the beneficiary’s’ estate, which is dependent on several factors including whether the covered individual was a Director of FNB or an employee of FNB and their salary level. As of December 31, 2022 and 2021, included in other liabilities on the
Consolidated Balance sheet is a liability of $660,000 and $696,000, respectively, for the obligation under the split-dollar benefit agreements.
Fair Value of Derivative Instruments - asset
The Company holds derivative instruments to hedge interest rate risk and to offer customers longer term fixed rate loans through a program similar to a back to back swap, which results in both a
derivative asset and liability on the Consolidated Balance Sheet. (See Note 17 for additional information). As of December 31, 2022 and 2021, the fair value for the derivatives instruments was $16.6 million and $4.0 million, respectively. The
change in the fair value of financial instruments was due to the rise in market interest rates during 2022. The effective portion of changes in the fair value of the cash flow interest hate hedge derivative is initially reported in other
comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings.
Deferred Tax Asset
Deferred tax assets are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred
income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period. (See note 12 for additional information) As of December 31, 2022 and 2021, the balance for deferred tax assets was $12.9
million and $4.1 million, respectively. The change was due to the impact market interest rates had on the fair values of the Company’s available for sale investment portfolio and cashflow hedges for interest rate risk.
Other Assets
Other assets increased $11.1 million in 2022 to $25.8 million from $14.7 million in 2021. Due to increased borrowing levels with FHLB of Pittsburgh, regulatory stock increased $7.3 million during
2022. We entered into and extended several leases during the year, which resulted in the right of use asset for facilities increasing $1.7 million. As a result of the discount rates utilized for the pension plan, the pension asset increased $1.2
million. The balance in investments in low income housing projects increased $1.0 million due to investments made in three partnerships during 2022. Foreclosed properties were sold during 2022, which resulted in a decrease to other assets of
$637,000.
Deposits
The following table shows the breakdown of deposits by deposit type (dollars in thousands) at December 31:
|
2022
|
2021
|
2020
|
||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||
|
Non-interest-bearing deposits
|
$
|
396,261
|
21.5
|
$
|
358,073
|
19.5
|
$
|
303,762
|
19.1
|
|||||||||||||||
|
NOW accounts
|
512,501
|
27.8
|
485,292
|
26.4
|
422,083
|
26.6
|
||||||||||||||||||
|
Savings deposits
|
321,917
|
17.5
|
313,048
|
17.0
|
255,853
|
16.1
|
||||||||||||||||||
|
Money market deposit accounts
|
335,838
|
18.2
|
350,122
|
19.1
|
225,968
|
14.2
|
||||||||||||||||||
|
Certificates of deposit
|
277,691
|
15.0
|
329,616
|
18.0
|
381,192
|
24.0
|
||||||||||||||||||
|
Total
|
$
|
1,844,208
|
100.0
|
$
|
1,836,151
|
100.0
|
$
|
1,588,858
|
100.0
|
|||||||||||||||
|
2022/2021
Change
|
2021/2020
Change
|
|||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
Non-interest-bearing deposits
|
$
|
38,188
|
10.7
|
$
|
54,311
|
17.9
|
||||||||||
|
NOW accounts
|
27,209
|
5.6
|
63,209
|
15.0
|
||||||||||||
|
Savings deposits
|
8,869
|
2.8
|
57,195
|
22.4
|
||||||||||||
|
Money market deposit accounts
|
(14,284
|
)
|
(4.1
|
)
|
124,154
|
54.9
|
||||||||||
|
Certificates of deposit
|
(51,925
|
)
|
(15.8
|
)
|
(51,576
|
)
|
(13.5
|
)
|
||||||||
|
Total
|
$
|
8,057
|
0.4
|
$
|
247,293
|
15.6
|
||||||||||
2022
Total deposits increased $8.1 million in 2022, or 0.4%. Deposit levels remained consistent during 2022 after significant growth in 2021 that was due to government stimulus funds in response to
the COVID-19 pandemic. With the increase in market interest rates, customer are moving funds to obtain additional liquidity and higher rates. We continue to enhance our cash management services to improve our customer services. Brokered
certificates of deposit increased $16.0 million as new brokered CDs were issued during 2022. As a percentage of total deposits, non-interest-bearing deposits totaled 21.5% as of the end of 2022, which compares to 19.5% at the end of 2021. The
rates paid on certificates of deposit by the Company remain competitive with rates paid by our competition.
2021
Total deposits increased $247.3 million in 2021, or 15.6%. The driver of the increase was government stimulus funds in response to the COVID 19 pandemic, which included individuals, businesses
and municipalities and all markets of Company. We continue to enhance our cash management services to improve our customer services and to grow deposits through our current customers. Brokered certificates of deposit decreased $23.8 million as
maturing certificates were not replaced in 2021. As a percentage of total deposits, non-interest-bearing deposits totaled 19.5% as of the end of 2021, which compares to 19.1% at the end of 2020.
Remaining maturities of certificates of deposit in excess of FDIC insurance limits are as follows for December 31, 2022 (dollars in thousands):
|
3 months or less
|
$
|
6,166
|
||
|
Over 3 months through 6 months
|
7,602
|
|||
|
Over 6 months through 12 months
|
18,275
|
|||
|
Over 12 months
|
22,244
|
|||
|
Total
|
$
|
54,287
|
||
|
As a percent of total certificates of deposit
|
19.55
|
%
|
Uninsured deposits as of December 31, 2022 and 2021, are estimated based on regulatory reporting requirements to be $732,173,000 and $742,304,000, respectively.
Deposits by type of depositor are as follows (dollars in thousands) at December 31:
|
2022
|
2021
|
2020
|
||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||||||||
|
Individuals
|
$
|
921,404
|
50.0
|
$
|
938,331
|
51.1
|
$
|
865,041
|
54.4
|
|||||||||||||||
|
Businesses and other organizations
|
586,531
|
31.8
|
534,402
|
29.1
|
467,159
|
29.4
|
||||||||||||||||||
|
State & political subdivisions
|
336,273
|
18.2
|
363,418
|
19.8
|
256,658
|
16.2
|
||||||||||||||||||
|
Total
|
$
|
1,844,208
|
100.0
|
$
|
1,836,151
|
100.0
|
$
|
1,588,858
|
100.0
|
|||||||||||||||
Borrowed Funds
Borrowed funds increased $183.3 million during 2022 to fund loan growth during the year. Short term borrowings from the FHLB increased $187.1 million and totaled $212.1 million as of December 31,
2022 compared to $25.0 million as of December 31, 2021. Long term borrowings from the FHLB decreased $4.7 million and total $10.0 million. Term loans from the FHLB totaled $10.0 million and $14.7 million as of December 31, 2022 and 2021,
respectively. The change in term loans was due to $4.7 million of term loans maturing during 2022. The Company did not issue any long term debt during 2022. In the fourth quarter of 2022, the Company entered into a line of credit with a
Pennsylvania community bank for $20.0 million that is unused as of December 31, 2022. Management continually monitors interest rates in order to minimize interest rate risk in future years and as part of this may extend some of the short term
borrowings via term notes. The Bank has five interest rate swap agreements outstanding to convert floating-rate debt to fixed rate debt on notional amounts of $15.0 million, $10.0 million and three agreements of $6.0 million. The $15.0 million
and $10.0 million were originated on April 1, 2020 and expire on April 1, 2025 and April 1, 2027. The three $6.0 million agreements originated on May 14, 2020 with a two year forward start date and expire on May 14, 2027, 2029 and 2032 The
Company has an interest rate swap agreement outstanding that was entered into on April 13, 2020, to convert floating-rate debt to fixed rate debt on a notional amount of $7.5 million. The interest rate swap agreement expires on June 17, 2027.
The interest rate swap instruments involve an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amounts. The differentials paid or received on interest rate swap agreements
are recognized as adjustments to interest expense in the period. The fair value of the interest rate swaps at December 31, 2022 was $ 6,873,000 and is included within fair value of derivative instruments – asset on the consolidated balance
sheets.
Fair Value of Derivative Instruments - liability
The Company holds derivative instruments to hedge interest rate risk and to offer customers longer term fixed rate loans through a program similar to a back to back swap, which results in both a
derivative asset and liability on the Consolidated Balance Sheet. (See Note 17 for additional information). As of December 31, 2022 and 2021, the fair value for the derivatives instruments was $9.7 million and $2.1 million, respectively. The
change in the fair value of financial instruments was due to rise in market interest rates during 2022. The effective portion of changes in the fair value of the cash flow interest hate hedge derivative is initially reported in other
comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings.
Other Liabilities
Other liabilities increased $2.4 million to $20.8 million during 2022. We entered into and extended several leases during the year, which resulted in the right of use asset for facilities
increasing $1.7 million. Employee benefit accruals, including profit sharing increased $477,000.
Stockholders’ Equity
We evaluate stockholders’ equity in relation to total assets and the risk associated with those assets. The greater our capital resources, the greater the likelihood of meeting our cash
obligations and absorbing unforeseen losses. For these reasons, capital adequacy has been, and will continue to be, of paramount importance. Due to its importance, we develop a capital plan and stress test capital levels using various
techniques and assumptions annually to ensure that in the event of unforeseen circumstances, we would remain in compliance with our capital plan approved by the Board of Directors and regulatory requirement levels.
Our Board of Directors determines our cash dividend rate after considering our capital requirements, current and projected net income, and other factors. In 2022 and 2021, the Company paid out
26.11% and 25.36% of net income in cash dividends, respectively.
As of December 31, 2022, the total number of common shares outstanding was 3,971,209. For comparative purposes, outstanding shares for prior periods were adjusted for the June 2022 stock dividend
in computing earnings and cash dividends per share as detailed in Note 1 of the consolidated financial statements. During 2022, we purchased 18,700 shares of treasury stock at a weighted average cost of $68.40 per share. The Company awarded 3,333
shares of restricted stock to employees at a weighted average cost per share of $68.69 under an equity incentive plan. The Board of Directors was awarded 1,800 shares at a cost of $67.53 per share under an incentive plan.
Stockholders’ equity decreased 5.8% in 2022 to $200.1 million. Excluding accumulated other comprehensive income (loss), stockholders’ equity increased $20.6 million, or 9.7%., Net income for
2022 was $29.1 million, offset by net cash dividends of $7,588,000 and net treasury stock activity of $826,000. All of the Company’s debt investment securities are classified as available-for-sale, making this portion of the Company’s balance
sheet more sensitive to the changing market value of investments. Accumulated other comprehensive loss decreased $32,986,000 from December 31, 2021, primarily as result of the decrease in the fair market value of the investment portfolio. Total
stockholders’ equity was approximately 8.6% of total assets as of December 31, 2022, compared to 9.9% of total assets as of December 31, 2021.
LIQUIDITY
Liquidity is a measure of the Company’s ability to efficiently meet normal cash flow requirements of both borrowers and depositors. Liquidity is needed to meet depositors’ withdrawal demands,
extend credit to meet borrowers’ needs, provide funds for normal operating expenses and cash dividends, and fund future capital expenditures.
To maintain proper liquidity, we use funds management policies along with our investment and asset liability policies to assure we can meet our financial obligations to depositors, credit
customers and stockholders. Management monitors liquidity by reviewing loan demand, investment opportunities, deposit pricing and the cost and availability of borrowing funds. Additionally, the bank has established various limits and ratios to
monitor liquidity. On a quarterly basis, we stress test our liquidity position to ensure that the Bank has the capability of meeting its cash flow requirements in the event of unforeseen circumstances. The Company’s historical activity in this
area can be seen in the Consolidated Statement of Cash Flows from investing and financing activities.
Cash generated by operating activities, investing activities and financing activities influences liquidity management. The most important source of funds is the deposits that are primarily core
deposits (deposits from customers with other relationships). Short-term debt from the Federal Home Loan Bank supplements the Company’s availability of funds as well as a line of credit arrangement with a corresponding bank. Other sources of
short-term funds include brokered CDs and the sale of loans, if needed.
The Company’s use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is detailed. Other significant uses of funds are
capital expenditures, purchase of loans and acquisition premiums. Surplus funds are then invested in investment securities.
Capital expenditures, including software purchases in 2022 totaled $1,635,000, which included:
|
■
|
Branch facility, Ephrata, Pennsylvania totaling $1,011,000
|
|
■
|
Branch facility, Greenville, Delaware $73,000
|
|
■
|
Signage upgrades and rebranding purchases totaling $71,000
|
|
■
|
ATM upgrades totaling $40,000
|
|
■
|
Building security improvements totaling $78,000
|
|
■
|
Computers, servers and copier purchases $96,000
|
Capital expenditures, including software purchases in 2021 totaled $1,105,000, which included:
|
■
|
Operations building in Wellsboro, Pennsylvania totaling $753,000
|
|
■
|
Vehicle purchases totaling $82,000
|
|
■
|
ATM upgrades totaling $124,000
|
|
■
|
Building and ground improvements totaling $96,000
|
We expect these expenditures will support our initiatives and will create operating efficiencies, while providing quality customer service.
In addition to the Bank’s cash balances, the Bank achieves additional liquidity primarily from its investment in the FHLB of Pittsburgh and the resulting borrowing capacity obtained through this
investment, investments that mature in less than one year and expected principal repayments from mortgage backed securities. The Bank has a maximum borrowing capacity at the Federal Home Loan Bank of approximately $871.2 million, inclusive of
any outstanding amounts, as a source of liquidity. The Bank also has two federal funds line with third party providers in the total amount of $34.0 million as of December 31, 2022, which is unsecured and a borrower in custody agreement was
established with the FRB in the amount of $1.0 million, which is collateralized by $1.4 million of municipal loans. The Company has a $20.0 million line of credit with a Pennsylvania community bank, which is unutilized as of December 31, 2022.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared
to its shareholders. The Company also has repurchased shares of its common stock. The Company’s primary source of income is dividends received from the Bank. The Bank may not declare a dividend without approval of the FRB, unless the dividend
to be declared by the Bank’s Board of Directors does not exceed the total of: (i) the Bank’s net profits for the current year to date, plus (ii) its retained net profits for the preceding two current years, less any required transfers to
surplus. In addition, the Bank can only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed its bad debts. The FRB, the OCC, the PDB and the FDIC have formal and informal policies
which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to
pay dividends, because banks which are not classified as well capitalized or adequately capitalized may not pay dividends and no dividend may be paid which would make the Bank undercapitalized after the dividend. At December 31, 2022, the
Company (unconsolidated basis) had liquid assets of $15.6 million.
CONTRACTUAL OBLIGATIONS
The Company has various financial obligations, including contractual obligations which may require cash payments. The following table (in thousands) presents as of December 31, 2022, significant
fixed and determinable contractual obligations to third parties by payment date. Further discussion of the obligations can be found in Notes 9, 10 and 18 to the Consolidated Financial Statements.
|
Contractual Obligations
|
One year
or Less |
One to
Three Years |
Three to
Five Years |
Over Five
Years |
Total
|
|||||||||||||||
|
Deposits without a stated maturity
|
$
|
1,566,517
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,566,517
|
||||||||||
|
Time deposits
|
153,926
|
82,643
|
35,356
|
5,766
|
277,691
|
|||||||||||||||
|
FHLB Advances
|
169,110
|
-
|
-
|
-
|
169,110
|
|||||||||||||||
|
Term borrowings - FHLB
|
43,000
|
10,000
|
-
|
-
|
53,000
|
|||||||||||||||
|
Note Payable
|
-
|
-
|
-
|
7,500
|
7,500
|
|||||||||||||||
|
Subordinated Debt
|
-
|
-
|
-
|
10,000
|
10,000
|
|||||||||||||||
|
Repurchase agreements
|
17,776
|
-
|
-
|
-
|
17,776
|
|||||||||||||||
|
Operating leases
|
847
|
1,466
|
1,277
|
2,354
|
5,944
|
|||||||||||||||
|
Total
|
$
|
1,951,176
|
$
|
94,109
|
$
|
36,633
|
$
|
25,620
|
$
|
2,107,538
|
||||||||||
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial
statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines
of credit and letters of credit. For information about our loan commitments, unused lines of credit and letters of credit, see Note 16 of the notes to consolidated financial statements.
For the year ended December 31, 2022, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash
flows.
INTEREST RATE AND MARKET RISK MANAGEMENT
The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest
sensitivity imbalances and the market value risk of assets and liabilities.
Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, since the Company has no trading portfolio, it is not subject to trading
risk.
At December 31, 2022, the Company had equity securities that represent only 0.09% of our total assets, and therefore market risk related to equity securities is not significant.
The primary factors that make assets interest-sensitive include adjustable-rate features on loans and investments, loan repayments, investment maturities and money market investments. The primary
components of interest-sensitive liabilities include maturing certificates of deposit, IRA certificates of deposit, repurchase agreements and short-term borrowings. Savings deposits, NOW accounts and money market investor accounts, with the
exception of top interest tier money market and NOW accounts, are considered core deposits and are not short-term interest sensitive and therefore are included in the table below in the over five year column. Top interest tier money market and
NOW accounts are included in the table below in the within three month column. Borrowings subject to swap arrangements are included in the table below based on the swap arrangement maturity.
The following table shows the cumulative static gap (at amortized cost) for various time intervals (dollars in thousands):
|
Maturity or Re-pricing of Company Assets and Liabilities as of December 31, 2022
|
||||||||||||||||||||||||||||
|
Within
Three
Months
|
Four to
Twelve
Months
|
One to
Two
Years
|
Two to
Three
Years
|
Three to
Five
Years
|
Over
Five
Years
|
Total
|
||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||||||
|
Interest-bearing deposits at banks
|
$
|
1,397
|
$
|
2,085
|
$
|
250
|
$
|
-
|
$
|
3,720
|
$
|
-
|
$
|
7,452
|
||||||||||||||
|
Investment securities
|
24,724
|
31,141
|
62,981
|
58,072
|
108,856
|
201,219
|
486,993
|
|||||||||||||||||||||
|
Residential mortgage loans
|
35,195
|
34,287
|
34,429
|
28,925
|
39,802
|
37,575
|
210,213
|
|||||||||||||||||||||
|
Construction loans
|
31,326
|
24,196
|
25,169
|
-
|
-
|
-
|
80,691
|
|||||||||||||||||||||
|
Commercial and farm loans
|
220,874
|
205,114
|
177,534
|
222,950
|
374,199
|
87,566
|
1,288,237
|
|||||||||||||||||||||
|
Loans to state & political subdivisions
|
7,628
|
3,900
|
5,059
|
4,831
|
14,404
|
23,386
|
59,208
|
|||||||||||||||||||||
|
Other loans
|
66,460
|
4,299
|
4,468
|
3,216
|
3,835
|
4,372
|
86,650
|
|||||||||||||||||||||
|
Total interest-earning assets
|
$
|
387,604
|
$
|
305,022
|
$
|
309,890
|
$
|
317,994
|
$
|
544,816
|
$
|
354,118
|
$
|
2,219,444
|
||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||
|
NOW accounts
|
$
|
338,542
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
173,959
|
$
|
512,501
|
||||||||||||||
|
Savings accounts
|
-
|
-
|
-
|
-
|
-
|
321,917
|
321,917
|
|||||||||||||||||||||
|
Money Market accounts
|
309,211
|
-
|
-
|
-
|
-
|
26,627
|
335,838
|
|||||||||||||||||||||
|
Certificates of deposit
|
43,299
|
110,627
|
50,951
|
31,692
|
35,356
|
5,766
|
277,691
|
|||||||||||||||||||||
|
Long-term borrowing
|
186,886
|
-
|
10,000
|
15,000
|
33,392
|
12,000
|
257,278
|
|||||||||||||||||||||
|
Total interest-bearing liabilities
|
$
|
877,938
|
$
|
110,627
|
$
|
60,951
|
$
|
46,692
|
$
|
68,748
|
$
|
540,269
|
$
|
1,705,225
|
||||||||||||||
|
Excess interest-earning
assets (liabilities)
|
$ |
(490,334
|
)
|
$ |
194,395
|
$ |
248,939
|
$ |
271,302
|
$ |
476,068
|
$ |
(186,151
|
)
|
||||||||||||||
|
Cumulative interest-earning assets
|
$
|
387,604
|
$
|
692,626
|
$
|
1,002,516
|
$
|
1,320,510
|
$
|
1,865,326
|
$
|
2,219,444
|
||||||||||||||||
|
Cumulative interest-bearing liabilities
|
877,938
|
988,565
|
1,049,516
|
1,096,208
|
1,164,956
|
1,705,225
|
||||||||||||||||||||||
|
Cumulative gap
|
$
|
(490,334
|
)
|
$
|
(295,939
|
)
|
$
|
(47,000
|
)
|
$
|
224,302
|
$
|
700,370
|
$
|
514,219
|
|||||||||||||
|
Cumulative interest rate
sensitivity ratio (1)
|
0.44
|
0.70
|
0.96
|
1.20
|
1.60
|
1.30
|
||||||||||||||||||||||
The previous table and the simulation models discussed below are presented assuming money market investment accounts and NOW accounts in the top interest rate tier are re-priced within the first
three months. The loan amounts reflect the principal balances expected to be re-priced as a result of contractual amortization and anticipated early payoffs.
Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on the Bank’s net interest income
because the re-pricing of certain assets and liabilities is discretionary and is subject to competition and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different
rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis.
The Bank currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management and asset
liability management processes that we believe will effectively identify, measure, and monitor the Bank’s risk exposure. In this analysis, the Bank examines the results of movements in interest rates with additional assumptions made concerning
the timing of interest rate changes, prepayment speeds on mortgage loans and mortgage securities and deposit pricing movements. Shock scenarios, which assume a parallel shift in interest rates and is instantaneous, typically have the greatest
impact on net interest income. The following is a rate shock analysis and the impact on net interest income as of December 31, 2022 (dollars in thousands):
|
Changes in Rates
|
Prospective One-Year
Net Interest Income |
Change In
Prospective |
% Change In
Prospective |
|||||||||
|
-400 Shock
|
$
|
75,244
|
$
|
(2,002
|
)
|
-2.59
|
%
|
|||||
|
-300 Shock
|
76,146
|
(1,100
|
)
|
-1.42
|
%
|
|||||||
|
-200 Shock
|
77,035
|
(211
|
)
|
-0.27
|
%
|
|||||||
|
-100 Shock
|
77,559
|
313
|
0.41
|
%
|
||||||||
|
Base
|
77,246
|
-
|
-
|
|||||||||
|
+100 Shock
|
75,649
|
(1,597
|
)
|
-2.07
|
%
|
|||||||
|
+200 Shock
|
73,838
|
(3,408
|
)
|
-4.41
|
%
|
|||||||
|
+300 Shock
|
72,281
|
(4,965
|
)
|
-6.43
|
%
|
|||||||
|
+400 Shock
|
70,704
|
(6,542
|
)
|
-8.47
|
%
|
|||||||
The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage backed securities, call activity of other investment
securities, and deposit selection, re-pricing and maturity structure. Because of these assumptions, actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change
on net interest income. Additionally, the changes above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. The
projections above utilize a static balance sheet and do not include any changes that may result from the growth of the Bank. Management has developed policy limits for acceptable changes in net interest income for multiple scenarios, including
shock scenarios. As of December 31, 2022, changes in net interest income projected for all scenarios, including the shock scenarios noted above are in line with Bank policy limits for interest rate risk.
CRITICAL ACCOUNTING POLICIES; CRITICAL ACCOUNTING ESTIMATES
The Company’s accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the consolidated financial statements. 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 and critical accounting estimates.
Other than Temporary Impairment
All securities are evaluated periodically to determine whether a decline in their value is other than temporary and is a matter of judgment. For debt securities, management considers whether the
present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s
intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in fair value, to determine whether the loss in value is other than temporary. Once a
decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost
basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income (loss), net of
applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings.
Allowance for Loan Losses
Arriving at an adequate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan 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 loan 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. This evaluation is inherently subjective as it requires significant estimates that may be susceptible to significant change, subjecting the Bank to
volatility of earnings. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of
the allowance for loan losses, refer to Note 1 of the consolidated financial statements.
Goodwill and Other Intangible Assets
As discussed in Note 1 of the consolidated financial statements, the Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The Company performed a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Based on the fair
value of the reporting unit, no impairment of goodwill was recognized in 2022, 2021 or 2020.
Pension Benefits
Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan
assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded
obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Our pension benefits
are described further in Note 11 of the “Notes to Consolidated Financial Statements.”
Deferred Tax Assets
We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of
the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. Management also evaluates deferred tax assets to determine if it is more likely than not that the
deferred tax benefit will be utilized in future periods. If not, a valuation allowance is recorded. Our deferred tax assets are described further in Note 12 of the consolidated financial statements.
Business Combinations
Business combinations are accounted for by applying the acquisition method. As of acquisition date, the identifiable assets acquired and liabilities assumed are measured at fair value and
recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statement of income from the date of acquisition. The calculation of intangible assets including core deposits and the fair
value of loans are based on significant judgements. Core deposits intangibles are calculated using a discounted cash flow model based on various factors including discount rate, attrition rate, interest rate, cost of alternative funds and net
maintenance costs.
Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these
pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Determining the fair value of the acquired loans involves estimating the
principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining
life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.
This information is included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate and Market Risk
Management”, appearing in this Annual Report on Form 10-K.
Citizens Financial Services, Inc.
Consolidated Balance Sheet
|
December 31,
|
||||||||
|
(in thousands, except share data)
|
2022
|
2021
|
||||||
|
ASSETS:
|
||||||||
|
Cash and cash equivalents:
|
||||||||
|
Noninterest-bearing
|
$
|
24,814
|
$
|
14,051
|
||||
|
Interest-bearing
|
1,397
|
158,782
|
||||||
|
Total cash and cash equivalents
|
26,211
|
172,833
|
||||||
|
Interest bearing time deposits with other banks
|
6,055
|
11,026
|
||||||
|
Equity securities
|
2,208
|
2,270
|
||||||
|
Available-for-sale securities
|
439,506
|
412,402
|
||||||
|
Loans held for sale
|
725
|
4,554
|
||||||
|
Loans (net of allowance for loan losses: 2022, $18,552; 2021, $17,304)
|
1,706,447
|
1,424,229
|
||||||
|
Premises and equipment
|
17,619
|
17,016
|
||||||
|
Accrued interest receivable
|
7,332
|
5,235
|
||||||
|
Goodwill
|
31,376
|
31,376
|
||||||
|
Bank owned life insurance
|
39,355
|
38,503
|
||||||
|
Other intangibles
|
1,272
|
1,627
|
||||||
|
Fair value of derivative instruments - asset
|
16,599 | 4,011 | ||||||
|
Deferred tax asset
|
12,886 | 4,082 | ||||||
|
Other assets
|
25,802
|
14,699
|
||||||
|
TOTAL ASSETS
|
$
|
2,333,393
|
$
|
2,143,863
|
||||
|
LIABILITIES:
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest-bearing
|
$
|
396,260
|
$
|
358,073
|
||||
|
Interest-bearing
|
1,447,948
|
1,478,078
|
||||||
|
Total deposits
|
1,844,208
|
1,836,151
|
||||||
|
Borrowed funds
|
257,278
|
73,977
|
||||||
|
Accrued interest payable
|
1,232
|
711
|
||||||
|
Fair value of derivative instruments - liability
|
9,726 | 2,101 | ||||||
|
Other liabilities
|
20,802
|
18,431
|
||||||
|
TOTAL LIABILITIES
|
2,133,246
|
1,931,371
|
||||||
|
STOCKHOLDERS’ EQUITY:
|
||||||||
|
Preferred Stock $1.00
par value; authorized 3,000,000 shares 2022 and 2021; none issued in 2022 or 2021
|
-
|
-
|
||||||
|
Common Stock $1.00
par value; authorized 25,000,000 shares 2022 and 2021; issued 4,427,687 and 4,388,901 shares in 2022 and 2021, respectively
|
4,428
|
4,389 | ||||||
|
Additional paid-in capital
|
80,911
|
78,395
|
||||||
|
Retained earnings
|
164,922
|
146,010
|
||||||
|
Accumulated other comprehensive income (loss)
|
(33,141 | ) |
(155
|
)
|
||||
|
Treasury stock, at cost: 456,478 and 444,481 shares for 2022 and 2021, respectively
|
(16,973 | ) | (16,147 | ) | ||||
|
TOTAL STOCKHOLDERS’ EQUITY
|
200,147
|
212,492
|
||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
2,333,393
|
$
|
2,143,863
|
||||
See accompanying notes to consolidated financial statements.
Citizens Financial Services, Inc.
Consolidated Statement of Income
Year Ended December 31,
|
(in thousands, except share and per share data)
|
2022
|
2021
|
2020
|
|||||||||
|
INTEREST AND DIVIDEND INCOME:
|
||||||||||||
|
Interest and fees on loans
|
$
|
74,265
|
$
|
66,371
|
$
|
63,538
|
||||||
|
Interest-bearing deposits with banks
|
400
|
447
|
401
|
|||||||||
|
Investment securities:
|
||||||||||||
|
Taxable
|
5,615
|
3,820
|
4,090
|
|||||||||
|
Nontaxable
|
2,454
|
2,201
|
1,869
|
|||||||||
|
Dividends
|
623
|
378
|
398
|
|||||||||
|
TOTAL INTEREST AND DIVIDEND INCOME
|
83,357
|
73,217
|
70,296
|
|||||||||
|
INTEREST EXPENSE:
|
||||||||||||
|
Deposits
|
7,316
|
5,837
|
6,851
|
|||||||||
|
Borrowed funds
|
3,907
|
1,268
|
1,254
|
|||||||||
|
TOTAL INTEREST EXPENSE
|
11,223
|
7,105
|
8,105
|
|||||||||
|
NET INTEREST INCOME
|
72,134
|
66,112
|
62,191
|
|||||||||
|
Provision for loan losses
|
1,683
|
1,550
|
2,400
|
|||||||||
|
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
70,451
|
64,562
|
59,791
|
|||||||||
|
NON-INTEREST INCOME:
|
||||||||||||
|
Service charges
|
5,346
|
4,755
|
4,221
|
|||||||||
|
Trust
|
803
|
865
|
803
|
|||||||||
|
Brokerage and insurance
|
1,895
|
1,625
|
1,297
|
|||||||||
|
Equity security gains (losses), net
|
(247
|
)
|
339
|
(41
|
)
|
|||||||
|
Available for sale security gains (losses), net
|
(14
|
)
|
212
|
305
|
||||||||
|
Gains on loans sold
|
258
|
1,283
|
2,168
|
|||||||||
|
Earnings on bank owned life insurance
|
852
|
1,828
|
695
|
|||||||||
|
Other
|
845
|
1,398
|
1,974
|
|||||||||
|
TOTAL NON-INTEREST INCOME
|
9,738
|
12,305
|
11,422
|
|||||||||
|
NON-INTEREST EXPENSES:
|
||||||||||||
|
Salaries and employee benefits
|
27,837
|
25,902
|
24,190
|
|||||||||
|
Occupancy
|
3,138
|
2,966
|
2,557
|
|||||||||
|
Furniture and equipment
|
565
|
519
|
757
|
|||||||||
|
Professional fees
|
1,891
|
1,526
|
1,517
|
|||||||||
|
Federal depository insurance
|
676
|
522
|
476
|
|||||||||
|
Pennsylvania shares tax
|
907
|
880
|
868
|
|||||||||
|
Amortization of intangibles
|
156
|
192
|
216
|
|||||||||
|
Merger and acquisition
|
-
|
-
|
2,179
|
|||||||||
|
ORE expenses
|
17
|
439
|
451
|
|||||||||
|
Software expenses
|
1,446
|
1,321
|
1,155
|
|||||||||
|
Other
|
8,061
|
7,283
|
6,481
|
|||||||||
|
TOTAL NON-INTEREST EXPENSES
|
44,694
|
41,550
|
40,847
|
|||||||||
|
Income before provision for income taxes
|
35,495
|
35,317
|
30,366
|
|||||||||
|
Provision for income taxes
|
6,435
|
6,199
|
5,263
|
|||||||||
|
NET INCOME
|
$
|
29,060
|
$
|
29,118
|
$
|
25,103
|
||||||
|
PER COMMON SHARE DATA:
|
||||||||||||
|
EARNINGS PER SHARE - BASIC
|
$
|
7.32
|
$
|
7.31
|
$
|
6.46
|
||||||
|
EARNINGS PER SHARE - DILUTED
|
$
|
7.32
|
$
|
7.31
|
$
|
6.46
|
||||||
|
CASH DIVIDENDS PER SHARE
|
$
|
1.90
|
$
|
1.84
|
$
|
1.88
|
||||||
|
Number of shares used in computation - basic
|
3,969,722
|
3,984,085
|
3,883,027
|
|||||||||
|
Number of shares used in computation - diluted
|
3,969,722
|
3,984,085
|
3,884,868
|
|||||||||
See accompanying notes to consolidated financial statements.
Citizens Financial Services, Inc.
Consolidated Statement of Changes in Comprehensive Income (Loss)
Year Ended December 31,
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Net Income
|
$
|
29,060
|
$
|
29,118
|
$
|
25,103
|
||||||
|
Other Comprehensive income (loss)
|
||||||||||||
|
Securities available for sale
|
||||||||||||
|
Unrealized holding gain (loss) during the period
|
(47,885
|
)
|
(7,071
|
)
|
5,074
|
|||||||
|
Income tax (benefit)
|
(10,056
|
)
|
(1,485
|
)
|
1,066
|
|||||||
|
Subtotal
|
(37,829
|
)
|
(5,586
|
)
|
4,008
|
|||||||
|
Reclassification adjustment for (gains) losses included in income
|
14 | (212 | ) | (305 | ) | |||||||
|
Income tax (benefit)
|
3
|
(44
|
)
|
(65
|
)
|
|||||||
|
Subtotal
|
11
|
(168
|
)
|
(240
|
)
|
|||||||
|
Unrealized loss (gain) on interest rate swap
|
4,963
|
1,920
|
(11
|
)
|
||||||||
|
Income tax (benefit)
|
1,043
|
402
|
(2
|
)
|
||||||||
|
Other comprehensive (loss) gain on interest rate swap
|
3,920
|
1,518
|
(9
|
)
|
||||||||
|
Change in unrecognized pension costs
|
1,155
|
1,892
|
(688
|
)
|
||||||||
|
Income tax (benefit)
|
243
|
398
|
(145
|
)
|
||||||||
|
Other comprehensive gain (loss) gain on unrecognized pension costs
|
912
|
1,494
|
(543
|
)
|
||||||||
|
Net other comprehensive (loss) income
|
(32,986
|
)
|
(2,742
|
)
|
3,216
|
|||||||
|
Comprehensive (loss) income
|
$
|
(3,926
|
)
|
$
|
26,376
|
$
|
28,319
|
|||||
See accompanying notes to consolidated financial statements.
Citizens Financial Services, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
|
Common Stock
|
Additional Paid-in
|
Retained
|
Accumulated
Other Comprehensive
|
Treasury
|
||||||||||||||||||||||||
|
(in thousands, except share data)
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income (Loss)
|
Stock
|
Total
|
|||||||||||||||||||||
|
Balance, December 31, 2019
|
3,938,668 | $ | 3,939 | $ | 55,089 | $ | 110,800 | $ | (629 | ) | $ | (14,425 | ) | $ | 154,774 | |||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
25,103 | 25,103 | ||||||||||||||||||||||||||
|
Net other comprehensive income
|
3,216 | 3,216 | ||||||||||||||||||||||||||
|
Stock dividend (1%)
|
38,318 | 38 | 1,878 | (1,916 | ) | - | ||||||||||||||||||||||
|
Stock issued for acquisition
|
373,356 | 373 | 18,854 | 19,227 | ||||||||||||||||||||||||
|
Purchase of treasury stock (40,438 shares)
|
(2,122 | ) | (2,122 | ) | ||||||||||||||||||||||||
|
Restricted stock, executive and Board of Director awards
|
(260 | ) | 408 | 148 | ||||||||||||||||||||||||
|
Restricted stock vesting
|
326 | 326 | ||||||||||||||||||||||||||
|
Sale of treasury stock
|
1 | 125 | 126 | |||||||||||||||||||||||||
|
Forfeited restricted stock
|
19 | (19 | ) | - | ||||||||||||||||||||||||
|
Cash dividend reinvestment paid from treasury stock
|
1 | (821 | ) | 820 | - | |||||||||||||||||||||||
|
Cash dividends, $1.881 per share
|
(6,539 | ) | (6,539 | ) | ||||||||||||||||||||||||
|
Balance, December 31, 2020
|
4,350,342 | $ | 4,350 | $ | 75,908 | $ | 126,627 | $ | 2,587 | $ | (15,213 | ) | $ | 194,259 | ||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
29,118 | 29,118 | ||||||||||||||||||||||||||
|
Net other comprehensive income (loss)
|
(2,742 | ) | (2,742 | ) | ||||||||||||||||||||||||
|
Stock dividend (1%)
|
38,559 | 39 | 2,313 | (2,352 | ) | - | ||||||||||||||||||||||
|
Purchase of treasury stock (23,390 shares)
|
(1,374 | ) | (1,374 | ) | ||||||||||||||||||||||||
|
Restricted stock, executive and Board of Director awards
|
(273 | ) | 444 | 171 | ||||||||||||||||||||||||
|
Restricted stock vesting
|
443 | 443 | ||||||||||||||||||||||||||
|
Forfeited restricted stock
|
4 | (4 | ) | - | ||||||||||||||||||||||||
|
Cash dividends, $1.843 per share
|
(7,383 | ) | (7,383 | ) | ||||||||||||||||||||||||
|
Balance, December 31, 2021
|
4,388,901 | $ | 4,389 | $ | 78,395 | $ | 146,010 | $ | (155 | ) | $ | (16,147 | ) | $ | 212,492 | |||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||||||||||||
|
Net income
|
29,060 | 29,060 | ||||||||||||||||||||||||||
|
Net other comprehensive loss
|
(32,986 | ) | (32,986 | ) | ||||||||||||||||||||||||
|
Stock dividend (1%)
|
38,786 | 39 | 2,521 | (2,560 | ) | - | ||||||||||||||||||||||
|
Purchase of treasury stock (18,700 shares)
|
(1,279 | ) | (1,279 | ) | ||||||||||||||||||||||||
|
Restricted stock, executive and Board of Director awards
|
(226 | ) | 370 | 144 | ||||||||||||||||||||||||
|
Restricted stock vesting
|
192 | 192 | ||||||||||||||||||||||||||
|
Sale of treasury stock
|
6 | 106 | 112 | |||||||||||||||||||||||||
|
Forfeited restricted stock
|
23 | (23 | ) | - | ||||||||||||||||||||||||
|
Cash dividends, $1.901 per share
|
(7,588 | ) | (7,588 | ) | ||||||||||||||||||||||||
|
Balance, December 31, 2022
|
4,427,687 | $ | 4,428 | $ | 80,911 | $ | 164,922 | $ | (33,141 | ) | $ | (16,973 | ) | $ | 200,147 | |||||||||||||
See accompanying notes to consolidated financial statements.
Citizens Financial Services, Inc.
Consolidated Statement of Cash Flows
|
Year Ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income
|
$
|
29,060
|
$
|
29,118
|
$
|
25,103
|
||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Provision for loan losses
|
1,683
|
1,550
|
2,400
|
|||||||||
|
Depreciation and amortization
|
1,033
|
1,113
|
1,138
|
|||||||||
|
Amortization and accretion of loans and other assets
|
(1,950 | ) | (4,535 | ) | (3,960 | ) | ||||||
|
Amortization and accretion on investment securities
|
1,889
|
2,215
|
1,155
|
|||||||||
|
Deferred income taxes
|
(36
|
)
|
689
|
367
|
||||||||
|
Equity security (gains) losses, net
|
247
|
(339
|
)
|
41
|
||||||||
|
Available for sale security (gains) losses, net
|
14
|
(212
|
)
|
(305
|
)
|
|||||||
|
Earnings on bank owned life insurance
|
(852
|
)
|
(1,828
|
)
|
(695
|
)
|
||||||
|
Stock awards
|
336
|
614
|
473
|
|||||||||
|
Originations of loans held for sale
|
(10,024
|
)
|
(44,668
|
)
|
(88,024
|
)
|
||||||
|
Proceeds from sales of loans held for sale
|
14,004
|
55,621
|
75,809
|
|||||||||
|
Realized gains on loans sold
|
(258
|
)
|
(1,283
|
)
|
(2,168
|
)
|
||||||
|
(Increase) decrease in accrued interest receivable
|
(2,097
|
)
|
764
|
(857
|
)
|
|||||||
|
Increase (decrease) in accrued interest payable
|
521
|
(306
|
)
|
(235
|
)
|
|||||||
|
Other, net
|
(330
|
)
|
180
|
1,580
|
||||||||
|
Net cash provided by operating activities
|
33,240
|
38,693
|
11,822
|
|||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Available-for-sale securities:
|
||||||||||||
|
Proceeds from sales of available-for-sale securities
|
7,480
|
29,198
|
23,415
|
|||||||||
|
Proceeds from maturity and principal repayments of securities
|
33,554
|
55,520
|
70,008
|
|||||||||
|
Purchase of securities
|
(117,913
|
)
|
(211,218
|
)
|
(143,987
|
)
|
||||||
|
Purchase of equity securities
|
(218
|
)
|
-
|
(1,339
|
)
|
|||||||
|
Proceeds from sale of equity securities
|
33
|
-
|
168
|
|||||||||
|
Proceeds from redemption of Regulatory Stock
|
7,770
|
4,989
|
9,454
|
|||||||||
|
Purchase of Regulatory Stock
|
(15,105
|
)
|
(3,688
|
)
|
(7,396
|
)
|
||||||
|
Net increase in loans
|
(281,389
|
)
|
(32,111
|
)
|
(63,440
|
)
|
||||||
|
Purchase of interest bearing time deposits
|
(3,720
|
)
|
-
|
(350
|
)
|
|||||||
|
Proceeds from matured interest bearing time deposits with other banks
|
5,954
|
2,732
|
848
|
|||||||||
|
Proceeds from sale of interest bearing time deposits with other banks
|
2,733 | - | - | |||||||||
|
Purchase of bank owned life insurance
|
- | (7,800 | ) | - | ||||||||
|
Purchase of premises, equipment and software
|
(1,634
|
)
|
(1,105
|
)
|
(942
|
)
|
||||||
|
Proceeds from life insurance
|
-
|
3,714
|
-
|
|||||||||
|
Investments in low income housing partnerships
|
(1,123 | ) | - | - | ||||||||
|
Proceeds from sale of foreclosed assets held for sale
|
1,126
|
1,537
|
1,805
|
|||||||||
|
Acquisition, net of cash paid
|
-
|
-
|
1,022
|
|||||||||
|
Net cash used in investing activities
|
(362,452
|
)
|
(158,232
|
)
|
(110,734
|
)
|
||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Net increase in deposits
|
8,057
|
247,293
|
168,914
|
|||||||||
|
Proceeds from long-term borrowings
|
-
|
9,869
|
20,000
|
|||||||||
|
Repayments of long-term borrowings
|
(4,725
|
)
|
(26,800
|
)
|
(15,000
|
)
|
||||||
|
Net increase (decrease) in short-term borrowed funds
|
188,013
|
2,060
|
(16,280
|
)
|
||||||||
|
Purchase of treasury stock
|
(1,279
|
)
|
(1,374
|
)
|
(2,122
|
)
|
||||||
|
Sale of treasury stock to employee stock purchase plan
|
112
|
-
|
126
|
|||||||||
|
Dividends paid
|
(7,588
|
)
|
(7,383
|
)
|
(6,539
|
)
|
||||||
|
Net cash provided by financing activities
|
182,590
|
223,665
|
149,099
|
|||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(146,622
|
)
|
104,126
|
50,187
|
||||||||
|
Cash and Cash Equivalents at Beginning of Year
|
172,833
|
68,707
|
18,520
|
|||||||||
|
Cash and Cash Equivalents at End of Year
|
$
|
26,211
|
$
|
172,833
|
$
|
68,707
|
||||||
|
Supplemental Disclosures of Cash Flow Information:
|
||||||||||||
|
Interest paid
|
$
|
10,703
|
$
|
7,411
|
$
|
8,175
|
||||||
|
Income taxes paid
|
$
|
6,600
|
$
|
5,500
|
$
|
4,750
|
||||||
|
Non-cash activities:
|
||||||||||||
|
Stock dividend
|
$
|
2,560
|
$
|
2,352
|
$
|
1,916
|
||||||
|
Real estate acquired in settlement of loans
|
$
|
61
|
$
|
906
|
$
|
281
|
||||||
|
Right of use asset and liability
|
$
|
2,403
|
$
|
1,636
|
$
|
636
|
||||||
|
Acquisition of
|
Midcoast
Community
Bancorp Inc.
|
|||||||||||
|
Non-cash assets acquired
|
||||||||||||
|
Available-for-sale securities
|
$ | - | $ | - | $ | - | ||||||
|
Interest bearing time deposits with other banks
|
- | - | - | |||||||||
|
Loans
|
-
|
- | 223,235 | |||||||||
|
Premises and equipment
|
-
|
- | 1,787 | |||||||||
|
Accrued interest receivable
|
-
|
- | 586 | |||||||||
|
Bank owned life insurance
|
-
|
- | 3,766 | |||||||||
|
Intangibles
|
-
|
- | 157 | |||||||||
|
Deferred tax asset
|
-
|
- | 3,402 | |||||||||
|
Other assets
|
-
|
- | 2,878 | |||||||||
|
Goodwill
|
-
|
- | 8,080 | |||||||||
|
-
|
- | 243,891 | ||||||||||
|
Liabilities assumed
|
||||||||||||
|
Noninterest-bearing deposits
|
-
|
- | 38,694 | |||||||||
|
Interest-bearing deposits
|
-
|
- | 170,132 | |||||||||
|
Accrued interest payable
|
-
|
- | 164 | |||||||||
|
Borrowed funds
|
-
|
- | 15,497 | |||||||||
|
Other liabilities
|
-
|
- | 1,198 | |||||||||
|
-
|
- | 225,685 | ||||||||||
|
Net non-cash liabilities acquired
|
-
|
- | 18,206 | |||||||||
|
Cash and cash equivalents acquired
|
$
|
-
|
$ | - | $ | 8,637 | ||||||
See accompanying notes to consolidated financial statements.
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
Citizens Financial Services, Inc. (individually and collectively, the “Company”) is
headquartered in Mansfield, Pennsylvania, and provides a full range of banking and related services through its wholly owned subsidiary, CZFS Acquisition Company, LLC (CZFS), and its wholly owned subsidiary, First Citizens Community Bank (the
“Bank”), and its wholly owned subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1st Realty of PA, LLC (“Realty”). CZFS was formed
in March 2020 as part of the merger with Midcoast Community Bancorp. Inc. (“MidCoast”). Realty was formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer. On
December 11, 2015, the Company completed its acquisition of The First National Bank of Fredericksburg (FNB). On December 8, 2017, the Bank completed its acquisition of the S&T Bank branch in State College (State College). On April 17, 2020,
the Company completed its acquisition of MidCoast. As of December 31, 2022, the Bank operates thirty two full-service banking branches in Potter, Tioga, Bradford, Clinton, Lebanon, Lancaster, Berks, Schuylkill, Centre and Chester counties, Pennsylvania, Allegany County, New York, and the cities of Wilmington
and Dover, Delaware, and a limited branch office in Union county, Pennsylvania. The Bank also provides trust services, including the administration of trusts and estates, retirement plans, and other employee benefit plans, along with a brokerage
division that provides a comprehensive menu of investment services. The Bank serves individual and corporate customers and is subject to competition from other financial institutions and intermediaries with respect to these services. The Company
and Bank are supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to additional regulation and supervision by the Pennsylvania Department of Banking.
On
October 18, 2022, the Company and HV Bancorp, Inc. (“HVBC”), the holding company for Huntingdon Valley Bank (“HVB”),) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which HVBC will merge with and into the
Company Concurrent with the merger, it is expected that HVB will merge with and into the Bank, with the Bank as the surviving institution.
Under
the terms of the Merger Agreement, each outstanding share of HVBC common stock will be converted into either the right to receive $30.50
in cash or 0.40 shares of the Company’s common stock. Not more than 20% of the outstanding shares of HVBC common stock (including for this purpose, dissenters’ shares) may be paid in cash and the remainder will be paid in the Company’s common stock. In
the event of a greater than 20% decline in market value of the Company’s common stock, HVBC may, in certain circumstances, be able
to terminate the Merger Agreement unless the Company increases the number of shares into which HVBC common stock may be converted or increases in the cash component of the merger consideration.
The
senior management of the Company and the Bank will be augmented by management team members from HVBC and HVB.
The
transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of HVBC. The merger is currently expected to be completed in the first half of 2023.
Each of the directors of HVBC have agreed to vote their shares in favor of the approval of the Merger
Agreement at the shareholders’ meeting to be held to vote on the proposed transaction. If the merger is not consummated under certain circumstances, HVBC has agreed to pay the Company a termination fee of $2,800,000.
A summary of significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:
Basis of Presentation
The financial statements are consolidated to include the accounts of the Company,
and its subsidiary CZFS, and its subsidiary, First Citizens Community Bank, and its subsidiaries, First Citizens Insurance Agency, Inc. and 1st Realty of PA, LLC. These statements have been prepared in accordance with U.S.
generally accepted accounting principles. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.
Use of Estimates
In preparing the financial statements, management makes 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 for the period. Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, goodwill, derivatives, pension plans and deferred tax
assets and liabilities.
Operating Segments
An operating segment is defined as a component of an enterprise that engages in business activities that generates revenue and incurs expense, and
the operating results of which are reviewed by the chief operating decision maker in the determination of resource allocation and performance. While the Company’s chief decision makers monitor the revenue streams of the various Company’s products,
services and regions, operations are managed and financial performance is evaluated on a Company-wide basis. Consistent with our internal reporting, the Company’s business activities are reported as one segment, which is community banking.
Cash and Cash Equivalents
Cash equivalents include cash on hand, deposits in banks and interest-earning deposits. Interest-earning deposits with original maturities of 90 days or less are considered cash equivalents.
Interest bearing time deposits with other banks are not included with cash and cash equivalents as the original maturities were greater than 90
days.
Investment Securities
Investment securities at the time of purchase are classified as one of the three following types:
Held-to-Maturity Securities - Includes securities
that the Company has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. The Company had no
held-to-maturity securities as of December 31, 2022 and 2021.
Trading Securities - Includes debt and equity
securities bought and held principally for the purpose of selling them in the near term. Such securities are reported at fair value with unrealized holding gains and losses included in earnings. The Company had no trading securities as of December 31, 2022 and 2021.
Available-for-Sale Securities – This category included debt securities not classified as held-to-maturity or trading securities that will be held for indefinite periods of time. These securities may be sold in response to
changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders’ equity, net of the estimated income tax effect.
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that
results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security.
Debt securities are periodically reviewed for other-than-temporary impairment. Management considers whether the present value of future cash flows
expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or
whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be
other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited
to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference
between fair value and amortized cost is charged to earnings.
The fair value of investments, except certain state and municipal securities, is based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value is based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the instruments being valued.
Equity Securities – This category includes common stocks of public companies. Such securities are reported at fair value with unrealized holding gains and losses included in earnings. Dividends are recognized as income when
earned.
Restricted Stock - Common stock of the Federal
Reserve Bank, Federal Home Loan Bank of Pittsburgh (FHLB) and correspondent banks represent ownership in institutions which are wholly owned by other financial institutions. These restricted equity securities are accounted for at cost and are
classified as other assets.
Loans Held for Sale
Certain newly originated fixed-rate residential mortgage loans are classified as held for sale, because it is management’s intent to sell these
residential mortgage loans. The residential mortgage loans held for sale are carried at the lower of aggregate cost or fair value.
Loans
Interest on all loans is recognized on the accrual basis based upon the principal amount outstanding. The accrual of interest income on loans is
discontinued when, in the opinion of management, doubt exists as to the ability to collect such interest. Payments received on non-accrual loans are applied to the outstanding principal balance or recorded as interest income, depending upon our
assessment of our ultimate ability to collect principal and interest. Loans are returned to the accrual status when factors indicating doubtful collectability cease to exist.
The Company recognizes nonrefundable loan origination fees, SBA fees and certain direct loan origination costs over the life of the related loan as
an adjustment of loan yield using the interest method.
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in the Company’s
loan portfolio. 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 loan losses is established through a provision for loan
losses which is charged to operations. The provision is based upon management’s periodic evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses are particularly susceptible to significant change in the near term.
Impaired loans are other commercial, other agricultural, municipal, agricultural real estate, commercial real estate loans and certain residential
mortgages cross collateralized with commercial relationships for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such
loans for impairment and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Company may choose to place a
loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial, agricultural, municipal or commercial real estate loan. Factors considered by management
in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the
original interest rate, and its recorded value; or, as a practical expedient in the case of a collateral dependent loan, the difference between the fair value of the collateral and the recorded amount of the loans.
Mortgage loans on one to four family properties and all consumer loans are large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays, which is defined as 90 days or less, generally are not
classified as impaired. Management determines the significance of payment delays on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the borrower’s
prior payment record, and the amount of shortfall in relation to the principal and interest owed.
The Company allocates the allowance based on the factors described below, which conform to the Company’s loan classification policy. In reviewing
risk within the loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) residential real estate loans; (ii) commercial
real estate (iii) agricultural real estate loans; (iv) construction; (v) consumer loans; (vi) other commercial loans (vii) other agricultural loans and (viii) state and political subdivision loans. Factors considered in this process include general
loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are
evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be
applied to non classified loans. The following qualitative factors are analyzed:
| • |
Level of and trends in delinquencies, impaired/classified loans
|
| • |
Change in volume and severity of past due loans
|
| • |
Volume of non-accrual loans
|
| • |
Volume and severity of classified, adversely or graded loans
|
| • |
Level of and trends in charge-offs and recoveries
|
| • |
Trends in volume, terms and nature of the loan portfolio
|
| • |
Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices
|
| • |
Changes in the quality of the Bank’s loan review system
|
| • |
Experience, ability and depth of lending management and other relevant staff
|
| • |
National, state, regional and local economic trends and business conditions
|
| • |
General economic conditions
|
| • |
Unemployment rates
|
| • |
Inflation / CPI
|
| • |
Changes in values of underlying collateral for collateral-dependent loans
|
| • |
Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses.
|
| • |
Existence and effect of any credit concentrations, and changes in the level of such concentrations
|
| • |
Any change in the level of board oversight
|
The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.
Loan Charge-off Policies
Consumer loans are generally fully or partially charged down to the fair value of collateral securing the asset when the loan is 180 days past due
for open-end loans or 120 days past due for closed-end loans unless the loan is well secured and in the process of collection. All other loans are generally charged down to the net realizable value when the loan is 90 days past due.
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than
an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them
to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid
foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans.
In addition to the allowance for the pooled portfolios, management has developed a separate allowance for loans that are identified as impaired through a TDR. TDRs are excluded from pooled loss forecasts and a separate reserve is provided under the
accounting guidance for loan impairment.
Purchased Credit Impaired Loans
The Company purchased loans in connection with its acquisitions of FNB in 2015, the
State College branch in 2017 and MidCoast in 2020, some of which showed evidence of credit deterioration as of the acquisition since origination. These purchased credit impaired (“PCI”) loans were recorded at the amount paid, such that
there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Over the life of the loan, expected cash flows continue to be estimated. If this subsequent
estimate indicated that the present value of expected cash flows is less than the carrying amount, a charge to the allowance for loan loss is made through a provision. If the estimate indicates that the present value of the expected cash flows is
greater than the carrying amount, it is recognized as part of future interest income.
Such PCI loans are accounted for individually, and the Company estimates the amount and timing of expected cash flows for each loan. The expected
cash flows in excess of the amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not amortized over the remaining
life of the loan (nonaccretable difference).
For loans purchased that did not show evidence of credit deterioration, the difference between the fair value of the loan at the acquisition date
and the loan’s face value is being amortized as a yield adjustment over the estimated remaining life of the loan using the effective interest method.
Foreclosed Assets Held For Sale
Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell. Prior to foreclosure, as the value of the
underlying loan is written down to fair market value of the real estate or other assets to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses
of such properties, net of related income and losses on disposition, are included in other expenses and gains and losses are included in other non-interest income or other non-interest expense.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed on straight line
and accelerated methods over the estimated useful lives of the assets, which range from 3 to 15 years for furniture, fixtures and equipment and 5 to 40 years for building premises. Repair and maintenance expenditures which extend the useful life of an asset are capitalized and other repair
expenditures are expensed as incurred.
When premises or equipment are retired or sold, the remaining cost and accumulated depreciation are removed from the accounts and any gain or loss
is credited to income or charged to expense, respectively.
The Company has operating leases for several branch locations. Generally, the underlying lease agreements do not contain any material residual value
guarantees or material restrictive covenants. The Company may also lease certain office equipment under operating leases. Many of our leases include both lease (e.g., minimum rent payments) and non-lease components (e.g., common-area or other
maintenance costs). The Company accounts for each component separately based on the standalone price of each component. In addition, there are several operating leases with lease terms of less than one year and therefore, we have elected the
practical expedient to exclude these short-term leases from our right of use (ROU) assets and lease liabilities.
Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management and is
based on whether the extension options are reasonably certain to be exercised after giving proper consideration to all facts and circumstances of the lease. If management determines that the Company is reasonably certain to exercise the extension
option(s), the additional term is included in the calculation of the lease liability.
As most of our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based
on the information available at the lease commencement date in determining the present value of the lease payments
Intangible Assets
Intangible assets, other than goodwill, include core deposit intangibles and mortgage
servicing rights (MSRs). Core deposit intangibles are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized over 10 years using the sum-of-the-years digits method of amortization, while the covenant not to compete was amortized over four years on a straight line basis.
MSRs arise from the Company originating certain loans for the express purpose of selling such loans in the secondary market. The Company maintains
all servicing rights for these loans. The loans held for sale are carried at lower of cost or market. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs
are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio and measured annually for impairment.
The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged
to expense.
Goodwill
The Company utilizes a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more
volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company may also perform a qualitative assessment to determine whether it is more likely than not that the fair
value of the reporting unit is less than its carrying value. Based on the fair value of the reporting unit, no impairment of
goodwill was recognized in 2022, 2021 or 2020.
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain employees. Any death
benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these agreements, the Bank receives the cash surrender value of the policy plus 50% of the benefit in excess of the cash surrender value and the remaining amount of the
payout will be given to the beneficiary named by the insured person in the policy. The Company is the sole beneficiary of any death benefits received from non-active insured persons. Additionally, as a result of the MidCoast acquisition, the
Company acquired life insurance policies on former MidCoast employees. The Company is owner and sole beneficiary of these policies. The Company acquired life insurance policies on former FNB employees and directors, as part of the acquisition of
FNB. The policies obtained as part of the acquisition provide a fixed dollar benefit to the former employee or director beneficiaries, whether or not the insured person is affiliated with the Company at the time of his or her death. 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 other non-interest income. The obligation of $660,000 and $696,000 under split-dollar benefit agreements to
former employees and directors or their beneficiaries have been recognized as liabilities on the consolidated balance sheet at December 31, 2022 and 2021. The (benefit)/expenses associated with the split dollar benefit were ($36,000), $9,000 and $3,000 for 2022, 2021 and 2020, respectively.
Income Taxes
The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference
between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to
period.
Derivatives
Derivative financial instruments are recognized as assets or liabilities at fair value. The Company has interest rate swap agreements which are
used as part of its asset liability management to help manage interest rate risk. The Company does not use derivatives for trading purposes.
At the inception of a derivative contract, the Company designates the derivative as
one of three types based on the purpose of the contract and
belief as to its effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the
derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is
reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or
expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being
hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy
for undertaking hedge transactions, at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the
hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged
forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the
derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining
life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into
earnings over the same periods which the hedged transactions will affect earnings.
Employee Benefit Plans
The Company has noncontributory defined benefit pension plan covering employees hired before January 1, 2007. It is the Company’s policy to fund
pension costs on a current basis to the extent deductible under existing tax regulations. Such contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.
The Company has a defined contribution, 401(k) plan covering eligible employees. The employee may also contribute to the plan on a voluntary basis,
up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k). Under the plan, the Company also makes contributions on behalf of eligible employees, which vest immediately. For employees hired after January 1, 2007, in lieu
of the pension plan, an additional annual discretionary 401(k) plan contribution is made and is equal to a percentage of an employee’s base compensation.
The Company also has a profit-sharing plan for employees which provide tax-deferred salary savings to plan participants. The Company has a deferred
compensation plan for directors who have elected to defer all or portions of their fees until their retirement or termination from service.
The Company has a restricted stock plan which covers eligible employees and non-employee corporate directors. Under the plan, awards are granted
based upon performance related requirements and are subject to certain vesting criteria. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.
The Company has an employee stock purchase plan that allows employees to withhold money from their paychecks, which is then utilized to purchase
shares of the Company’s stock on either the open market or through treasury stock, if shares are unavailable on the open market.
The Company maintains a non-qualified supplemental executive retirement plan (“SERP”) for certain executives to compensate those executive
participants in the Company’s noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. The SERP is considered an unfunded plan for tax and ERISA purposes and all obligations arising
under the SERP are payable from the general assets of the Company. Expenses under the SERP are recognized as earned over the expected years of service.
The Company maintains a non-tax qualified executive deferred compensation plan (“Deferred Compensation Plan”) for eligible employees designated by
the board of directors. Each of the named executive officers are eligible to participate in the Deferred Compensation Plan. The Deferred Compensation Plan is considered an unfunded plan for tax and ERISA purposes and all obligations arising under
the Deferred Compensation Plan are payable from the general assets of the Company. Expenses under the Deferred Compensation Plan are recognized as earned over the expected years of service.
Advertising Costs
Advertising and promotion costs are generally expensed as incurred and amounted to $970,000, $838,000 and $716,000 for the years ended December 31, 2022, 2021 and 2020, respectively.
Comprehensive Income (Loss)
The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other
comprehensive income (loss) is comprised of unrealized holding gains (losses) on the available-for-sale securities portfolio, unrealized gains (losses) on interest rate swaps and unrecognized pension costs.
Recent Accounting Pronouncements – Not yet effective
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This
standard, along with several other subsequent codification updates, replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses that are expected to occur over the remaining life of a
financial asset and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at
amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model (“CECL”) will apply to the allowance for loan losses, available-for-sale and held-to-maturity debt securities, purchased
financial assets with credit deterioration and certain off-balance sheet credit exposures.
Management has completed its implementation plan, segmentation and testing, and model validation. The implementation plan
included drafting of additional controls and policies to govern data uploads to its third-party vendor, balancing and reconciling, testing and auditing of inputs, and review and decision-making surrounding segmentation, methodologies, qualitative
factor adjustments, and reasonable and supportable forecasts and reversion techniques. Parallel runs were processed during 2022 and the results were consistent with management’s expectations. The implementation plan is currently going through the
Company’s control structure and internal control testing is being performed.
As a result of adopting this standard, the Company expects the decrease in its allowance effective January 1, 2023, will
result in a combined 10.0 percent to 15.0 percent decrease in our allowance for loan losses and our reserves for unfunded commitments. These estimates are subject to further
refinements based on ongoing evaluations of our model, methodologies, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date. The adoption of ASU 2016-13 is not expected to have a significant impact on our
regulatory capital ratios.
At adoption, the Company did not
have any securities classified as HTM debt securities. No allowance was recorded related to AFS debt securities at the date of
adoption, January 1, 2023.
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. The Company is currently evaluating the impact the adoption of the standard
will have on the Company’s financial position or results of operations.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities
transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional
expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective
immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new
modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply
to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging
relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship.
In March 2022, the FASB issued ASU 2022-01,
Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method. ASC 815 currently permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to
be included in a last-of-layer closed portfolio. The amendments in this Update allow non-prepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply
the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby allowing consistent accounting for similar hedges. The guidance is effective for public business entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.
In 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. The Company is currently evaluating the effect that ASU 2022-03 may have on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to
have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
Treasury Stock
The purchase of the Company’s common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the
cost of such stock on a last-in-first-out basis.
Cash Flows
The Company utilizes the net reporting of cash receipts and cash payments for deposit, short-term borrowing and lending activities.
Trust, Brokerage and Insurance Assets and Income
Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such
assets are not assets of the Company. The majority of trust revenue is earned and collected monthly, with the amount determined based on a percentage of the fair value of the trust assets under management. Trust fees are contractually agreed with
each customer, and fee levels vary based mainly on the size of assets under management. None of the contracts with trust customers provide for incentive-based fees. In addition, trust revenue includes fees for provision of services, including
employee benefit plan administration, tax return preparation and estate planning and settlement. Fees for such services are billed based on contractual arrangements or established fee schedules and are typically billed upon completion of providing
such services. Brokerage and insurance commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional
fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with certain customers is generally satisfied through the passage of time
as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Other performance obligations (such as the delivery of account statements to
customers) are generally considered immaterial to the overall transaction price.
Earnings Per Share
The following table sets forth the computation of earnings per share. Earnings per share calculations give retroactive effect to stock dividends
declared by the Company.
|
2022
|
2021
|
2020
|
||||||||||
|
Basic earnings per share computation:
|
||||||||||||
|
Net income applicable to common stock
|
$
|
29,060,000
|
$
|
29,118,000
|
$
|
25,103,000
|
||||||
|
Weighted average common shares outstanding
|
3,969,722
|
3,984,085
|
3,883,027
|
|||||||||
|
Earnings per share - basic
|
$
|
7.32
|
$
|
7.31
|
$
|
6.46
|
||||||
|
Diluted earnings per share computation:
|
||||||||||||
|
Net income applicable to common stock
|
$
|
29,060,000
|
$
|
29,118,000
|
$
|
25,103,000
|
||||||
|
Weighted average common shares outstanding for basic earnings per share
|
3,969,722
|
3,984,085
|
3,883,027
|
|||||||||
|
Add: Dilutive effects of restricted stock
|
-
|
-
|
1,841
|
|||||||||
|
Weighted average common shares outstanding for dilutive earnings per share
|
3,969,722
|
3,984,085
|
3,884,868
|
|||||||||
|
Earnings per share - dilutive
|
$
|
7.32
|
$
|
7.31
|
$
|
6.46
|
||||||
Nonvested shares of restricted stock totaling 5,458,
5,494 and 4,302 were
outstanding during 2022, 2021 and 2020 respectively, but were not included in the computation of diluted earnings per common share because to do so would be anti-dilutive. These anti-dilutive shares had per share prices ranging from $44.93-$74.27, $44.93-$63.19 and $58.37-$62.93 for 2022, 2021 and 2020,
respectively.
Reclassification
Certain of the prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no material effect
on net income or stockholders’ equity.
2. REVENUE RECOGNITION
Under ASC Topic 606, management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments
along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold and earnings on bank owned life insurances are not within the scope of this topic. The main types of noninterest income within the scope of
the standard are as follows:
| • |
Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These
agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has
transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are
attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.
|
| • |
Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly
basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these
accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the
Company where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction.
|
| • |
Gains (losses) on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the
real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining
control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller,
the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market
terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.
|
| • |
Brokerage and insurance – Fees include commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at
the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with
certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Fees for
these services are billed monthly and are recorded as revenue at the end of the month for which the wealth management service has been performed. Other performance obligations (such as the delivery of account statements to customers) are
generally considered immaterial to the overall transaction price.
|
The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty
of revenue and cash flows for the years ended December 31, 2022, 2021 and 2020 (in thousands). All revenue in the table below relates to goods
and services transferred at a point in time.
|
Revenue stream
|
||||||||||||
|
Service charges on deposit accounts
|
2022
|
2021
|
2020
|
|||||||||
|
Overdraft fees
|
$
|
1,374
|
$
|
1,111
|
$
|
1,171
|
||||||
|
Statement fees
|
208
|
225
|
207
|
|||||||||
|
Interchange revenue
|
3,226
|
2,801
|
2,287
|
|||||||||
|
ATM income
|
229
|
388
|
323
|
|||||||||
|
Other service charges
|
309
|
230
|
233
|
|||||||||
|
Total Service Charges
|
5,346
|
4,755
|
4,221
|
|||||||||
|
Trust
|
803
|
865
|
803
|
|||||||||
|
Brokerage and insurance
|
1,895
|
1,625
|
1,297
|
|||||||||
|
Other
|
543
|
492
|
339
|
|||||||||
|
Total
|
$
|
8,587
|
$
|
7,737
|
$
|
6,660
|
||||||
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Effective March 26, 2020, the Federal Reserve reduced reserve requirements to zero for
all depository institutions. There were no required federal reserves included in “Cash and due from banks” at December 31, 2022 or December 31, 2021. The required reserves are used to facilitate the implementation of monetary policy by the Federal
Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of vault cash and a depository amount held with the Federal Reserve Bank. Federal law prohibits
the Company from borrowing from the Bank unless the loans are secured by specific collateral.
Non-retirement account deposits with one financial institution are insured up to $250,000. At times, the Company maintains cash and cash equivalents with other financial institutions in excess of the insured amount.
4. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of investment securities at December 31, 2022 and 2021 were as follows (in
thousands):
|
December 31, 2022
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
U.S. Agency securities
|
$
|
78,556
|
$
|
-
|
$
|
(7,879
|
)
|
$
|
70,677
|
|||||||
|
U.S. Treasuries
|
162,236
|
-
|
(13,666
|
)
|
148,570
|
|||||||||||
|
Obligations of state and political subdivisions
|
120,562
|
35
|
(10,297
|
)
|
110,300
|
|||||||||||
|
Corporate obligations
|
10,335
|
-
|
(952
|
)
|
9,383
|
|||||||||||
|
Mortgage-backed securities in government sponsored entities
|
115,304
|
15
|
(14,743
|
)
|
100,576
|
|||||||||||
|
Total available-for-sale securities
|
$
|
486,993
|
$
|
50
|
$
|
(47,537
|
)
|
$
|
439,506
|
|||||||
|
December 31, 2021
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
U.S. Agency securities
|
$
|
73,803
|
$
|
976
|
$
|
(834
|
)
|
$
|
73,945
|
|||||||
|
U.S. Treasuries
|
116,743
|
63
|
(1,459
|
)
|
115,347
|
|||||||||||
|
Obligations of state and political subdivisions
|
109,367
|
2,706
|
(52
|
)
|
112,021
|
|||||||||||
|
Corporate obligations
|
10,378
|
39
|
(84
|
)
|
10,333
|
|||||||||||
|
Mortgage-backed securities in government sponsored entities
|
101,727
|
597
|
(1,568
|
)
|
100,756
|
|||||||||||
|
Total available-for-sale securities
|
$
|
412,018
|
$
|
4,381
|
$
|
(3,997
|
)
|
$
|
412,402
|
|||||||
The following table shows the Company’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, 2022 and 2021 (in thousands). As of December 31, 2022, the Company owned 361 securities each of whose fair value was less than its cost basis.
|
Less than Twelve Months
|
Twelve Months or Greater
|
Total
|
||||||||||||||||||||||
|
2022
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
||||||||||||||||||
|
U.S. agency securities
|
$
|
39,729
|
$
|
(1,892
|
)
|
$
|
30,948
|
$
|
(5,987
|
)
|
$
|
70,677
|
$
|
(7,879
|
)
|
|||||||||
| U.S. Treasuries | 32,673 | (1,337 | ) | 115,897 | (12,329 | ) | 148,570 | (13,666 | ) | |||||||||||||||
|
Obligations of states and political subdivisions
|
66,725
|
(4,887
|
)
|
35,782
|
(5,410
|
)
|
102,507
|
(10,297
|
)
|
|||||||||||||||
| Corporate obligations | 2,165 | (165 | ) | 6,218 | (787 | ) | 8,383 | (952 | ) | |||||||||||||||
|
Mortgage-backed securities in government sponsored entities
|
40,270
|
(3,367
|
)
|
57,319
|
(11,376
|
)
|
97,589
|
(14,743
|
)
|
|||||||||||||||
|
Total securities
|
$
|
181,562
|
$
|
(11,648
|
)
|
$
|
246,164
|
$
|
(35,889
|
)
|
$
|
427,726
|
$
|
(47,537
|
)
|
|||||||||
|
2021
|
||||||||||||||||||||||||
|
U.S. agency securities
|
$
|
26,754
|
$
|
(387
|
)
|
$
|
7,542
|
$
|
(447
|
)
|
$
|
34,296
|
$
|
(834
|
)
|
|||||||||
| U.S. Treasuries |
106,794 | (1,459 | ) | - | - | 106,794 | (1,459 | ) | ||||||||||||||||
|
Obligations of states and political subdivisions
|
10,744
|
(26
|
)
|
2,899
|
(26
|
)
|
13,643
|
(52
|
)
|
|||||||||||||||
| Corporate obligations |
6,922 | (84 | ) | - | - | 6,922 | (84 | ) | ||||||||||||||||
|
Mortgage-backed securities in government sponsored entities
|
60,182
|
(1,305
|
)
|
7,975
|
(263
|
)
|
68,157
|
(1,568
|
)
|
|||||||||||||||
|
Total securities
|
$
|
211,396
|
$
|
(3,261
|
)
|
$
|
18,416
|
$
|
(736
|
)
|
$
|
229,812
|
$
|
(3,997
|
)
|
As of December 31, 2022, the Company’s investment securities portfolio contained unrealized losses on U.S. Treasuries, agency securities issued or
backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, obligations of states and political subdivisions, corporate obligations and mortgage backed securities
in government sponsored entities. For fixed maturity available for sale investments management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the
credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its
anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is
more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized
cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. As of December 31, 2022 and
2021, the Company had concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or company-specific rating
changes that are not expected to result in the non-collection of principal and interest during the period.
Proceeds from sales of securities available-for-sale during 2022, 2021 and 2020 were $7,480,000, $29,198,000 and $23,415,000, respectively. The gross losses realized during 2022 consisted of $14,000 from the sales of three agency securities. The gross gains realized during 2021 consisted of $177,000 and $125,000 from the sales of six treasury securities and three agency
securities, respectively. The gross losses realized during 2021 consisted of $90,000 from the sale of one agency security. The gross gains realized during 2020 consisted of $344,000 from the sales of seventeen mortgage backed securities. The gross losses
realized during 2020 consisted of $39,000 from the sale of two mortgage backed securities. Gross gains and gross losses were realized as follows on available for sale securities (in thousands):
|
2022
|
2021
|
2020
|
||||||||||
|
Gross gains
|
$
|
-
|
$
|
302
|
$
|
344
|
||||||
|
Gross losses
|
(14
|
)
|
(90
|
)
|
(39
|
)
|
||||||
|
Net (losses) gains
|
$
|
(14
|
)
|
$
|
212
|
$
|
305
|
|||||
The following table presents the net gains (losses) on the Company’s equity investments recognized in earnings during 2022, 2021 and 2020 and the
portion of unrealized gains for the period that relates to equity investments held at December 31, 2022, 2021 and 2020 (in thousands):
|
Equity Securities
|
2022
|
2021
|
2020
|
|||||||||
|
Net (losses) gains on in equity securities held during the period
|
$
|
(251
|
)
|
$
|
339
|
$
|
(109
|
)
|
||||
|
Less: Net gains realized on the sale of equity securities during the period
|
4
|
-
|
68
|
|||||||||
|
Net unrealized gains (losses) recognized in earnings
|
$
|
(247
|
)
|
$
|
339
|
$
|
(41
|
)
|
||||
Investment securities with an approximate carrying value of $311,766,000 and $295,028,000 at December 31, 2022 and 2021, respectively, were
pledged to secure public funds and certain other deposits as provided by law and certain borrowing arrangements of the Company.
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. The amortized cost and fair value of debt securities at December 31, 2022, by contractual maturity are shown below (in thousands). Municipal securities that have been refunded and will therefore pay-off on the call date are
reflected in the table below utilizing the call date as the date of repayment as payment is guaranteed on that date:
|
Available-for-sale securities:
|
Amortized Cost
|
Fair Value
|
||||||
|
Due in one year or less
|
$
|
22,327
|
$
|
21,863
|
||||
|
Due after one year through five years
|
195,401
|
180,261
|
||||||
|
Due after five years through ten years
|
103,463
|
92,019
|
||||||
|
Due after ten years
|
165,802
|
145,363
|
||||||
|
Total
|
$
|
486,993
|
$
|
439,506
|
||||
5. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central and
south central Pennsylvania, southern New York and Wilmington and Dover, Delaware. Although the Company had a diversified loan portfolio at December 31, 2022 and 2021, a substantial portion of its debtors’ ability to honor their contracts is
dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio, as well as how those segments are analyzed within the allowance for loan losses as of December 31, 2022 and 2021 (in
thousands):
|
2022
|
Total Loans
|
Individually
evaluated for
impairment
|
Loans acquired
with deteriorated
credit quality
|
Collectively
evaluated for
impairment
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Residential
|
$
|
210,213
|
$
|
335
|
$
|
9
|
$
|
209,869
|
||||||||
|
Commercial
|
876,569
|
5,675
|
1,856
|
869,038
|
||||||||||||
|
Agricultural
|
313,614
|
5,380
|
1,441
|
307,055
|
||||||||||||
|
Construction
|
80,691
|
-
|
-
|
80,691
|
||||||||||||
|
Consumer
|
86,650
|
4
|
-
|
86,646
|
||||||||||||
|
Other commercial loans
|
63,222
|
102
|
-
|
63,120
|
||||||||||||
|
Other agricultural loans
|
34,832
|
473
|
-
|
34,097
|
||||||||||||
|
State and political subdivision loans
|
59,208
|
-
|
-
|
59,208
|
||||||||||||
|
Total
|
1,724,999
|
11,969
|
3,306
|
1,709,724
|
||||||||||||
|
Allowance for loan losses
|
18,552
|
102
|
-
|
18,450
|
||||||||||||
|
Net loans
|
$
|
1,706,447
|
$
|
11,867
|
$
|
3,306
|
$
|
1,691,274
|
||||||||
|
2021
|
|
|
|
|||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Residential
|
$
|
201,097
|
$
|
620
|
$
|
14
|
$
|
200,463
|
||||||||
|
Commercial
|
687,338
|
8,381
|
2,145
|
676,812
|
||||||||||||
|
Agricultural
|
312,011
|
5,355
|
1,643
|
305,013
|
||||||||||||
|
Construction
|
55,036
|
-
|
-
|
55,036
|
||||||||||||
|
Consumer
|
25,858
|
-
|
-
|
25,858
|
||||||||||||
|
Other commercial loans
|
74,585
|
186
|
-
|
74,399
|
||||||||||||
|
Other agricultural loans
|
39,852
|
991
|
-
|
38,861
|
||||||||||||
|
State and political subdivision loans
|
45,756
|
-
|
-
|
45,756
|
||||||||||||
|
Total
|
1,441,533
|
15,533
|
3,802
|
1,422,198
|
||||||||||||
|
Allowance for loan losses
|
17,304
|
121
|
-
|
17,183
|
||||||||||||
|
Net loans
|
$
|
1,424,229
|
$
|
15,412
|
$
|
3,802
|
$
|
1,405,015
|
||||||||
During 2022 the Company continued its participation in the Paycheck Protection
Program (“PPP”), administered directly by the U.S. Small Business Administration (the “SBA”) through the processing of forgiveness of PPP loans. During 2021, the Company originated $24.3 million of PPP loans. There were no outstanding principal balances of
PPP loans as of December 31, 2022. As of December 31, 2021, the Company had outstanding principal balances of $6.8 million of PPP loans
that were included in other commercial loans. As of December 31, 2022, all PPP loans had either been forgiven or repaid. The PPP loans were fully guaranteed by the SBA and were eligible for forgiveness by the SBA to the extent that the proceeds
are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan was made as long as certain conditions were met regarding employee retention and compensation levels. PPP loans
deemed eligible for forgiveness by the SBA were repaid by the SBA to the Company. The SBA issued guidance for forgiveness with a streamlined approach for loans of $150,000 or less.
As of December 31, 2022 and 2021, net unamortized loan fees, including PPP fees, and
costs of $2,573,000 and $2,038,000, respectively, were included in the carrying value of loans. Purchased loans acquired in connection with the FNB acquisition, the State College branch acquisition and the MidCoast acquisition were recorded at fair value on their acquisition date
without a carryover of the related allowance for loan losses.
Upon acquisition, the Company evaluated whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired
with Deteriorated Credit Quality. PCI loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest
payments. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans’ collateral. The carrying value of PCI loans was $3,306,000 and $3,802,000 at December 31, 2022 and 2021,
respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows.
On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the
MidCoast acquisition was $8,005,000 and the estimated fair value of the loans was $4,869,000. Total contractually required payments on these loans, including interest, at the acquisition date was $8,801,000. However, the Company’s preliminary estimate of expected cash flows was $5,835,000
at the acquisition date. At the acquisition date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $2,966,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment
to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $966,000 on the acquisition date relating to these impaired loans.
The table below presents the components of the purchase accounting adjustments related
to the purchased impaired loans acquired in the MidCoast Acquisition as of April 17, 2020 (in thousands):
|
April 17, 2020
|
||||
|
Contractually required principal and interest at acquisition
|
$
|
8,801
|
||
|
Non-accretable discount
|
(2,966
|
)
|
||
|
Expected cash flows
|
5,835
|
|||
|
Accretable discount
|
(966
|
)
|
||
|
Estimated fair value
|
$
|
4,869
|
||
Changes in the accretable discount for PCI loans were as follows for the years ended December 31, 2022 and 2021 (in thousands):
|
December 31, 2022
|
December 31, 2021
|
|||||||
|
Balance at beginning of period
|
$
|
370
|
$
|
788
|
||||
|
Accretion
|
(759
|
)
|
(499
|
)
|
||||
| Reclassification of non-accretable discount |
1,212 | 81 | ||||||
|
Balance at end of period
|
$
|
823
|
$
|
370
|
||||
The following table presents additional information regarding PCI loans (in thousands):
|
December 31, 2022
|
December 31, 2021
|
|||||||
|
Outstanding balance
|
$
|
5,758
|
$
|
6,159
|
||||
|
Carrying amount
|
3,306
|
3,802
|
||||||
Real estate loans serviced for Freddie Mac, Fannie Mae and the FHLB, which are not included in the Consolidated Balance Sheet, totaled $187,754,000 and $197,037,000 at December
31, 2022 and 2021, respectively. Loans sold to Freddie Mac and Fannie Mae were sold without recourse and total $177,575,000 and $184,897,000 at December 31, 2022 and 2021, respectively. Additionally, the Bank acquired a portfolio of loans sold to the FHLB during the acquisition of
FNB, which were sold under the Mortgage Partnership Finance Program (“MPF”). The Bank was not an active participant in the MPF program in 2022 or 2021. The MPF portfolio balance was $10,179,000 and $12,140,000 at December 31, 2022 and 2021,
respectively. The FHLB maintains a first-loss position for the MPF portfolio that totals $161,000. Should the FHLB exhaust its first-loss
position, recourse to the Bank’s credit enhancement would be up to the next $348,000 of losses. The Bank did not experience any losses for
the MPF portfolio during 2022, 2021 or 2020.
The segments of the Bank’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance.
Residential real estate mortgages consist of 15 to 30 year first mortgages on residential real estate, while residential real estate home equities are consumer purpose installment loans or lines of credit secured by a mortgage which is often a second lien on
residential real estate with terms of 15 years or less. Commercial real estate are business purpose loans secured by a mortgage on
commercial real estate. Agricultural real estate are loans secured by a mortgage on real estate used in agriculture production. Construction real estate are loans secured by residential or commercial real estate used during the construction phase of
residential and commercial projects. Consumer loans are typically unsecured or primarily secured by collateral other than real estate and overdraft lines of credit connected with customer deposit accounts. Other commercial loans are loans for
commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non real estate collateral. State and political subdivisions are loans for state and local
municipalities for capital and operating expenses or tax free loans used to finance commercial development.
Management considers other commercial loans, other agricultural loans, commercial and agricultural real estate loans and state and political
subdivision loans which are 90 days or more past due to be impaired. Certain residential mortgages, home equity and consumer loans that
are cross collateralized with commercial relationships determined to be impaired may be classified as impaired as well. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms
of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is
recognized through an allowance allocation or a charge-off to the allowance.
The following table includes the recorded investment and unpaid principal balances for impaired loans by class, with the associated allowance amount
as of December 31, 2022 and 2021, if applicable (in thousands):
|
Unpaid
Principal
Balance
|
Recorded
Investment
With No
Allowance
|
Recorded
Investment
With
Allowance
|
Total
Recorded
Investment
|
Related
Allowance
|
||||||||||||||||
| 2022 |
||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||
|
Mortgages
|
$
|
395
|
$
|
242
|
$
|
39
|
$
|
281
|
$
|
4
|
||||||||||
|
Home Equity
|
71
|
39
|
15
|
54
|
-
|
|||||||||||||||
|
Commercial
|
6,655
|
5,314
|
361
|
5,675
|
57
|
|||||||||||||||
|
Agricultural
|
6,062
|
5,192
|
188
|
5,380
|
24
|
|||||||||||||||
|
Consumer
|
4
|
-
|
4
|
4
|
4
|
|||||||||||||||
|
Other commercial loans
|
797
|
32
|
70
|
102
|
13
|
|||||||||||||||
|
Other agricultural loans
|
669
|
473
|
-
|
473
|
-
|
|||||||||||||||
|
Total
|
$
|
14,653
|
$
|
11,292
|
$
|
677
|
$
|
11,969
|
$
|
102
|
||||||||||
| |
|
|
|
|
||||||||||||||||
|
2021
|
||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||
|
Mortgages
|
$
|
697
|
$
|
495
|
$
|
45
|
$
|
540
|
$
|
6
|
||||||||||
|
Home Equity
|
97
|
37
|
43
|
80
|
6
|
|||||||||||||||
|
Commercial
|
9,330
|
8,096
|
285
|
8,381
|
61
|
|||||||||||||||
|
Agricultural
|
5,694
|
5,167
|
188
|
5,355
|
14
|
|||||||||||||||
|
Other commercial loans
|
813
|
92
|
94
|
186
|
34
|
|||||||||||||||
|
Other agricultural loans
|
1,274
|
991
|
-
|
991
|
-
|
|||||||||||||||
|
Total
|
$
|
17,905
|
$
|
14,878
|
$
|
655
|
$
|
15,533
|
$
|
121
|
The following table includes the average investment in impaired loans and the income recognized on impaired loans for 2022, 2021 and 2020 (in
thousands):
|
Interest
|
||||||||||||
|
Average
|
Interest
|
Income
|
||||||||||
|
Recorded
|
Income
|
Recognized
|
||||||||||
|
2022
|
Investment
|
Recognized
|
Cash Basis
|
|||||||||
|
Real estate loans:
|
||||||||||||
|
Mortgages
|
$
|
421
|
$
|
12
|
$
|
-
|
||||||
|
Home Equity
|
64
|
4
|
-
|
|||||||||
|
Commercial
|
6,216
|
207
|
10
|
|||||||||
|
Agricultural
|
5,540
|
126
|
-
|
|||||||||
| Consumer |
1 | - | - | |||||||||
|
Other commercial loans
|
260
|
3
|
-
|
|||||||||
|
Other agricultural loans
|
538
|
4
|
-
|
|||||||||
|
Total
|
$
|
13,040
|
$
|
356
|
$
|
10
|
||||||
|
2021
|
|
|||||||||||
|
Real estate loans:
|
|
|||||||||||
|
Mortgages
|
$
|
682
|
$
|
16
|
$
|
-
|
||||||
|
Home Equity
|
99
|
4
|
-
|
|||||||||
|
Commercial
|
8,789
|
288
|
31
|
|||||||||
|
Agricultural
|
4,562
|
82
|
-
|
|||||||||
|
Other commercial loans
|
704
|
2
|
-
|
|||||||||
|
Other agricultural loans
|
1,044
|
3
|
-
|
|||||||||
|
Total
|
$
|
15,880
|
$
|
395
|
$
|
31
|
||||||
| Interest | ||||||||||||
| Average | Interest | Income | ||||||||||
| Recorded | Income | Recognized | ||||||||||
|
2020
|
Investment | Recognized | Cash Basis | |||||||||
|
Real estate loans:
|
||||||||||||
|
Mortgages
|
$
|
956
|
$
|
20
|
$
|
-
|
||||||
|
Home Equity
|
139
|
6
|
-
|
|||||||||
|
Commercial
|
10,354
|
358
|
27
|
|||||||||
|
Agricultural
|
3,918
|
75
|
-
|
|||||||||
|
Consumer
|
3
|
-
|
-
|
|||||||||
|
Other commercial loans
|
1,671
|
3
|
-
|
|||||||||
|
Other agricultural loans
|
1,237
|
6
|
-
|
|||||||||
|
Total
|
$
|
18,278
|
$
|
468
|
$
|
27
|
||||||
Credit Quality Information
For commercial real estate loans, agricultural real estate loans, construction loans, other commercial loans, other agricultural loans and state and
political subdivision loans, management uses a nine point internal risk rating system to monitor the credit quality. The first five categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized
by management generally follow bank regulatory definitions. The definitions of each rating are defined below:
| • |
Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of
the obligor or by the value of the underlying collateral.
|
| • |
Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious
problem if not corrected.
|
| • |
Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and are
characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
|
| • |
Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these
weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.
|
| • |
Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not
warranted.
|
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan
rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the
supervision of management. All commercial, agricultural and state and political relationships over $500,000 are reviewed annually to
ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to: 1) review a minimum of 50%
of the dollar volume of the commercial, agricultural and municipal loan portfolios on an annual basis, 2) review a sample of new loans originated for over $1.0
million in the last year, 3) review a sample of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan
relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such
other loans which management or the consultant deems appropriate.
The following tables represent credit exposures by internally assigned grades as of December 31, 2022 and 2021 (in thousands):
|
2022
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
Ending Balance
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
$
|
842,912
|
$
|
28,047
|
$
|
5,610
|
$
|
-
|
$
|
-
|
$
|
876,569
|
||||||||||||
|
Agricultural
|
295,443
|
11,960
|
6,211
|
-
|
-
|
313,614
|
||||||||||||||||||
|
Construction
|
75,703
|
2,642
|
2,346
|
-
|
-
|
80,691
|
||||||||||||||||||
|
Other commercial loans
|
59,902
|
2,953
|
337
|
30
|
-
|
63,222
|
||||||||||||||||||
|
Other agricultural loans
|
32,708
|
1,307
|
817
|
-
|
-
|
34,832
|
||||||||||||||||||
|
State and political subdivision loans
|
59,208
|
-
|
-
|
-
|
-
|
59,208
|
||||||||||||||||||
|
Total
|
$
|
1,365,876
|
$
|
46,909
|
$
|
15,321
|
$
|
30
|
$
|
-
|
$
|
1,428,136
|
||||||||||||
|
2021
|
|
|
|
|
|
|||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
$
|
646,137
|
$
|
35,332
|
$
|
5,869
|
$
|
-
|
$
|
-
|
$
|
687,338
|
||||||||||||
|
Agricultural
|
291,537
|
15,105
|
5,369
|
-
|
-
|
312,011
|
||||||||||||||||||
|
Construction
|
55,036
|
-
|
-
|
-
|
-
|
55,036
|
||||||||||||||||||
|
Other commercial loans
|
70,932
|
3,289
|
316
|
48
|
-
|
74,585
|
||||||||||||||||||
|
Other agricultural loans
|
37,800
|
1,351
|
701
|
-
|
-
|
39,852
|
||||||||||||||||||
|
State and political subdivision loans
|
45,588
|
168
|
-
|
-
|
-
|
45,756
|
||||||||||||||||||
|
Total
|
$
|
1,147,030
|
$
|
55,245
|
$
|
12,255
|
$
|
48
|
$
|
-
|
$
|
1,214,578
|
For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or
non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event.
Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of
December 31, 2022 and 2021 (in thousands):
|
2022
|
Performing
|
Non-performing
|
PCI
|
Total
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Mortgages
|
$
|
161,998
|
$
|
562
|
$
|
9
|
$
|
162,569
|
||||||||
|
Home Equity
|
47,615
|
29
|
-
|
47,644
|
||||||||||||
|
Consumer
|
86,643
|
7
|
-
|
86,650
|
||||||||||||
|
Total
|
$
|
296,256
|
$
|
598
|
$
|
9
|
$
|
296,863
|
||||||||
|
2021
|
Performing
|
Non-performing
|
PCI
|
Total
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Mortgages
|
$
|
150,320
|
$
|
608
|
$
|
14
|
$
|
150,942
|
||||||||
|
Home Equity
|
50,122
|
33
|
-
|
50,155
|
||||||||||||
|
Consumer
|
25,858
|
-
|
-
|
25,858
|
||||||||||||
|
Total
|
$
|
226,300
|
$
|
641
|
$
|
14
|
$
|
226,955
|
||||||||
Aging Analysis of Past Due Loans by Class
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length
of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loans as of December 31, 2022 and 2021 (in thousands):
|
30-59 Days
|
60-89 Days
|
90 Days
|
Total Past
|
Total
Financing
|
90 Days
and
|
|||||||||||||||||||||||||||
|
2022
|
Past Due
|
Past Due
|
Or Greater
|
Due
|
Current
|
PCI
|
Receivables
|
Accruing
|
||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||||||
|
Mortgages
|
$
|
356
|
$
|
132
|
$
|
229
|
$
|
717
|
$
|
161,843
|
$
|
9
|
$
|
162,569
|
$
|
-
|
||||||||||||||||
|
Home Equity
|
48
|
9
|
29
|
86
|
47,558
|
-
|
47,644
|
-
|
||||||||||||||||||||||||
|
Commercial
|
1,065
|
115
|
1,788
|
2,968
|
871,745
|
1,856
|
876,569
|
-
|
||||||||||||||||||||||||
|
Agricultural
|
-
|
-
|
1,368
|
1,368
|
310,805
|
1,441
|
313,614
|
-
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
80,691
|
-
|
80,691
|
-
|
||||||||||||||||||||||||
|
Consumer
|
147
|
-
|
7
|
154
|
86,496
|
-
|
86,650
|
7
|
||||||||||||||||||||||||
|
Other commercial loans
|
1,660
|
35
|
32
|
1,727
|
61,495
|
-
|
63,222
|
-
|
||||||||||||||||||||||||
|
Other agricultural loans
|
-
|
-
|
-
|
-
|
34,832
|
-
|
34,832
|
-
|
||||||||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||||||||||
|
subdivision loans
|
-
|
-
|
-
|
-
|
59,208
|
-
|
59,208
|
-
|
||||||||||||||||||||||||
|
Total
|
$
|
3,276
|
$
|
291
|
$
|
3,453
|
$
|
7,020
|
$
|
1,714,673
|
$
|
3,306
|
$
|
1,724,999
|
$
|
7
|
||||||||||||||||
|
Loans considered non-accrual
|
$
|
46
|
$
|
76
|
$
|
3,446
|
$
|
3,568
|
$
|
3,370
|
$
|
-
|
$
|
6,938
|
||||||||||||||||||
|
Loans still accruing
|
3,230
|
215
|
7
|
3,452
|
1,711,303
|
3,306
|
1,718,061
|
|||||||||||||||||||||||||
|
Total
|
$
|
3,276
|
$
|
291
|
$
|
3,453
|
$
|
7,020
|
$
|
1,714,673
|
$
|
3,306
|
$
|
1,724,999
|
||||||||||||||||||
|
2021
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Real estate loans:
|
|
|||||||||||||||||||||||||||||||
|
Mortgages
|
$
|
220
|
$
|
170
|
$
|
209
|
$
|
599
|
$
|
150,329
|
$
|
14
|
$
|
150,942
|
$
|
13
|
||||||||||||||||
|
Home Equity
|
103
|
-
|
33
|
136
|
50,019
|
-
|
50,155
|
33
|
||||||||||||||||||||||||
|
Commercial
|
127
|
115
|
1,969
|
2,211
|
682,982
|
2,145
|
687,338
|
-
|
||||||||||||||||||||||||
|
Agricultural
|
31
|
-
|
1,367
|
1,398
|
308,970
|
1,643
|
312,011
|
-
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
55,036
|
-
|
55,036
|
-
|
||||||||||||||||||||||||
|
Consumer
|
163
|
1
|
-
|
164
|
25,694
|
-
|
25,858
|
-
|
||||||||||||||||||||||||
|
Other commercial loans
|
17
|
10
|
92
|
119
|
74,466
|
-
|
74,585
|
-
|
||||||||||||||||||||||||
|
Other agricultural loans
|
10
|
-
|
-
|
10
|
39,842
|
-
|
39,852
|
-
|
||||||||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||||||||||
|
subdivision loans
|
-
|
-
|
-
|
-
|
45,756
|
-
|
45,756
|
-
|
||||||||||||||||||||||||
|
Total
|
$
|
671
|
$
|
296
|
$
|
3,670
|
$
|
4,637
|
$
|
1,433,094
|
$
|
3,802
|
$
|
1,441,533
|
$
|
46
|
||||||||||||||||
|
Loans considered non-accrual
|
$
|
-
|
$
|
-
|
$
|
3,624
|
$
|
3,624
|
$
|
3,992
|
$
|
-
|
$
|
7,616
|
||||||||||||||||||
|
Loans still accruing
|
671
|
296
|
46
|
1,013
|
1,429,102
|
3,802
|
1,433,917
|
|||||||||||||||||||||||||
|
Total
|
$
|
671
|
$
|
296
|
$
|
3,670
|
$
|
4,637
|
$
|
1,433,094
|
$
|
3,802
|
$
|
1,441,533
|
Nonaccrual Loans
Loans are considered for nonaccrual status upon reaching 90
days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is
not expected.
The following table reflects the loans on nonaccrual status as of December 31, 2022 and 2021, respectively. The balances are presented by class of
loan (in thousands):
|
2022
|
2021
|
|||||||
|
Real estate loans:
|
||||||||
|
Mortgages
|
$
|
562
|
$
|
595
|
||||
|
Home Equity
|
29
|
-
|
||||||
|
Commercial
|
2,778
|
2,945
|
||||||
|
Agricultural
|
3,222
|
3,133
|
||||||
|
Other commercial loans
|
62
|
140
|
||||||
|
Other agricultural loans
|
285
|
803
|
||||||
|
$
|
6,938
|
$
|
7,616
|
|||||
Interest income on loans would have increased by approximately $676,000, $573,000 and $756,000 during 2022, 2021 and 2020, respectively, if these loans had performed in accordance with their terms.
Troubled Debt Restructurings (TDRs)
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an
insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms
before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the
collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing
this balance to the Company’s investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation
within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower’s ability to continue to repay the loan based on
continued evaluation of their operating results and cash flows from operations. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of December 31, 2022, 2021 and
2020, included within the allowance for loan losses are reserves of $15,000, $26,000 and $257,000, respectively, that are associated with loans
modified as TDRs.
Loan modifications that are considered TDRs completed during the years ended December 31, 2022, 2021 and 2020 were as follows (dollars in thousands):
|
Number of contracts
|
Pre-modification Outstanding
Recorded Investment
|
Post-Modification Outstanding
Recorded Investment
|
||||||||||||||||||||||
2022 |
Interest
Modification
|
Term
Modification
|
Interest
Modification
|
Term
Modification
|
Interest
Modification
|
Term
Modification
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Home Equity
|
- | 1 | $ |
- | $ |
8 | $ |
- | $ |
8 | ||||||||||||||
|
Commercial
|
-
|
4
|
|
-
|
2,301
|
-
|
|
2,301
|
||||||||||||||||
|
Agricultural
|
-
|
2
|
-
|
1,137
|
-
|
1,137
|
||||||||||||||||||
|
Total
|
-
|
7
|
$
|
-
|
$
|
3,446
|
$
|
-
|
$
|
3,446
|
||||||||||||||
|
2021
|
|
|
|
|
|
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
-
|
4
|
$ |
-
|
$ |
1,469
|
$ |
-
|
$ |
1,469
|
||||||||||||||
|
Agricultural
|
-
|
4
|
-
|
2,090
|
-
|
2,090
|
||||||||||||||||||
|
Total
|
-
|
8
|
$
|
-
|
$
|
3,559
|
$
|
-
|
$
|
3,559
|
||||||||||||||
|
2020
|
||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Mortgages
|
-
|
1
|
$
|
-
|
$
|
2
|
$
|
-
|
$
|
2
|
||||||||||||||
|
Commercial
|
-
|
10
|
-
|
2,456
|
-
|
2,456
|
||||||||||||||||||
|
Agricultural
|
-
|
2
|
-
|
494
|
-
|
494
|
||||||||||||||||||
| Consumer |
- | 1 | - | 3 | - | 3 | ||||||||||||||||||
| Other commercial loans |
- | 2 | - | 1,094 | - | 1,094 | ||||||||||||||||||
|
Other agricultural loans
|
-
|
1
|
-
|
19
|
-
|
19
|
||||||||||||||||||
|
Total
|
-
|
17
|
$
|
-
|
$
|
4,068
|
$
|
-
|
$
|
4,068
|
||||||||||||||
Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan.
Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The following table presents the recorded investment in loans that were modified as
TDRs during each 12-month period prior to the current reporting periods, which begin January 1, 2022, 2021 and 2020, respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):
|
December 31, 2022
|
December 31, 2021
|
December 31, 2020
|
||||||||||||||||||||||
|
Number of
contracts
|
Recorded investment
|
Number of
contracts
|
Recorded investment
|
Number of
contracts
|
Recorded investment
|
|||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
-
|
$
|
-
|
-
|
$
|
-
|
1
|
$
|
110
|
|||||||||||||||
|
Total recidivism
|
-
|
$
|
-
|
-
|
$
|
-
|
1
|
$
|
110
|
|||||||||||||||
Foreclosed Assets Held For Sale
Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the
Consolidated Balance Sheet. As of December 31, 2022 and 2021 included with other assets are $543,000 and $1,180,000, respectively, of foreclosed assets. As of December 31, 2022, included within the foreclosed assets is $241,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2022, the Company has
initiated formal foreclosure proceedings on $185,000 of consumer residential mortgages, which have not yet been transferred into foreclosed
assets.
Allowance for Loan Losses
The following tables roll forward the balance of the allowance for loan and lease losses for the years ended December 31, 2022, 2021 and 2020 and is
segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2022, 2021 and 2020 (in thousands):
|
Balance at
December 31, 2021
|
Charge-offs
|
Recoveries
|
Provision
|
Balance at
December 31, 2022
|
Individually
evaluated for
impairment
|
Collectively
evaluated for
impairment
|
||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
1,147
|
$
|
-
|
$
|
-
|
$
|
(91
|
)
|
$
|
1,056
|
$
|
4
|
$
|
1,052
|
|||||||||||||
|
Commercial
|
8,099
|
-
|
3
|
2,018
|
10,120
|
57
|
10,063
|
|||||||||||||||||||||
|
Agricultural
|
4,729
|
-
|
-
|
(140
|
)
|
4,589
|
24
|
4,565
|
||||||||||||||||||||
|
Construction
|
434
|
-
|
-
|
367
|
801
|
-
|
801
|
|||||||||||||||||||||
|
Consumer
|
262
|
(37
|
)
|
21
|
(111
|
)
|
135
|
4
|
131
|
|||||||||||||||||||
|
Other commercial loans
|
1,023
|
(435
|
)
|
13
|
439
|
1,040
|
13
|
1,027
|
||||||||||||||||||||
|
Other agricultural loans
|
558
|
-
|
-
|
(69
|
)
|
489
|
-
|
489
|
||||||||||||||||||||
|
State and political subdivision loans
|
281
|
-
|
-
|
41
|
322
|
-
|
322
|
|||||||||||||||||||||
|
Unallocated
|
771
|
-
|
-
|
(771
|
)
|
-
|
-
|
-
|
||||||||||||||||||||
|
Total
|
$
|
17,304
|
$
|
(472
|
)
|
$
|
37
|
$
|
1,683
|
$
|
18,552
|
$
|
102
|
$
|
18,450
|
|||||||||||||
|
Balance at
December 31, 2020
|
Charge-offs
|
Recoveries
|
Provision
|
Balance at
December 31, 2021
|
Individually
evaluated for
impairment
|
Collectively
evaluated for
impairment
|
||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
1,174
|
$
|
-
|
$
|
-
|
$
|
(27
|
)
|
$
|
1,147
|
$
|
12
|
$
|
1,135
|
|||||||||||||
|
Commercial
|
6,216
|
(54
|
)
|
89
|
1,848
|
8,099
|
61
|
8,038
|
||||||||||||||||||||
|
Agricultural
|
4,953
|
-
|
-
|
(224
|
)
|
4,729
|
14
|
4,715
|
||||||||||||||||||||
|
Construction
|
122
|
-
|
-
|
312
|
434
|
-
|
434
|
|||||||||||||||||||||
|
Consumer
|
321
|
(27
|
)
|
21
|
(53
|
)
|
262
|
-
|
262
|
|||||||||||||||||||
|
Other commercial loans
|
1,226
|
(133
|
)
|
43
|
(113
|
)
|
1,023
|
34
|
989
|
|||||||||||||||||||
|
Other agricultural loans
|
864
|
-
|
-
|
(306
|
)
|
558
|
-
|
558
|
||||||||||||||||||||
|
State and political subdivision loans
|
479
|
-
|
-
|
(198
|
)
|
281
|
-
|
281
|
||||||||||||||||||||
|
Unallocated
|
460
|
-
|
-
|
311
|
771
|
-
|
771
|
|||||||||||||||||||||
|
Total
|
$
|
15,815
|
$
|
(214
|
)
|
$
|
153
|
$
|
1,550
|
$
|
17,304
|
$
|
121
|
$
|
17,183
|
|||||||||||||
|
Balance at
December 31, 2019
|
Charge-offs
|
Recoveries
|
Provision
|
Balance at
December 31, 2020
|
Individually
evaluated for
impairment
|
Collectively
evaluated for
impairment |
||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
1,114
|
$
|
-
|
$
|
14
|
$
|
46
|
$
|
1,174
|
$
|
18
|
$
|
1,156
|
||||||||||||||
|
Commercial
|
4,549
|
(435
|
)
|
37
|
2,065
|
6,216
|
95
|
6,121
|
||||||||||||||||||||
|
Agricultural
|
5,022
|
(4
|
)
|
19
|
(84
|
)
|
4,953
|
83
|
4,870
|
|||||||||||||||||||
|
Construction
|
43
|
-
|
-
|
79
|
122
|
-
|
122
|
|||||||||||||||||||||
|
Consumer
|
112
|
(50
|
)
|
21
|
238
|
321
|
-
|
321
|
||||||||||||||||||||
|
Other commercial loans
|
1,255
|
(44
|
)
|
12
|
3
|
1,226
|
170
|
1,056
|
||||||||||||||||||||
|
Other agricultural loans
|
961
|
-
|
-
|
(97
|
)
|
864
|
144
|
720
|
||||||||||||||||||||
|
State and political subdivision loans
|
536
|
-
|
-
|
(57
|
)
|
479
|
-
|
479
|
||||||||||||||||||||
|
Unallocated
|
253
|
-
|
-
|
207
|
460
|
-
|
460
|
|||||||||||||||||||||
|
Total
|
$
|
13,845
|
$
|
(533
|
)
|
$
|
103
|
$
|
2,400
|
$
|
15,815
|
$
|
510
|
$
|
15,305
|
|||||||||||||
As discussed in Footnote 1, management evaluates various qualitative factors on a quarterly basis. The following are explanations for the changes in
the allowance by portfolio segments:
2022
Residential - There was a decrease in the historical loss factor for residential loans when comparing 2022 and 2021 and a slight decrease in the
specific reserve for residential loans between 2022 and 2021. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for residential loan categories due to a general improvement in
economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022. The increase in the provision for commercial loans was due to the organic loan growth experienced in 2022.
Commercial real estate– There was a decrease in the historical loss factor and the specific reserve for commercial real estate loans from 2021 to
2022. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for commercial real estate loan categories due to a general improvement in economic activity and decrease in unemployment as a
result of the reduced impact of the Covid-19 pandemic during 2022.
Agricultural real estate – There was a decrease in the historical loss factor for agricultural real estate loans from 2021 to 2022. The specific
reserve for agricultural real estate loans increased slightly from 2021 to 2022. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for agricultural real estate loan categories due to
a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.
Construction - There was no change in the historical loss factor or specific reserve for construction loans from 2021 to 2022. The qualitative factor
for the volume and severity of classified, adversely or graded loans was increased for construction loans during 2022 due to an increase in special mention and substandard loans. The qualitative factor for national, state, regional and local economic
trends and business conditions was decreased for construction loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.
Consumer - There was a decrease in the historical loss factor for consumer loans from 2021 to 2022. There was a change in the composition of the loan
portfolio with a large increase in short term student loans, which requires a lower provision. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for consumer loan categories due to a
general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.
Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2021 and 2022. The specific reserve
for other commercial loans decreased from 2021 to 2022. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for other commercial loan categories due to a general improvement in
economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.
Other agricultural - There was no change in the historical loss factor or specific reserve for other agricultural loans from 2021 to 2022. The
qualitative factor for national, state, regional and local economic trends and business conditions was decreased for agricultural real estate loan categories due to a general improvement in economic activity and decrease in unemployment as a result
of the reduced impact of the Covid-19 pandemic during 2022.
Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2021 to 2022. The qualitative factor
for national, state, regional and local economic trends and business conditions was decreased for municipal loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the
Covid-19 pandemic during 2022.
2021
Residential - There was a decrease in the historical loss factor for residential loans when comparing 2020 and 2021 and a slight decrease in the specific reserve for residential loans
between 2020 and 2021. The qualitative factor for the level of past due loans for residential real estate loans was decreased due to a decrease in past due loans during 2021.
Commercial real estate – There was a decrease in the historical loss factor and the specific reserve for commercial real estate loans from 2020 to 2021. The qualitative factor for the
volume of non-accrual loans was decreased for commercial real estate loans due to a decrease in the volume of non-accrual loans during 2021. The decrease in the qualitative factors was offset by the increase in the commercial real estate portfolio,
which resulted in the provision for 2021.
Agricultural real estate – There was no change in the historical loss factor for agricultural real estate loans from 2020 to 2021 The specific reserve for agricultural real estate
loans decreased from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for agricultural real estate loans during 2021 due to a decrease in substandard loans.
Construction - There was no change in the historical loss factor or specific reserve for construction loans from 2020 to 2021. The qualitative factors for trends in volume, terms and
nature of the portfolio, experience and depth of lending management and relevant staff, and changes in value of underlying value of collateral were increased for the construction loan portfolio during 2021 due to the increase in the overall size of
the portfolio, the increase in the size of individual construction loans and the complexity of the construction projects funded.
Consumer - There was a decrease in the historical loss factor for consumer loans from 2020 to 2021. The negative provision was due to a decrease in consumer loans.
Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2020 and 2021. The specific reserve for other commercial loans decreased
from 2020 to 2021. The qualitative factors for the level of past due loans, the volume of non-accrual loans and the volume and severity of classified, adversely or graded loans were decreased for other commercial loans due to a decrease in past due
loans, non-accrual loans and substandard loans during 2021.
Other agricultural - There was a decrease in the historical loss factor for other agricultural loans from 2020 to 2021. The specific reserve for other agricultural loans decreased from
2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for other agricultural loans during 2021 due to a decrease in substandard loans. The negative provision was primarily due to the
overall decrease in other agricultural loans.
Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2020 to 2021. The qualitative factor for the volume and severity of
classified, adversely or graded loans was decreased for municipal loans during 2021 due to a decrease in substandard loans. The negative provision was primarily due to the overall decrease in other municipal loans during 2021.
6. PREMISES & EQUIPMENT
Premises and equipment at December 31, 2022 and 2021 are summarized as follows (in thousands):
|
December 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
Land
|
$
|
5,667
|
$
|
5,462
|
||||
|
Buildings
|
20,997
|
20,094
|
||||||
|
Furniture, fixtures and equipment
|
7,512
|
7,275
|
||||||
|
Construction in process
|
151
|
67
|
||||||
|
34,327
|
32,898
|
|||||||
|
Less: accumulated depreciation
|
16,708
|
15,882
|
||||||
|
Premises and equipment, net
|
$
|
17,619
|
$
|
17,016
|
||||
Depreciation expense amounted to $877,000,
$922,000 and $921,000 for
2022, 2021 and 2020, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table provides the gross carrying value and accumulated amortization of intangible assets as of December 31, 2022 and 2021 (in
thousands):
|
December 31, 2022
|
December 31, 2021
|
|||||||||||||||||||||||
|
Gross carrying value
|
Accumulated
amortization
|
Net carrying value
|
Gross carrying value
|
Accumulated
amortization
|
Net carrying value
|
|||||||||||||||||||
|
Amortized intangible assets (1):
|
||||||||||||||||||||||||
|
MSRs
|
$
|
2,336
|
$
|
(1,362
|
)
|
$
|
974
|
$
|
2,499
|
$
|
(1,326
|
)
|
$
|
1,173
|
||||||||||
|
Core deposit intangibles
|
1,943
|
(1,645
|
)
|
298
|
1,943
|
(1,489
|
)
|
454
|
||||||||||||||||
|
Total amortized intangible assets
|
$
|
4,279
|
$
|
(3,007
|
)
|
$
|
1,272
|
$
|
4,442
|
$
|
(2,815
|
)
|
$
|
1,627
|
||||||||||
|
Unamortized intangible assets:
|
||||||||||||||||||||||||
|
Goodwill
|
$
|
31,376
|
$
|
31,376
|
||||||||||||||||||||
|
(1)
|
||||||||||||||||||||||||
The following table provides the current year and estimated future amortization expense for the next five years of amortized intangible assets (in
thousands). We based our projections of amortization expense shown below on existing asset balances at December 31, 2022. Future amortization expense may vary from these projections:
|
MSRs
|
Core deposit intangibles
|
Total
|
||||||||||
|
Year ended December 31, 2022
|
$
|
305
|
$
|
156
|
$
|
461
|
||||||
|
Estimate for year ended December 31,
|
||||||||||||
|
2023
|
267
|
121
|
388
|
|||||||||
|
2024
|
211
|
86
|
297
|
|||||||||
|
2025
|
162
|
50
|
212
|
|||||||||
|
2026
|
121
|
17
|
138
|
|||||||||
|
2027
|
88
|
12
|
100
|
|||||||||
|
2028 and thereafter
|
125 | 12 | 137 | |||||||||
| Total |
974 | 298 | 1,272 | |||||||||
8. FEDERAL HOME LOAN BANK (FHLB) STOCK
As a member of the FHLB of Pittsburgh, the Bank is required to maintain a minimum investment in stock of the FHLB that varies
with the level of advances outstanding with the FHLB. As of December 31, 2022 and 2021, included in other assets, the Bank held $10,627,000
and $3,292,000, respectively, of FHLB stock. The stock does not have a readily determinable fair value and as such is classified as
restricted stock, carried at cost and evaluated by management. 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) A significant 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’s regulatory capital ratios are strong, liquidity appears adequate, new shares of FHLB stock continue to exchange
hands at the $100 par value and the FHLB has repurchased shares of excess capital stock from its members and has paid a quarterly cash
dividend.
9. DEPOSITS
The following table shows the breakdown of deposits as of December 31, 2022 and 2021, by deposit type (in thousands):
|
2022
|
2021
|
|||||||
|
Non-interest-bearing deposits
|
$
|
396,260
|
$
|
358,073
|
||||
|
NOW accounts
|
512,502
|
485,292
|
||||||
|
Savings deposits
|
321,917
|
313,048
|
||||||
|
Money market deposit accounts
|
335,838
|
350,122
|
||||||
|
Certificates of deposit
|
277,691
|
329,616
|
||||||
|
Total
|
$
|
1,844,208
|
$
|
1,836,151
|
||||
Certificates of deposit of $250,000 or more amounted to $56,287,000
and $79,610,000 at December 31, 2022 and 2021, respectively. Brokered deposits totaled $16,006,000 as of December 31, 2022. There were no brokered
certificates of deposits as of December 31, 2021.
Following are maturities of certificates of deposit as of December 31, 2022 (in thousands):
|
2023
|
$
|
153,926
|
||
|
2024
|
50,951
|
|||
|
2025
|
31,692
|
|||
|
2026
|
18,845
|
|||
|
2027
|
16,511
|
|||
|
Thereafter
|
5,766
|
|||
|
Total certificates of deposit
|
$
|
277,691
|
10. BORROWED FUNDS AND REPURCHASE AGREEMENTS
The following table shows the breakdown of borrowed funds as of December 31, 2022 and 2021 (dollars in thousands):
| Securities | ||||||||||||||||||||||||||||||||||||
| Sold Under | Bank | |||||||||||||||||||||||||||||||||||
|
Agreements
to
|
FHLB |
Federal
Funds
|
FRB | Line of |
|
Notes | Term | Total | ||||||||||||||||||||||||||||
|
Repurchase
(a)
|
Advances
(b)
|
Lines
(c)
|
BIC
Line (d)
|
Credit
(e)
|
Subordinated
Debt (f)
|
Payable
(g)
|
Loans
(h)
|
Borrowed
Funds
|
||||||||||||||||||||||||||||
|
2022
|
||||||||||||||||||||||||||||||||||||
|
Balance at December 31
|
$
|
17,776
|
$
|
169,110
|
$
|
-
|
$
|
-
|
$ | - | $ | 9,892 |
$
|
7,500
|
$
|
53,000
|
$
|
257,278
|
||||||||||||||||||
|
Highest balance at any month-end
|
17,776
|
186,626
|
-
|
-
|
- | 9,892 |
7,500
|
53,000
|
259,215
|
|||||||||||||||||||||||||||
|
Average balance
|
16,246
|
69,571
|
3
|
49
|
- | 9,885 |
7,500
|
46,407
|
149,661
|
|||||||||||||||||||||||||||
|
Weighted average interest rate:
|
||||||||||||||||||||||||||||||||||||
|
Paid during the year
|
1.95
|
%
|
3.50
|
%
|
1.99
|
%
|
1.76
|
%
|
0.00 | % | 4.18 | % |
3.63
|
%
|
1.00
|
%
|
2.61
|
%
|
||||||||||||||||||
|
As of year-end
|
4.13
|
%
|
4.45
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00 | % | 4.18 | % |
3.57
|
%
|
1.00
|
%
|
3.66
|
%
|
||||||||||||||||||
|
2021
|
||||||||||||||||||||||||||||||||||||
|
Balance at December 31
|
$
|
16,873
|
$
|
-
|
$
|
-
|
$
|
-
|
$ | - | $ | 9,879 |
$
|
7,500
|
$
|
39,725
|
$
|
73,977
|
||||||||||||||||||
|
Highest balance at any month-end
|
16,873
|
-
|
-
|
-
|
- | 9,879 |
7,500
|
66,525
|
100,777
|
|||||||||||||||||||||||||||
|
Average balance
|
14,726
|
-
|
-
|
-
|
- | 7,036 |
7,500
|
55,360
|
84,622
|
|||||||||||||||||||||||||||
|
Weighted average interest rate:
|
||||||||||||||||||||||||||||||||||||
|
Paid during the year
|
0.06
|
%
|
0.00
|
%
|
0.51
|
%
|
0.22
|
%
|
0.00 | % | 4.17 | % |
3.57
|
%
|
1.26
|
%
|
1.50
|
%
|
||||||||||||||||||
|
As of year-end
|
0.08
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00 | % | 4.18 | % |
3.57
|
%
|
1.15
|
%
|
1.56
|
%
|
||||||||||||||||||
(a)
|
Remaining Contractual Maturity of the Agreements
|
||||||||||||||||||||
| Overnight and | Up to | Greater than | ||||||||||||||||||
|
2022
|
Continuous
|
30 Days
|
30 - 90 Days
|
90 days
|
Total
|
|||||||||||||||
|
Repurchase Agreements:
|
||||||||||||||||||||
|
U.S. agency securities
|
$
|
20,371
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
20,371
|
||||||||||
|
Total carrying value of collateral pledged
|
$
|
20,371
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
20,371
|
||||||||||
|
Total liability recognized for repurchase agreements
|
$
|
17,776
|
||||||||||||||||||
| 2021 | ||||||||||||||||||||
|
Repurchase Agreements:
|
||||||||||||||||||||
|
U.S. agency securities
|
$ | 17,155 | $ |
- | $ | - | $ | - | $ | 17,155 | ||||||||||
|
Total carrying value of collateral pledged
|
$ | 17,155 | $ |
- | $ | - | $ | - | $ | 17,155 | ||||||||||
|
Total liability recognized for repurchase agreements
|
$ | 16,873 | ||||||||||||||||||
(b) FHLB Advances consist of an
“Open RepoPlus” agreement with the FHLB of Pittsburgh. FHLB “Open RepoPlus” advances are short-term borrowings that bear interest based on the FHLB discount rate or Federal Funds rate, whichever is higher. The Company has a borrowing limit of $871,227,000, inclusive of any outstanding advances and letters of credit. FHLB advances are secured by a blanket security agreement that includes the
Company’s FHLB stock, as well as certain investment and mortgage-backed securities held in safekeeping at the FHLB and certain residential and commercial mortgage loans. A portion of these advances, $43.0 million, are subject to interest rate swap arrangements. See Note 17 for additional information.
(c) The federal funds lines consist
of unsecured lines from two third party banks at market rates. The Bank has a borrowing limit totaling $34,000,000, inclusive of any
outstanding balances. No specific collateral is required to be pledged for these borrowings.
(d) The Federal Reserve Bank
Borrower in Custody (FRB BIC) Line consists of a borrower in custody in agreement opened in January 2010 with the Federal Reserve Bank of Philadelphia secured by municipal loans maintained in the Company’s possession. As of December 31, 2022 and
2021, the Company has a borrowing limit of $1,050,000 and $1,068,000, respectively, inclusive of any outstanding advances. The approximate carrying value of the municipal loan collateral was $1,360,000 and $1,683,000 as of December 31, 2022 and 2021, respectively.
(e) The Company issued a $20.0 million revolving line of credit in December 2022 with a Pennsylvania community Bank with a maturity date of February 1, 2024, subject to an annual review by the lender, which may extend the line an additional year. The line is subject to an annual fee of $20,000. Interest on outstanding borrowings is payable at prime minus 0.50% No specific collateral is required to be pledged for these borrowings.
(f) In April 2021, the Company
issued $10.0 million of fixed to floating rate subordinated notes that mature on April 16, 2031, unless redeemed earlier. The notes bear interest at 4%
per annum through April 16, 2026 and subsequently pay interest at the 90-day average secured overnight financing rate, determined on the
determination date of the applicable interest period, plus basis points. The Company may redeem the notes, in whole or in part, on
or after April 16, 2026, and at any time upon the occurrence of certain events, subject in each case to the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Issuance costs associated with the notes totaled $131,000 and were capitalized and will be amortized over the life of the note on a straight-line basis, which approximates the effective yield method. As
of December 31, 2022, the net unamortized issuance costs totaled $108,000.
(g) In December 2003, the Company
formed a special purpose entity (“Entity”) to issue $7,500,000 of floating rate obligated mandatory redeemable trust preferred securities
as part of a pooled offering. The rate was determined quarterly and floated based on the 3 month LIBOR plus 2.80 percent. The Entity may redeem them, in whole or in part, at face value after December 17, 2008, and on a quarterly basis thereafter. The
Company borrowed the proceeds of the issuance from the Entity in December 2003 in the form of a $7,500,000 note payable. Debt issue
costs of $75,000 have been capitalized and fully amortized as of December 31, 2008. Under current accounting rules, the Company’s
minority interest in the Entity was recorded at the initial investment amount and is included in the other assets section of the balance sheet. The Entity is not consolidated as part of the Company’s consolidated financial statements. The $7,500,000 note payable is subject to an interest rate swap arrangement. See Note 17 for additional information.
(h) Term Loans consist of separate
loans with the FHLB of Pittsburgh as follows (dollars in thousands):
| December 31, |
December 31, |
||||||||||
|
Interest Rate
|
Maturity
|
2022
|
2021
|
||||||||
|
Fixed:
|
|||||||||||
| 3.86 | % |
January 3, 2023
|
25,000 | - | |||||||
| 4.57 | % |
February 14, 2023
|
18,000 | - | |||||||
| 2.46 | % |
March 28, 2024
|
5,000 | 5,000 | |||||||
| 1.70 | % |
August 20, 2024
|
5,000 | 5,000 | |||||||
|
0.26
|
%
|
January 3, 2022
|
- |
25,000
|
|||||||
|
2.08
|
%
|
January 6, 2022
|
- |
4,725
|
|||||||
|
Total term loans
|
$
|
53,000
|
$
|
39,725
|
|||||||
Following are maturities of borrowed funds as of December 31, 2022 (in thousands):
|
2023
|
$
|
229,886
|
||
|
2024
|
10,000
|
|||
|
2025
|
-
|
|||
|
2026
|
-
|
|||
|
2027
|
-
|
|||
|
Thereafter
|
17,392
|
|||
|
Total borrowed funds
|
$
|
257,278
|
11. EMPLOYEE BENEFIT PLANS
Noncontributory Defined Benefit Pension Plan
The Bank sponsors a trusteed, noncontributory defined benefit pension plan covering substantially all employees and officers hired prior to January 1,
2007. The pension plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank and compensation rates during employment. Upon retirement or other termination of employment, employees can
elect either an annuity benefit or a lump sum distribution of vested benefits in the pension plan. The Bank’s funding policy is to make annual contributions, if needed, based upon the funding formula developed by the pension plans’ actuary. The Bank
did not make any contributions to the pension plans in 2022, 2021 or 2020.
In lieu of the pension plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting length of service
requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee’s base compensation. The contribution amount is placed in a separate account within the 401(k) plan and is subject to a vesting
requirement. Contributions by the Company totaled $300,000, $290,000 and $212,0000 for 2022, 2021 and 2020, respectively.
The following table sets forth the obligation and funded status of the pension plan as of December 31 (in thousands):
|
2022
|
2021
|
|||||||
|
Change in benefit obligation
|
||||||||
|
Benefit obligation at beginning of year
|
$
|
13,123
|
$
|
14,020
|
||||
|
Service cost
|
356
|
380
|
||||||
|
Interest cost
|
275
|
270
|
||||||
|
Actuarial (Gain) / Loss
|
(3,230
|
)
|
(438
|
)
|
||||
|
Settlement gain
|
(37
|
)
|
(17
|
)
|
||||
|
Benefits paid
|
(1,163
|
)
|
(1,092
|
)
|
||||
|
Benefit obligation at end of year
|
9,324
|
13,123
|
||||||
|
Change in plan assets
|
||||||||
|
Fair value of plan assets at beginning of year
|
13,916
|
13,247
|
||||||
|
Actual return (loss) on plan assets
|
(1,418
|
)
|
1,761
|
|||||
|
Employer contribution
|
-
|
-
|
||||||
|
Benefits paid
|
(1,163
|
)
|
(1,092
|
)
|
||||
|
Fair value of plan assets at end of year
|
11,335
|
13,916
|
||||||
|
Funded status
|
$
|
2,011
|
$
|
793
|
||||
Amounts not yet recognized as a component of net periodic pension cost as of December 31 (in thousands):
|
Amounts recognized in accumulated other comprehensive loss consists of:
|
2022
|
2021
|
||||||
|
Net loss
|
$
|
1,336
|
$
|
2,491
|
||||
|
Prior service cost
|
-
|
-
|
||||||
|
Total
|
$
|
1,336
|
$
|
2,491
|
||||
The accumulated benefit obligation for the defined benefit pension plan was $9,324,000 and $13,123,000 at December 31, 2022 and 2021 respectively.
The components of net periodic benefit costs for the years ended December 31 are as follows (in thousands):
|
2022
|
2021
|
2020
|
||||||||||
|
Service cost
|
$
|
356
|
$
|
380
|
$
|
330
|
||||||
|
Interest cost
|
275
|
270
|
332
|
|||||||||
|
Return on plan assets
|
(935
|
)
|
(895
|
)
|
(862
|
)
|
||||||
|
Settlement loss (gain)
|
144
|
235
|
302
|
|||||||||
|
Net amortization and deferral
|
96
|
336
|
233
|
|||||||||
|
Net periodic benefit (income) cost
|
$
|
(64
|
)
|
$
|
326
|
$
|
335
|
|||||
The estimated net loss that will be amortized from accumulated other comprehensive loss into the net periodic benefit cost (income) in 2023 is $28,000.
The weighted-average assumptions used to determine benefit obligations at December 31, 2022 and 2021 is summarized in the following table. The change
in the discount rate is the primary driver of the actuarial gain that occurred in 2022 of $3,230,000.
|
2022
|
2021
|
|||||||
|
Discount rate
|
4.75
|
%
|
2.25
|
%
|
||||
|
Rate of compensation increase
|
3.00
|
%
|
3.00
|
%
|
||||
The weighted-average assumptions used to determine net periodic benefit cost (income) for the year ended December 31, 2022, 2021 and 2020 is
summarized in the following table.
|
2022
|
2021
|
2020
|
||||||||||
|
Discount rate FCCB Plan
|
2.25
|
%
|
2.00
|
%
|
2.75
|
%
|
||||||
|
Expected long-term return on plan assets
|
7.00
|
%
|
7.00
|
%
|
7.00
|
%
|
||||||
|
Rate of compensation increase
|
3.00
|
%
|
3.00
|
%
|
3.00
|
%
|
||||||
The long-term rate of return on plan assets gives consideration to returns currently being earned on plan assets as well as future rates expected to
be earned. The investment objective is to maximize total return consistent with the interests of the participants and beneficiaries, and prudent investment management. The allocation of the pension plan assets is determined on the basis of sound
economic principles and is continually reviewed in light of changes in market conditions. Asset allocation favors equity securities, with a target allocation of 50-70%. The target allocation for debt securities is 30-50%. At December 31, 2022, the pension
plan had a sufficient cash and money market position in order to re-allocate the equity portfolio for diversification purposes and reduce risk in the total portfolio. The following table sets forth by level, within the fair value hierarchy as
defined in footnote 19, the Plan’s assets at fair value as of December 31, 2022 and 2021 (dollars in thousands):
|
2022
|
Level I
|
Level II
|
Level III
|
Total
|
Allocation
|
|||||||||||||||
|
Cash and cash equivalents
|
$
|
431
|
$
|
-
|
$
|
-
|
$
|
431
|
3.8
|
%
|
||||||||||
|
Equity Securities
|
5,391
|
-
|
-
|
5,391
|
47.6
|
%
|
||||||||||||||
|
Mutual Funds and ETF’s
|
3,322
|
-
|
-
|
3,322
|
29.3
|
%
|
||||||||||||||
|
Corporate Bonds
|
-
|
2,143
|
-
|
2,143
|
18.9
|
%
|
||||||||||||||
|
U.S. Agency Securities
|
- | 48 | - | 48 | 0.4 | % | ||||||||||||||
|
Total
|
$
|
9,144
|
$
|
2,191
|
$
|
-
|
$
|
11,335
|
100.0
|
%
|
||||||||||
|
2021
|
Level I
|
Level II
|
Level III
|
Total
|
Allocation
|
|||||||||||||||
|
Cash and cash equivalents
|
$
|
188
|
$
|
-
|
$
|
-
|
$
|
188
|
1.4
|
%
|
||||||||||
|
Equity Securities
|
6,291
|
-
|
-
|
6,291
|
45.2
|
%
|
||||||||||||||
|
Mutual Funds and ETF’s
|
5,246
|
-
|
-
|
5,246
|
37.7
|
%
|
||||||||||||||
|
Corporate Bonds
|
-
|
2,191
|
-
|
2,191
|
15.7
|
%
|
||||||||||||||
|
Total
|
$
|
11,725
|
$
|
2,191
|
$
|
-
|
$
|
13,916
|
100.0
|
%
|
||||||||||
Equity securities include the Company’s common stock in the amounts of $876,000 (7.7% of total plan assets) and $686,000 (4.9% of total plan assets) at December 31, 2022 and 2021,
respectively.
The Bank does not expect to make a
contribution to its pension plan in 2023. Expected future benefit payments that the Bank estimates from its pension plan are as follows (in thousands):
|
2023
|
$
|
143
|
||
|
2024
|
712
|
|||
|
2025
|
1,029
|
|||
|
2026
|
1,860
|
|||
|
2027
|
1,186
|
|||
|
2028 - 2032
|
4,284
|
Defined Contribution Plan
The Company sponsors a voluntary 401(k) savings plan which eligible employees can elect to contribute up to the maximum amount allowable not to exceed
the limits of IRS Code Sections 401(k). Under the plan, the Company also makes required contributions on behalf of the eligible employees. The Company’s contributions vest immediately. Contributions by the Company totaled $623,000, $563,000 and $518,000 for 2022, 2021 and 2020, respectively.
Directors’ Deferred Compensation Plan
The Company’s directors may elect to defer all or portions of their fees until their retirement or termination from service. Amounts deferred under
the deferred compensation plan earn interest based upon the highest current rate offered to certificate of deposit customers. Amounts deferred under the deferred compensation plan are not guaranteed and represent a general liability of the Company.
As of December 31, 2022 and 2021, an obligation of $580,000 and $587,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Amounts included in interest expense on the deferred amounts totaled $11,000, $6,000 and $8,000 for the years ended December 31, 2022, 2021 and 2020, respectively.
Restricted Stock Plan
The Company maintains a Restricted Stock Plan (the Plan) whereby employees and non-employee corporate directors are eligible to receive awards of
restricted stock based upon performance related requirements. Awards granted under the Plan are in the form of the Company’s common stock and maybe subject to certain vesting requirements including in the case of employees, continuous employment or
service with the Company. In April 2016, the Company’s stockholder authorized a total of 150,000 shares of the Company’s common stock to
be made available under the Plan. As of December 31, 2022, 116,058 shares remain available to be issued under the Plan. The Plan assists
the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation. The following table details the
vesting, awarding and forfeiting of unearned restricted shares during 2022:
|
2022
|
||||||||
|
Shares
|
Weighted
Average
Market Price
|
|||||||
|
Outstanding, beginning of year
|
6,954
|
$
|
58.51
|
|||||
|
Granted
|
3,333
|
68.69
|
||||||
|
Forfeited
|
(362
|
)
|
62.35
|
|||||
|
Vested
|
(3,303
|
)
|
58.09
|
|||||
|
Outstanding, end of year
|
6,622
|
$
|
63.63
|
|||||
Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.
Compensation expense related to restricted stock was $279,000, $318,000 and $333,000 for the years ended December 31, 2022, 2021 and 2020,
respectively. The per share weighted-average grant-date fair value of restricted shares granted during 2022, 2021 and 2020 was $68.69, $60.73 and $50.89, respectively. At
December 31, 2022, the total compensation cost related to nonvested awards that has not yet been recognized was $421,000, which is expected
to be recognized over the next 3 years.
Supplemental Executive Retirement Plan
The Company maintains a non-qualified supplemental executive retirement plan (“SERP”) for certain executives to compensate those executive
participants in the Company’s noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. At December 31, 2022 and 2021, an obligation of $2,706,000 and $2,509,000, respectively, for the SERP was included
in other liabilities in the Consolidated Balance Sheet. Expenses related to the SERP totaled $240,000, $473,000 and $107,000 for the years ended
December 31, 2022, 2021 and 2020, respectively. Benefit payments for 2022, 2021 and 2020 were $42,000, $42,000 and $32,000, respectively.
Deferred Compensation Plan
The Company in 2018 initiated a non-qualified executive deferred compensation plan for eligible employees designated by the Board of Directors. At
December 31, 2022 and 2021, an obligation of $1,235,000 and $940,000, respectively, was included in other liabilities for the deferred compensation plan in the Consolidated Balance Sheet. Expenses related to the deferred compensation plan totaled $296,000, $309,000 and $230,000 for the years ended December 31, 2022, 2021 and 2020, respectively. There were no benefit payments in 2022, 2021 or 2020.
Salary Continuation Plan
The Company maintains a salary continuation plan for certain employees acquired through the acquisition of the FNB. At December 31, 2022 and 2021 an
obligation of $617,000 and $646,000,
respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Expenses related to the salary continuation plan totaled $47,000,
$49,000 and $51,000 for the
years ended December 31, 2022, 2021 and 2020, respectively. Benefit payments related to the salary continuation plan totaled $76,000, $76,000, and $68,000 for the years ended
December 31, 2022, 2021 and 2020, respectively
Continuation of Life Insurance Plan
The Company, as part of the acquisition of FNB, has promised a continuation of life insurance coverage to certain persons post-retirement. GAAP
requires the recording of post-retirement costs and a liability equal to the present value of the cost of post-retirement insurance during the person’s term of service. The estimated present value of future benefits to be paid totaled $660,000 and $696,000 at December 31, 2022
and 2021, respectively, which is included in other liabilities in the Consolidated Balance Sheet. (Benefits)/Expenses for the plan totaled ($36,000),
$9,000 and $2,600 for the
years ended December 31, 2022, 2021 and 2020, respectively.
12. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2022
|
2021
|
2020
|
||||||||||
|
Currently payable
|
$
|
6,471
|
$
|
5,510
|
$
|
4,896
|
||||||
|
Deferred tax liability (asset)
|
(36
|
)
|
689
|
367
|
||||||||
|
Provision for income taxes
|
$
|
6,435
|
$
|
6,199
|
$
|
5,263
|
||||||
The following temporary differences gave rise to the net deferred tax asset and liabilities at December 31, 2022 and 2021, respectively (in
thousands):
|
2022
|
2021
|
|||||||
| Deferred tax assets: |
|
|
||||||
|
Allowance for loan losses
|
$
|
4,581
|
$
|
4,712
|
||||
|
Deferred compensation
|
559
|
491
|
||||||
|
Merger & acquisition costs
|
1
|
1
|
||||||
|
Allowance for losses on available-for-sale securities
|
9
|
4
|
||||||
|
Pension and other retirement obligation
|
146
|
360
|
||||||
|
Interest on non-accrual loans
|
974
|
795
|
||||||
|
Incentive plan accruals
|
503
|
536
|
||||||
|
Other real estate owned
|
32
|
16
|
||||||
|
Unrealized losses on available-for-sale securities
|
9,972 | - | ||||||
|
Low income housing tax credits
|
138
|
137
|
||||||
|
NOL carry forward
|
1,134
|
1,226
|
||||||
|
Right of use asset
|
1,053
|
686
|
||||||
|
Accrued vacation
|
157
|
168
|
||||||
|
Other
|
164
|
159
|
||||||
|
Total
|
$
|
19,423
|
$
|
9,291
|
||||
|
Deferred tax liabilities:
|
||||||||
|
Premises and equipment
|
$
|
(492
|
)
|
$
|
(559
|
)
|
||
|
Investment securities accretion
|
(240
|
)
|
(90
|
)
|
||||
|
Loan fees and costs
|
(685
|
)
|
(644
|
)
|
||||
|
Goodwill and core deposit intangibles
|
(2,332
|
)
|
(2,309
|
)
|
||||
|
Mortgage servicing rights
|
(205
|
)
|
(246
|
)
|
||||
|
Unrealized gains on available-for-sale securities
|
-
|
(81
|
)
|
|||||
| Unrealized gains on equity securities |
(16 | ) | (61 | ) | ||||
| Unrealized gains on interest rate swap | (1,443 | ) | (401 | ) | ||||
|
Right of use asset
|
(1,047
|
)
|
(685
|
)
|
||||
|
Other
|
(77
|
)
|
(133
|
)
|
||||
|
Total
|
(6,537
|
)
|
(5,209
|
)
|
||||
|
Deferred tax (liability) asset, net
|
$
|
12,886
|
$
|
4,082
|
No valuation allowance was
established at December 31, 2022 and 2021, due to the Company’s ability to carryback to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.
The total provision for income taxes is different from that computed at the statutory rates due to the following items (dollars in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2022
|
2021
|
2020
|
||||||||||
|
Provision at statutory rates on pre-tax income
|
$
|
7,450
|
$
|
7,413
|
$
|
6,377
|
||||||
|
Effect of tax-exempt income
|
(835
|
)
|
(764
|
)
|
(936
|
)
|
||||||
|
Low income housing tax credits
|
(141
|
)
|
(141
|
)
|
(141
|
)
|
||||||
|
Bank owned life insurance
|
(179
|
)
|
(384
|
)
|
(146
|
)
|
||||||
|
Nondeductible interest
|
74
|
44
|
44
|
|||||||||
|
Nondeductible merger and acquisition expenses
|
61
|
-
|
32
|
|||||||||
|
Other items
|
5
|
31
|
33
|
|||||||||
|
Provision for income taxes
|
$
|
6,435
|
$
|
6,199
|
$
|
5,263
|
||||||
|
Statutory tax rates
|
21
|
%
|
21
|
%
|
21
|
%
|
||||||
|
Effective tax rates
|
18.1
|
%
|
17.6
|
%
|
17.3
|
%
|
||||||
The Company 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 50 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 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. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. With limited exception, the Company’s federal and state income tax returns for taxable years through 2018 have been
closed for purposes of examination by the federal and state taxing authorities.
Investments in Qualified Affordable Housing Projects
As of December 31, 2022 and 2021, the Company was invested in seven and five partnerships, respectively, that provide affordable housing. The
balance of the investments, which is included within other assets in the Consolidated Balance Sheet, was $1,304,000 and $288,000 as of December 31, 2022 and 2021, respectively. Investments purchased prior to January 1, 2015, are accounted for utilizing the effective yield
method. During 2022, the Company entered into two additional partnerships that are expected to generate tax credits of $6,660,000 that will be utilized over the next thirteen years.
During 2021, the Company entered into one additional partnership that is expected to generate tax credits of $2,951,000 that will be utilized over the next eleven years.
Tax credits of $141,000 were recognized as a reduction of tax expense during 2022, 2021 and 2020. Included within other expenses on the
Consolidated Statement of Income was $108,000 of amortization of the investments in qualified affordable housing projects for 2022,
2021 and 2020, respectively.
13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive income (loss), net of tax, as of December 31, were as follows (in thousands):
|
2022
|
2021
|
|||||||
|
Net unrealized gain on securities available for sale
|
$
|
(47,487
|
)
|
$
|
385
|
|||
|
Tax effect
|
9,973
|
(81
|
)
|
|||||
|
Net -of-tax amount
|
(37,514
|
)
|
304
|
|||||
|
Unrealized loss on interest rate swap
|
6,873
|
1,910
|
||||||
|
Tax effect
|
1,444
|
401
|
||||||
|
Net -of-tax amount
|
5,429
|
1,509
|
||||||
|
Unrecognized pension costs
|
(1,336
|
)
|
(2,491
|
)
|
||||
|
Tax effect
|
280
|
523
|
||||||
|
Net -of-tax amount
|
(1,056
|
)
|
(1,968
|
)
|
||||
|
Total accumulated other comprehensive loss
|
$
|
(33,141
|
)
|
$
|
(155
|
)
|
||
The following tables present the changes in accumulated other comprehensive income (loss) by component net of tax for the years ended December 31,
2022, 2021 and 2020 (in thousands):
|
Unrealized gain
(loss) on
available for sale
securities (a)
|
Unrealized
gain (loss) on
interest rate
swap (a)
|
Defined Benefit
Pension
Items (a)
|
Total
|
|||||||||||||
|
Balance as of December 31, 2019
|
$
|
2,290
|
$
|
-
|
$
|
(2,919
|
)
|
$
|
(629
|
)
|
||||||
|
Other comprehensive income (loss) before reclassifications (net of tax)
|
4,008
|
4
|
(727
|
)
|
3,285
|
|||||||||||
|
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)
|
(240
|
)
|
(13
|
)
|
184
|
(69
|
)
|
|||||||||
|
Net current period other comprehensive income (loss)
|
3,768
|
(9
|
)
|
(543
|
)
|
3,216
|
||||||||||
|
Balance as of December 31, 2020
|
$
|
6,058
|
$
|
(9
|
)
|
$
|
(3,462
|
)
|
$
|
2,587
|
||||||
|
Balance as of December 31, 2020
|
$
|
6,058
|
$
|
(9
|
)
|
$
|
(3,462
|
)
|
$
|
2,587
|
||||||
|
Other comprehensive income (loss) before reclassifications (net of tax)
|
(5,586
|
)
|
1,403
|
1,229
|
(2,954
|
)
|
||||||||||
|
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)
|
(168
|
)
|
115
|
265
|
212
|
|||||||||||
|
Net current period other comprehensive income (loss)
|
(5,754
|
)
|
1,518
|
1,494
|
(2,742
|
)
|
||||||||||
|
Balance as of December 31, 2021
|
$
|
304
|
$
|
1,509
|
$
|
(1,968
|
)
|
$
|
(155
|
)
|
||||||
|
Balance as of December 31, 2021
|
$
|
304
|
$
|
1,509
|
$
|
(1,968
|
)
|
$
|
(155
|
)
|
||||||
|
Other comprehensive income (loss) before reclassifications (net of tax)
|
(37,829
|
)
|
4,034
|
836
|
(32,959
|
)
|
||||||||||
|
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)
|
11
|
(114
|
)
|
76
|
(27
|
)
|
||||||||||
|
Net current period other comprehensive income (loss)
|
(37,818
|
)
|
3,920
|
912
|
(32,986
|
)
|
||||||||||
|
Balance as of December 31, 2022
|
$
|
(37,514
|
)
|
$
|
5,429
|
$
|
(1,056
|
)
|
$
|
(33,141
|
)
|
|||||
| (a) |
||||||||||||||||
The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the years ended
December 31, 2022, 2021 and 2020 (in thousands):
|
Details about accumulated other comprehensive income (loss)
|
Amount reclassified from accumulated
comprehensive income (loss) (a)
|
Affected line item in the Consolidated
Statement of Income
|
|||||||||||
|
December 31,
|
|||||||||||||
|
2022
|
2021
|
2020
|
|||||||||||
|
Unrealized gains and losses on available for sale securities
|
|||||||||||||
|
$
|
(14
|
)
|
$
|
212
|
$
|
305
|
Available for sale securities (losses) gains, net
|
||||||
|
3
|
(44
|
)
|
(65
|
)
|
Provision for income taxes
|
||||||||
|
$
|
(11
|
)
|
$
|
168
|
$
|
240
|
Net of tax | ||||||
| Unrealized gain (loss) on interest rate swap | $ | 145 | $ | (147 | ) | $ | 18 | Interest expense |
|||||
| (31 | ) | 32 | (5 | ) | Provision for income taxes |
||||||||
| $ | 114 | $ | (115 | ) | $ | 13 | Net of tax |
||||||
|
Defined benefit pension items
|
|||||||||||||
|
$
|
(96
|
)
|
$
|
(336
|
)
|
$
|
(233
|
)
|
Other expenses
|
||||
|
20
|
71
|
49
|
Provision for income taxes
|
||||||||||
|
$
|
(76
|
)
|
$
|
(265
|
)
|
$
|
(184
|
)
|
Net of tax | ||||
|
Total reclassifications
|
$
|
27
|
$
|
(212
|
)
|
$
|
69
|
||||||
|
(a)
|
|||||||||||||
14. RELATED PARTY TRANSACTIONS
Certain executive officers and directors of the Company, or companies in which they have 10 percent or more beneficial ownership, were indebted to the
Bank. A summary of loan activity for the years ended December 31, 2022 and 2021 with officers, directors, stockholders and associates of such persons is listed below (in thousands):
|
Year Ended December 31,
|
||||||||
|
2022
|
2021
|
|||||||
|
Balance, beginning of year
|
$
|
11,680
|
$
|
12,970
|
||||
|
New loans
|
5,199
|
5,341
|
||||||
|
Repayments
|
(7,287
|
)
|
(6,631
|
)
|
||||
|
Balance, end of year
|
$
|
9,592
|
$
|
11,680
|
||||
15. REGULATORY MATTERS
Dividend Restrictions:
The approval of the Federal Reserve Board (FRB) is required for the Bank to pay dividends to the Company if the total of all dividends declared in any
calendar year exceeds the Bank’s net income (as defined) for that year combined with its retained net income for the preceding
calendar years. Under this formula, the Bank can declare dividends in 2023 without approval of the FRB or Pennsylvania Department of Banking of approximately $42,879,000, plus the Bank’s 2023 year-to-date net income at the time of the dividend declaration.
Loans:
The Bank is subject to regulatory restrictions which limit its ability to loan funds to the Company. At December 31, 2022, the Bank’s regulatory
lending limit amounted to approximately $33,407,000.
Regulatory Capital Requirements:
Federal regulations require the Bank to maintain minimum amounts of capital. Specifically, the Bank is required to maintain certain minimum dollar
amounts and ratios of Total, Tier I and Common Equity Tier I capital to risk-weighted assets and of Tier I 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 under-capitalized.” 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
permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered
well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. Following the passage of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in response to the COVID-19 pandemic, the
federal banking regulators revised the CBLR framework as follows: (i) beginning in the second quarter of 2020, a qualifying community bank need only have a leverage ratio of at least 8%, subject to the other qualifying requirements, and (ii) if a
qualifying community bank’s leverage ratio falls below 8%, then it will have two calendar quarters to maintain a leverage ratio of 7% or greater. These revisions under the CARES Act are effective April 23, 2020 and will terminate upon the earlier
of the termination of the national emergency related to COVID-19 or December 31, 2020. Following such termination there is a grace period for returning to the 9% CBLR threshold. The CBLR will be set at 8% for the remainder of 2020, 8.5% for 2021,
and 9% thereafter. The grace period is also adjusted to account for the graduating increase. As a result, in 2020 and 2021, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 7% and 7.5%, respectively.
Thereafter, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance
with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply. At December 31, 2021, the Bank was considered “well-capitalized” under the CBLR
framework, with a leverage ratio of 8.94%. At December 31, 2022, the Bank leverage ratio under the CBLR framework was 8.77%, which is less than 9.0% requirement to be considered “well-capitalized” under the CBLR. As such, as of December 31, 2022,
and going forward, the Bank reverted to the prompt corrective action framework and will no longer utilize the CBLR framework. The following table provides the Bank’s computed risk‑based capital ratios as of December 31, 2022, which reflects the Bank
being well capitalized on that date (dollars in thousands):
|
Actual
|
For Capital Adequacy Purposes
|
To Be Well Capitalized Under
Prompt Corrective Action Provisions
|
||||||||||||||||||||||
|
2022
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
Total Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
238,966
|
12.87
|
%
|
$
|
148,567
|
8.00
|
%
|
$
|
185,709
|
10.00
|
%
|
||||||||||||
|
Bank
|
$
|
222,714
|
12.01
|
%
|
$
|
148,348
|
8.00
|
%
|
$
|
185,435
|
10.00
|
%
|
||||||||||||
|
Tier 1 Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
210,250
|
11.32
|
%
|
$
|
111,425
|
6.00
|
%
|
$
|
148,567
|
8.00
|
%
|
||||||||||||
|
Bank
|
$
|
203,998
|
11.00
|
%
|
$
|
111,261
|
6.00
|
%
|
$
|
148,348
|
8.00
|
%
|
||||||||||||
|
Common Equity Tier 1 Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
202,750
|
10.92
|
%
|
$
|
83,569
|
4.50
|
%
|
$
|
120,711
|
6.50
|
%
|
||||||||||||
|
Bank
|
$
|
203,998
|
11.00
|
%
|
$
|
83,446
|
4.50
|
%
|
$
|
120,533
|
6.50
|
%
|
||||||||||||
|
Tier 1 Capital (to Average Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
210,250
|
9.03
|
%
|
$
|
93,161
|
4.00
|
%
|
$
|
116,451
|
5.00
|
%
|
||||||||||||
|
Bank
|
$
|
203,998
|
8.77
|
%
|
$
|
93,075
|
4.00
|
%
|
$
|
116,344
|
5.00
|
%
|
||||||||||||
16. COMMITMENTS, CONTINGENT LIABILITIES, RISKS AND UNCERTAINTIES
The Company 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 and interest rate or liquidity risk in excess of the amount recognized in the
consolidated balance sheet.
Credit Extension Commitments
The Company’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 Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments, whose
contract amounts represent credit risk at December 31, 2022 and 2021, are as follows (in thousands):
|
2022
|
2021
|
|||||||
|
Commitments to extend credit
|
$
|
437,449
|
$
|
275,998
|
||||
|
Standby letters of credit
|
15,972
|
17,083
|
||||||
|
$
|
453,421
|
$
|
293,081
|
|||||
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 Company evaluates each
customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company on extension of credit is based on management’s credit assessment of the counter party.
Standby letters of credit are conditional commitments issued by the Company to guarantee a financial agreement between a customer and a third party.
Performance letters of credit represent conditional commitments issued by the Bank 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 during the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
The Company also offers limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing for
business, personal or household use. The non-contractual amount of financial instruments with off-balance sheet risk at December 31, 2022 was $12,232,000.
The Company reserves the right to discontinue this service without prior notice.
Legal and Regulatory Proceedings
In the ordinary course of business, the Company is subject to legal proceedings, including claims, litigation, investigations and administrative
proceedings, all of which are considered incidental to the normal conduct of business. Litigation may relate to lending, deposit and other customer relationships, vendor and contractual issues, employee matters, intellectual property matters,
personal injuries and torts, regulatory and legal compliance, and other matters. The Company believes it has substantial defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal
proceedings, intends to defend itself vigorously.
The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available.
Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in its consolidated financial statements. These legal reserves may be increased or decreased to reflect
any relevant developments. Where a loss is not probable or the amount of a probable loss is not reasonably estimable, the Company does not accrue legal reserves. Additionally, for those matters where a loss is reasonably possible and the amount of
loss is reasonably estimable, the Company estimates the amount of losses that it could incur beyond the accrued legal reserves. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than
remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.”
While the outcome of legal proceedings and the timing of the ultimate resolution are inherently difficult to predict, based on information currently
available, advice of counsel and available insurance coverage, the Company believes that it has established adequate legal reserves. Further, based upon available information, the Company is of the opinion that these legal proceedings, individually
or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the
matters discussed above could be material to the Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.
17. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its
exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources,
and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the
receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s
known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to
interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of
variable rate amounts from a counterparty in exchange for the Company making fixed interest payments. As of December 31, 2022 and 2021, the Company had six interest rate swaps with a notional of $50.5 million associated with the
Company’s cash outflows associated with various floating-rate amounts.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other
comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in
earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in earnings during the periods ended December 31, 2022 and 2021. Amounts reported in accumulated other
comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the twelve months ending December 31, 2023, the Company estimates that no amount will be reclassified as an increase in interest expense.
Customer Swaps
The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of customers desiring to manage
interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. In order to economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into
derivative contracts with third parties to offset the customer contracts, such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts decrease over
time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to customers. The Company utilizes a loan hedging program to accommodate clients preferring a fixed
rate loan. The loan documents include an addendum with a zero premium collar. The zero premium collar is a cap and floor at the same interest rate, resulting in a fixed rate to the borrower. To hedge this embedded option, the Company enters into a
dealer facing trade exactly mirroring the terms of the loan addendum. At December 31, 2022, the Company had interest rate swaps related to this program with an aggregate notional amount of $71.8 million.
Counterparty Credit Risk
As a result of its derivative contracts, the Company is exposed to credit risk. Specifically, approved counterparties and exposure limits are
defined. On at least an annual basis, the customer derivative contracts and related counterparties are evaluated for credit risk with an adjustment made to the contracts fair value. In accordance with the interest rate agreements with derivative
dealers, the Company may be required to post margin to these counterparties. At December 31, 2022, the Company has required collateral with certain of its derivative counterparties in the amount of $13.9 million and was not holding collateral of any derivative counterparties.
The following table reflects the estimated fair value positions of derivative contracts as of December 31, 2022 and 2021:
Derivatives designated as hedging instruments under ASC 815 (in thousands):
|
Fair Value
December 31,
|
|||||||||||||||
|
Third party interest rate swaps
|
Balance Sheet Location
|
Notional
Amount
|
Interest rate
Paid
|
Interest rate
Received
|
2022
|
2021
|
|||||||||
|
Maturing in
|
other assets/(other liabilities)
|
$
|
15,000
|
Fixed - 0.57%
|
3-Month Libor
|
$
|
1,269
|
$
|
291
|
||||||
|
Maturing in
|
other assets/(other liabilities)
|
10,000
|
Fixed - 0.65%
|
3-Month Libor
|
1,324
|
361
|
|||||||||
|
Maturing in
|
other assets/(other liabilities)
|
7,500
|
Fixed - 3.57%
|
3-Month Libor + 280
|
995
|
239
|
|||||||||
|
Maturing in
|
other assets/(other liabilities)
|
6,000
|
Fixed - 0.61%
|
3-Month Libor
|
822
|
244
|
|||||||||
|
Maturing in
|
other assets/(other liabilities)
|
6,000
|
Fixed - 0.72%
|
3-Month Libor
|
1,065
|
329
|
|||||||||
|
Maturing in
|
other assets/(other liabilities)
|
6,000
|
Fixed - 0.82%
|
3-Month Libor
|
1,398
|
446
|
|||||||||
|
$
|
50,500
|
$
|
6,873
|
$
|
1,910
|
||||||||||
Derivatives not designated as hedging instruments under ASC 815 (in thousands):
|
December 31, 2022
|
December 31, 2021
|
||||||||||||||||
|
Interest Rate Products
|
Balance Sheet Location
|
Notional Amount
|
Fair Value
|
Notional Amount
|
Fair Value
|
||||||||||||
|
Zero Premium Collar
|
other assets/(other liabilities)
|
$
|
71,776
|
$
|
(9,726
|
)
|
$
|
67,375
|
$
|
(1,817
|
)
|
||||||
|
Zero Premium Collar
|
other assets/(other liabilities)
|
$
|
-
|
$
|
-
|
$
|
19,938
|
$
|
284
|
||||||||
|
|
|||||||||||||||||
|
Dealer Offset to Zero Premium Collar
|
other assets/(other liabilities)
|
$
|
71,776
|
$
|
9,726
|
$
|
67,375
|
$
|
1,817
|
||||||||
|
Dealer Offset to Zero Premium Collar
|
other assets/(other liabilities)
|
$
|
-
|
$
|
-
|
$
|
19,938
|
$
|
(284
|
)
|
|||||||
The following table presents the effect of the Company’s cash flow hedge accounting on Accumulated Other Comprehensive Income for the years ended
December 31, 2022 and 2021 (in thousands):
|
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
|
|||||||||||||||||
|
Amount of (Loss) Gain Recognized in OCI on
Derivatives
|
Location of Gain
Reclassified from
Accumulated OCI
into Income |
Amount of (loss) gain reclassified
from Accumulated OCI into income
|
|||||||||||||||
|
Year Ended December 31,
|
Year Ended December 31,
|
||||||||||||||||
|
Derivatives in Hedging relationships
|
2022
|
2021
|
2022
|
2021
|
|||||||||||||
|
Interest rate Products
|
$
|
4,963
|
$
|
1,920
|
Interest Expense
|
$
|
145
|
$
|
(147
|
)
|
|||||||
18. LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a
period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that
modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Lessee Accounting
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches with terms extending through
2037. All of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s Consolidated Balance Sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized
on the consolidated statements of condition as right-of-use (“ROU”) assets and corresponding lease liabilities.
The following table represents the Consolidated Balance Sheet classification of the
Company’s ROU assets and lease liabilities (in thousands). The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), on the Consolidated Balance Sheet.
|
Balance at December 31,
|
|||||||||
|
Lease Type
|
2022
|
2021
|
Affected line item on the Consolidated Balance Sheet
|
||||||
|
Right of Use Assets
|
|||||||||
|
Operating
|
$
|
4,987
|
$
|
3,264
|
|
||||
|
Lease Liabilities:
|
|||||||||
|
Operating
|
$
|
5,016
|
$
|
3,266
|
|
||||
The calculated amount of the ROU assets and lease liabilities in the table above are
impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the
Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate
implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases
existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The following table displays the weighted average remaining lease term and the weighted average discount rate for the Company’s operating
leases outstanding as of December 31, 2022:
|
Operating
|
||||
|
Weighted average term (years)
|
8.92
|
|||
|
Weighted average discount rate
|
3.06
|
%
|
||
The following table represents lease costs and other lease information for the years ended December 31, 2022, 2021, and 2020, respectively (in
thousands). As the Company elected not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and
utilities.
|
December 31,
|
||||||||||||
|
Lease Cost
|
2022
|
2021
|
2020
|
|||||||||
|
Operating lease cost
|
$
|
728
|
$
|
676
|
$
|
571
|
||||||
|
Variable lease cost
|
64
|
63
|
50
|
|||||||||
|
Total lease cost
|
$
|
792
|
$
|
739
|
$
|
621
|
||||||
Future minimum payments for operating leases with initial or remaining terms of one
year or more as of December 31, 2022 along with a reconciliation to the discounted amount recorded on the December 31, 2022 Consolidated Balance Sheet (in thousands):
|
Undiscounted cash flows due within
|
Operating
|
|||
|
2023
|
847
|
|||
|
2024
|
760
|
|||
|
2025
|
706
|
|||
|
2026
|
642
|
|||
|
2027
|
635
|
|||
|
2028 and
thereafter
|
2,354
|
|||
|
Total undiscounted cash flows
|
5,944
|
|||
|
Impact of present value discount
|
(928
|
)
|
||
|
Amount reported on
|
$
|
5,016
|
||
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and
liabilities at fair value. The three broad levels defined by this hierarchy are as follows:
|
Level I:
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
Level II:
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these
assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
|
|
Level III:
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using
management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy, is set forth below.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon
internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect
counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation
that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event
or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.
Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The fair values of equity securities and securities available for sale are determined by quoted prices in active markets, when available, and
classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices
for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities and classified as Level II. The fair values consider observable data that may include dealer quotes, market spreads, cash flows,
the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
The following tables present the assets reported on the consolidated balance sheet at their fair value on a recurring basis as of December 31, 2022 and 2021 (in thousands) 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.
|
2022
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Fair value measurements on a recurring basis:
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Equity securities
|
$
|
2,208
|
$
|
-
|
$
|
-
|
$
|
2,208
|
||||||||
|
Available for sale securities:
|
||||||||||||||||
|
U.S. Agency securities
|
-
|
70,677
|
-
|
70,677
|
||||||||||||
|
U.S. Treasuries securities
|
148,570
|
-
|
-
|
148,570
|
||||||||||||
|
Obligations of state and political subdivisions
|
-
|
110,300
|
-
|
110,300
|
||||||||||||
|
Corporate obligations
|
-
|
9,383
|
-
|
9,383
|
||||||||||||
|
Mortgage-backed securities in government sponsored entities
|
-
|
100,576
|
-
|
100,576
|
||||||||||||
|
Other Assets
|
||||||||||||||||
|
|
-
|
16,599
|
-
|
16,599
|
||||||||||||
|
Liabilities
|
||||||||||||||||
|
|
-
|
(9,726
|
)
|
-
|
(9,726
|
)
|
||||||||||
|
2021
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Fair value measurements on a recurring basis:
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Equity securities
|
$
|
2,270
|
$
|
-
|
$
|
-
|
$
|
2,270
|
||||||||
|
Available for sale securities:
|
||||||||||||||||
|
U.S. Agency securities
|
-
|
73,945
|
-
|
73,945
|
||||||||||||
|
U.S. Treasuries securities
|
115,347
|
-
|
-
|
115,347
|
||||||||||||
|
Obligations of state and political subdivisions
|
-
|
112,021
|
-
|
112,021
|
||||||||||||
|
Corporate obligations
|
-
|
10,333
|
-
|
10,333
|
||||||||||||
|
Mortgage-backed securities in government sponsored entities
|
-
|
100,756
|
-
|
100,756
|
||||||||||||
|
Other Assets
|
||||||||||||||||
|
|
- | 4,011 | - | 4,011 | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
|
- | (2,101 | ) | - | (2,101 | ) | ||||||||||
Financial Instruments, Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial
liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end
of the period. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in
the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during 2022 and 2021
include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition,
were remeasured at fair value through a write-down included in other non-interest expense.
Assets measured at fair value on a nonrecurring basis as of December 31, 2022 and 2021 (in thousands) are included in the table below:
|
2022
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Impaired Loans
|
$
|
-
|
$
|
-
|
$
|
496
|
$
|
496
|
||||||||
|
Other real estate owned
|
-
|
-
|
297
|
297
|
||||||||||||
|
2021
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Impaired Loans
|
$
|
-
|
$
|
-
|
$
|
459
|
$
|
459
|
||||||||
|
Other real estate owned
|
-
|
-
|
552
|
552
|
||||||||||||
|
•
|
Impaired Loans - The Company has measured impairment on impaired loans generally based on the fair value of the loan’s
collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or
observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of
the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less
estimated selling costs) and the loan is included in the table above as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not
currently being carried at its fair value. The fair values above excluded estimated selling costs of $50,000 and $47,000 at December 31, 2022 and 2021, respectively.
|
|
•
|
Other Real Estate Owned – OREO is carried at the lower of cost or fair value, less estimated costs to sell, which is measured at
the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in
the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the
property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level II measurement. In some
cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in
the above table as a Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are
included in net expenses from OREO.
|
The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing level
III techniques (dollars in thousands).
|
2022
|
Fair Value
|
Valuation Technique(s)
|
Unobservable input
|
Range
|
Weighted average
|
|
Impaired Loans
|
496
|
Appraised Collateral Values
|
Discount for time since appraisal
|
0-100%
|
25.16%
|
|
Selling costs
|
8%-10%
|
8.41%
|
|||
|
Holding period
|
6 - 12 months
|
11.51 months
|
|||
|
Other real estate owned
|
297
|
Appraised Collateral Values
|
Discount for time since appraisal
|
20-84%
|
39.84%
|
|
2021
|
Fair Value
|
Valuation Technique(s)
|
Unobservable input
|
Range
|
Weighted average
|
|
Impaired Loans
|
459
|
Appraised Collateral Values
|
Discount for time since appraisal
|
0-100%
|
23.38%
|
|
Selling costs
|
8%-10%
|
8.27%
|
|||
|
Holding period
|
6 - 12 months
|
11.52 months
|
|||
|
Other real estate owned
|
552
|
Appraised Collateral Values
|
Discount for time since appraisal
|
20-44%
|
41.76%
|
Financial Instruments Not Required to be Measured or Reported at Fair Value
The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a
recurring basis are as follows (in thousands):
|
December 31, 2022
|
Carrying
Amount
|
Fair Value
|
Level I
|
Level II
|
Level III
|
|||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Interest bearing time deposits with other banks
|
$
|
6,055
|
$
|
6,055
|
$
|
-
|
$
|
-
|
$
|
6,055
|
||||||||||
|
Loans held for sale
|
725
|
725
|
-
|
-
|
725
|
|||||||||||||||
|
Net loans
|
1,706,447
|
1,662,514
|
-
|
-
|
1,662,514
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
1,844,208
|
1,832,037
|
1,566,517
|
-
|
265,520
|
|||||||||||||||
|
Borrowed funds
|
257,278
|
246,288
|
-
|
-
|
246,288
|
|||||||||||||||
|
December 31, 2021
|
Carrying
Amount
|
Fair Value
|
Level I
|
Level II
|
Level III
|
|||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Interest bearing time deposits with other banks
|
$
|
11,026
|
$
|
11,026
|
$
|
-
|
$
|
-
|
$
|
11,026
|
||||||||||
|
Loans held for sale
|
4,554
|
4,554
|
-
|
-
|
4,554
|
|||||||||||||||
|
Net loans
|
1,424,229
|
1,426,698
|
-
|
-
|
1,426,698
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
1,836,151
|
1,836,179
|
1,506,535
|
-
|
329,644
|
|||||||||||||||
|
Borrowed funds
|
73,977
|
72,346
|
-
|
-
|
72,346
|
|||||||||||||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial
instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates 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 estimates.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an
estimation methodology suitable for each category of financial instruments. The carrying amounts for cash and cash equivalents, bank owned life insurance, regulatory stock, accrued interest receivable and payable approximate fair value and are
considered Level I measurements.
20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The following is condensed financial information for Citizens Financial Services, Inc.:
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||
|
CONDENSED BALANCE SHEET
|
||||||||
|
December 31,
|
||||||||
|
(in thousands)
|
2022
|
2021
|
||||||
|
Assets:
|
||||||||
|
Cash
|
$
|
13,490
|
$
|
15,046
|
||||
|
Investments
|
2,116
|
2,150
|
||||||
|
Investment in subsidiary:
|
|
|
||||||
|
First Citizens Community Bank
|
200,610 | 212,057 | ||||||
|
Other assets
|
2,291
|
1,297
|
||||||
|
Total assets
|
$
|
218,507
|
$
|
230,550
|
||||
|
Liabilities:
|
||||||||
|
Other liabilities
|
$
|
968
|
$
|
679
|
||||
|
Borrowed funds
|
17,392
|
17,379
|
||||||
|
Total liabilities
|
18,360
|
18,058
|
||||||
|
Stockholders’ equity
|
200,147
|
212,492
|
||||||
|
Total liabilities and stockholders’ equity
|
$
|
218,507
|
$
|
230,550
|
||||
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||||||
|
CONDENSED STATEMENT OF INCOME
|
||||||||||||
|
Year Ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Dividends from:
|
||||||||||||
|
Bank subsidiary
|
$
|
8,331
|
$
|
8,994
|
$
|
16,171
|
||||||
|
Equity securities
|
114
|
104
|
45
|
|||||||||
|
Interest income
|
6 | - | - | |||||||||
|
Total income
|
8,451
|
9,098
|
16,216
|
|||||||||
|
Realized securities gains (losses)
|
(219
|
)
|
284
|
(23
|
)
|
|||||||
|
Expenses
|
1,307
|
1,008
|
775
|
|||||||||
|
Income before equity in undistributed earnings of subsidiary
|
6,925
|
8,374
|
15,418
|
|||||||||
|
Equity in undistributed earnings - First Citizens Community Bank
|
22,135
|
20,744
|
9,685
|
|||||||||
|
Net income
|
$
|
29,060
|
$
|
29,118
|
$
|
25,103
|
||||||
|
Comprehensive (loss) income
|
$
|
(3,926
|
)
|
$
|
26,376
|
$
|
28,319
|
|||||
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||||||
|
STATEMENT OF CASH FLOWS
|
||||||||||||
|
Year Ended December 31,
|
||||||||||||
|
(in thousands)
|
2022
|
2021
|
2020
|
|||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$
|
29,060
|
$
|
29,118
|
$
|
25,103
|
||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Equity in undistributed earnings of subsidiaries
|
(22,135
|
)
|
(20,744
|
)
|
(9,685
|
)
|
||||||
|
Investment securities losses (gains), net
|
219
|
(284
|
)
|
23
|
||||||||
|
Other, net
|
240
|
543
|
14
|
|||||||||
|
Net cash provided by operating activities
|
7,384
|
8,633
|
15,455
|
|||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchases of equity securities
|
(218
|
)
|
-
|
(1,339
|
)
|
|||||||
|
Proceeds from the sale of equity securities
|
33
|
-
|
168
|
|||||||||
|
Acquisition of Midcoast
|
-
|
- | (7,614 | ) | ||||||||
|
Net cash used in investing activities
|
(185
|
)
|
-
|
(8,785
|
)
|
|||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Cash dividends paid
|
(7,588
|
)
|
(7,383
|
)
|
(6,539
|
)
|
||||||
|
Issuance of subordinated debt
|
- | 9,869 | - | |||||||||
|
Purchase of treasury stock
|
(1,279
|
)
|
(1,374
|
)
|
(2,122
|
)
|
||||||
|
Sale of treasury stock to employee stock purchase plan
|
112
|
-
|
126
|
|||||||||
|
Net cash (used in) provided by financing activities
|
(8,755
|
)
|
1,112
|
(8,535
|
)
|
|||||||
|
Net (decrease) increase in cash
|
(1,556
|
)
|
9,745
|
(1,865
|
)
|
|||||||
|
Cash at beginning of year
|
15,046
|
5,301
|
7,166
|
|||||||||
|
Cash at end of year
|
$
|
13,490
|
$
|
15,046
|
$
|
5,301
|
||||||
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company 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
Company’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. 5), 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 by management or employees in the
normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. Management’s assessment did not identify any material weaknesses in the
Company’s internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework.
Because there were no material weaknesses discovered, management believes that, as of December 31, 2022, the Company’s internal control over financial reporting was effective.
/s/ Randall E. Black
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
Date: March 9, 2023
/s/ Stephen J. Guillaume
By: Stephen J. Guillaume
By: Stephen J. Guillaume
Chief Financial Officer
(Principal Financial & Accounting Officer)
(Principal Financial & Accounting Officer)
Date: March 9, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Citizens Financial Services, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Citizens Financial Services, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021; the
related consolidated statements of income, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022; 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, 2022 and 2021, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
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.
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 Loan Losses (ALL)
Description of the Matter
The Company’s loan portfolio totaled $1.7 billion as of December 31, 2022, and the associated ALL was $18.5 million. As discussed in Notes 1 and 5 to the consolidated
financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and
testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss
experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of
credit risk for the commercial loan portfolios.
We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s
judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.
How We Addressed the Matter in Our Audit
We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested
the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of
the data utilized to support management’s assessment.
To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL.
Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s
estimate. For example, we compared the inputs and data to the Company’s historical loan performance data, third-party macroeconomic data, and peer bank data and considered the existence of new or contrary information. We also compared the ALL to a
range of historical losses to evaluate the ALL, including the reasonableness of qualitative adjustments. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s
loan portfolio, and asset quality trends.
We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings
applied to the commercial loan portfolio were reasonable.
We have served as the Company’s auditor since 1994.
/s/S.R. Snodgrass, P.C.
Cranberry Township, Pennsylvania
March 9, 2023
None.
|
(a)
|
Disclosure Controls and Procedures
|
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer
concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or
submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to
the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
|
(b)
|
Internal Control Over Financial Reporting
|
Management’s annual report on internal control over financial reporting is incorporated herein by reference to Item 8 - the Company’s audited Consolidated Financial Statements in this Annual
Report on Form 10-K
|
(c)
|
Changes to Internal Control Over Financial Reporting
|
There were no changes in the Company’s internal control over financial reporting during the three months ended December 31, 2022 that have materially affected, or are reasonable likely to
materially affect, the Company’s internal control over financial reporting.
None.
Not applicable
PART III
Directors
For information relating to the directors of the Company, the section captioned “Proposal 1. Election of Directors” in the Company’s Proxy Statement for
the 2023 Annual Meeting of Stockholders (the “2023 Proxy Statement”) is incorporated by reference.
Executive Officers
For information relating to officers of the Company, the section captioned “Proposal 1. Election of Directors” in the 2023 Proxy Statement is
incorporated by reference.
Compliance with Section 16(a) of the Exchange Act
For information regarding compliance with Section 16(a) of the Exchange Act, the section captioned “Other Information Relating to Directors and Executive
Officers - Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2023 Proxy Statement is incorporated by reference.
Disclosure of Code of Ethics
The Company has adopted a Code of Ethics that applies to directors, officers and employees of the Company and the Bank. A copy of the Code of Ethics is posted on the Company’s website at www.firstcitizensbank.com.
The Company intends to satisfy the disclosure requirement of Form 8-K regarding an amendment to, or a waiver from, a provision of its Code of Ethics by posting such information on its website.
Corporate Governance
For information regarding the audit committee and its composition and the audit committee financial expert, the section captioned “Corporate Governance –
Committees of the Board of Directors” in the Company’s 2023 Proxy Statement is incorporated by reference.
Executive Compensation
For information regarding executive and director compensation, the sections captioned “Director Compensation”, “Executive Compensation”, “Compensation
Discussion and Analysis” and “Compensation Committee Report” in the Company’s 2023 Proxy Statement are incorporated by reference.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
|
(a)
|
Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership”
in the Company’s 2023 Proxy Statement.
|
|
(b)
|
Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the
Company’s 2023 Proxy Statement.
|
|
(c)
|
Changes in Control
Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of
the registrant.
|
|
(d)
|
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2021 about Company common stock that may be issued under the Company’s 2016 Restricted Stock Plan. The plan was approved by the Company’s
stockholders.
|
|
Plan Category
|
Number of securities to be issued upon the exercise of outstanding options, warrants and rights
|
Weighted-average exercise price of outstanding options, warrants and rights
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
|
|||||||||
|
Equity compensation plans approved by security holders
|
n/a
|
n/a
|
116,058
|
|||||||||
|
Equity compensation plans not approved by security holders
|
n/a
|
n/a
|
n/a
|
|||||||||
|
Total
|
n/a
|
n/a
|
119,391
|
|||||||||
Certain Relationships and Related Transactions
For information regarding certain relationships and related transactions, the section captioned “Other Information Relating to Directors and Executive Officers
- Transactions with Related Persons” in the Company’s 2023 Proxy Statement is incorporated by reference.
Director Independence
For information regarding director independence, the section captioned “Corporate Governance – Director Independence” in the Company’s 2023 Proxy
Statement is incorporated by reference.
For information regarding the principal accountant fees and expenses the section captioned “Audit – Related Matters” in the Company’s 2023 Proxy Statement
is incorporated by reference.
PART IV
| (a) |
The following documents are filed as a part of this report:
|
|
1.
|
The following financial statements are incorporated by reference in Item 8:
|
Report of Independent Registered Public Accounting Firm (PCAOB ID )
Consolidated Balance Sheet as of December 31, 2022 and 2021
Consolidated Statement of Income for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statement of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
|
2.
|
All financial statement schedules are omitted because the required information is either not applicable, not required or isshown in the respective financial statement or in the notes thereto, which are
incorporated by reference at subsection (a)(1) of this item.
|
|
3.
|
The following Exhibits are filed herewith, or incorporated by reference as a part of this report.
|
|
Restated Articles of Incorporation of Citizens Financial Services, Inc.(1)
|
|
|
Articles of Amendment of Restated Articles of Incorporation of Citizens Financial Services, Inc. (2)
|
|
|
Bylaws of Citizens Financial Services, Inc.(3)
|
|
|
Amendment No. 1 to Amended and restated Bylaws of Citizens Financial Services, Inc. (4)
|
|
|
Instrument defining the rights of security holders
|
|
|
*Amended and Restated Executive Employment Agreement between Citizens Financial Services, Inc., First Citizens Community Bank and Randall E. Black(5)
|
|
|
*Citizens Financial Services, Inc. Directors’ Deferred Compensation Plan(6)
|
|
|
*Citizens Financial Services, Inc. Directors’ Life Insurance Program(7)
|
|
|
*Supplemental Executive Retirement Plan(8)
|
|
|
*Second Amendment to First Citizens Community Bank Supplemental Executive Retirement Plan(9)
|
|
|
*Change in Control Agreement, between First Citizens Community Bank, Citizens Financial Services, Inc. (as guarantor) and Mickey L. Jones (10)
|
|
|
*First Citizens Community Bank Annual Incentive Plan (11)
|
|
|
*Amended and Restated First Citizens Community Bank Annual Incentive Plan
|
|
|
*First Citizens Community Bank Endorsement Split-Dollar Life Insurance Plan (12)
|
|
|
Citizens Financial Services, Inc. 2016 Equity Incentive Plan (13)
|
|
|
*Change in Control Agreement, between First Citizens Community Bank, Citizens Financial Services, Inc. (as guarantor) and Jeffrey L. Wilson (14)
|
|
*Change in Control Agreement, between First Citizens Community Bank, Citizens Financial Services, Inc. (as guarantor) and David Z. Richards, Jr. (15)
|
|
|
*Change in Control Agreement, between First Citizens Community Bank, Citizens Financial Services, Inc. (as guarantor) and Jeffrey B. Carr (16)
|
|
|
*First Citizens Community Bank Executive Deferred Compensation Plan (17)
|
|
|
*Amended and Restated First Citizens Community Bank Executive Deferred Compensation Plan (18)
|
|
|
*First Citizens Community Bank Long Term Incentive Plan (19)
|
|
|
List of Subsidiaries
|
|
|
Consent of S.R. Snodgrass, P.C., Independent Registered Public Accountants
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
|
|
Section 1350 Certification of Chief Executive Officer
|
|
|
Section 1350 Certification of Chief Financial Officer
|
|
|
101
|
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) The Consolidated Balance Sheet,
(ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) related notes.
|
|
104
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
|
*Management contract or compensatory plan, contract or arrangement
(1) Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, as
filed with the Commission on August 9, 2018.
(2) Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on April 26,
2021.
(3) Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on December
17, 2020.
(4) Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on November
23, 2022
(5) Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012,
as filed with the Commission on August 9, 2012.
(6) Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019,
as filed with the Commission on August 8, 2019.
(7) Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2004, as filed with the Commission on March 15, 2005.
(8) Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2012, as filed with the Commission on March 7, 2013.
(9) Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2021, as filed with the Commission on November 4, 2021.
(10) Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012,
as filed with the Commission on August 9, 2012.
(11) Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013,
as filed with the Commission on August 8, 2013.
(12) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on January
7, 2015.
(13) Incorporated by reference to Exhibit A to the Company’s definitive proxy statements for the 2016 Annual Meeting of
Shareholders, as filed with the Commission on March 10, 2016.
(14) Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K, as filed with the Commission on December 22, 2016.
(15) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, as filed with the Commission on December 11, 2017.
(16) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, as filed with the Commission on December 21, 2017.
(17) Incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2018, as filed with the Commission on March 7, 2019.
(18) Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2021, as filed with the Commission on March 10, 2022
(19) Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2019, as filed with the Commission on March 12, 2020.
Not Applicable.
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.
Citizens Financial Services, Inc.
(Registrant)
/s/ Randall E. Black
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
Date: March 9, 2023
Pursuant to the requirements of the Securities 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.
|
Signature and Capacity
|
Date
|
|
/s/ Randall E. Black
|
March 9, 2023
|
|
Randall E. Black, Chief Executive Officer, President and Director
|
|
|
(Principal Executive Officer)
|
|
|
/s/ Stephen J. Guillaume
|
March 9, 2023
|
|
Stephen J. Guillaume, Chief Financial Officer
|
|
|
(Principal Financial & Accounting Officer)
|
|
|
/s/ Robert W. Chappell
|
March 9, 2023
|
|
Robert W. Chappell, Director
|
|
|
/s/ R. Joseph Landy
|
March 9, 2023
|
|
R. Joseph Landy, Director
|
|
|
/s/ Roger C. Graham, Jr.
|
March 9, 2023
|
|
Roger C. Graham, Director
|
|
|
/s/ E. Gene Kosa
|
March 9, 2023
|
|
E. Gene Kosa, Director
|
|
|
/s/ Rinaldo A. DePaola
|
March 9, 2023
|
|
Rinaldo A. DePaola, Director
|
|
|
/s/ Thomas E. Freeman
|
March 9, 2023
|
|
Thomas E. Freeman, Director
|
|
|
/s/ Alletta M. Schadler
|
March 9, 2023
|
|
Alletta M. Schadler, Director
|
|
|
/s/ Christopher W. Kunes
|
March 9, 2023
|
|
Christopher W. Kunes
|
|
|
/s/ David Z, Richards, Jr.
|
March 9, 2023
|
|
David Z. Richards, Jr., Director
|
|
|
/s/ Mickey L. Jones.
|
March 9, 2023
|
|
Mickey L. Jones, Director
|
|
|
/s/ Janie M Hifiger
|
March 9, 2023
|
|
Janie M Hilfiger, Director
|
111