NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. and its wholly owned subsidiaries, Jersey Shore State Bank (“JSSB”), Luzerne Bank ("Luzerne" and collectively with JSSB , the "Banks"), Woods Real Estate Development Co., Inc., Woods Investment Company, Inc., United Insurance Solutions, LLC, and The M Group Inc. D/B/A The Comprehensive Financial Group (“The M Group”), a wholly owned subsidiary of JSSB (collectively, the “Corporation”). All significant intercompany balances and transactions have been eliminated.
Nature of Business
The Banks engage in a full-service commercial banking business, making available to the community a wide range of financial services including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction financing, farm loans, community development loans, loans to non-profit entities and local government, and various types of demand and time deposits including, but not limited to, checking accounts, savings accounts, money market deposit accounts, certificates of deposit, and IRAs. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law.
The financial services are provided by the Banks to individuals, partnerships, non-profit organizations, and corporations through their twenty-five offices located in Clinton, Lycoming, Centre, Montour, Union, Blair, and Luzerne Counties, Pennsylvania.
Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the Banks.
Woods Investment Company, Inc., a Delaware holding company, is engaged in investing activities.
The M Group engages in securities brokerage and financial planning services, which include the sale of life insurance products, annuities, and estate planning services.
United Insurance Solutions, LLC offers property and casualty and auto insurance products within the Corporation's market footprint. The Corporation became the sole owner of United Insurance Solutions, LLC when it purchased the outstanding 20% minority interest on October 1, 2021.
Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial service operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of net deferred tax assets, impairment of goodwill, other than temporary impairment of debt securities, fair value of financial instruments, and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks and federal funds sold. Interest-earning deposits mature within 90 days and are carried at cost. Net cash flows are reported for loan, deposit, and short-term borrowing transactions.
Restrictions on Cash and Cash Equivalents
Based on deposit levels, the Banks must maintain cash and other reserves with the Federal Reserve Bank of Philadelphia ("FRB").
Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity, securities available for sale, or securities held for trading. Debt securities acquired with the intent and ability to hold to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available for sale securities are reported as a separate component of shareholders’ equity, net of tax, until realized. Equity securities are carried at fair value. Unrealized holding gains and losses for equity securities are recognized as a separate component within the income statement. Realized security gains and losses are computed using the specific identification method for debt securities and the average cost method for marketable equity securities. Interest and dividends on investment securities are recognized as income when earned.
Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its fair value, whether it is more likely than not that the Corporation would be required to sell the security before its anticipated recovery in fair value, and a review of the Corporation’s capital adequacy, interest rate risk position, and liquidity. The assessment of a security’s ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, and management’s intent and ability requires considerable judgment. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statement of Income.
Fair values of investment securities are based on observed market prices. Certain investment securities do not have observed bid prices and their fair value is based on instruments with similar risk elements. Since regulatory stock is redeemable at par, the Corporation carries it at cost.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are stated at the principal amount outstanding, net of deferred fees and discounts, unamortized loan fees and costs, and the allowance for loan losses. Interest on loans is recognized as income when earned on the accrual method. The Corporation’s general policy has been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectability of additional interest. Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in payment and, in management’s judgment, the borrower has the ability and intent to make future principal payments. Otherwise, payments are applied to the unpaid principal balance of the loan. Loans are restored to accrual status if certain conditions are met, including but not limited to, the repayment of all unpaid interest and scheduled principal due, ongoing performance consistent with the contractual agreement, and the future expectation of continued, timely payments.
Loan origination and commitment fees as well as certain direct loan origination costs are being deferred and amortized as an adjustment to the related loan’s yield over the contractual lives of the related loans.
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio as of the Consolidated Balance Sheet date. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed semi-annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, historical loan loss experience, and general economic conditions. In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at December 31, 2022, future adjustments could be necessary if circumstances or economic
conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, rising unemployment, or negative performance trends in financial information from borrowers could be indicators of subsequent increased levels of nonperforming assets and possible charge-offs, which would normally require increased loan loss provisions. An integral part of the periodic regulatory examination process is the review of the adequacy of the Banks' loan loss allowance. The regulatory agencies could require the Banks, based on their evaluation of information available at the time of their examination, to provide additional loan loss provisions to further supplement the allowance.
Impaired loans are commercial and commercial real estate loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks individually evaluate such loans for impairment and do not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. The Banks may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial 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 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 collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
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 are 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 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.
Loan Charge-off Policies
Loans are generally fully or partially charged down to the fair value of collateral securing the asset when:
• management judges the asset to be uncollectible;
•repayment is deemed to be protracted beyond reasonable time frames;
•the asset has been classified as a loss by either the internal loan review process or external examiners;
•the borrower has filed bankruptcy and the loss becomes evident due to a lack of assets; or
•the loan is 180 days past due unless both well secured and in the process of collection.
Troubled 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 to 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. These loans are excluded from pooled loss forecasts and a separate reserve is provided under the accounting guidance for loan impairment. Consumer loans whose terms have been modified in a TDR are also individually analyzed for estimated impairment.
Loans Held for Sale
In general, fixed rate residential mortgage loans originated by the Banks are held for sale and are carried at cost due to their short holding period, which can range from less than two weeks to a maximum of thirty days. Sold loans are not serviced by the Banks. Proceeds from the sale of loans in excess of the carrying value are accounted for as a gain. Total gains on the sale of loans are shown as a component of non-interest income within the Consolidated Statement of Income.
Foreclosed Assets
Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Net operating expenses and gains and losses realized from disposition are included in non-interest expense and income, respectively, within the Consolidated Statement of Income.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets, which range from five to ten years for furniture, fixtures, and equipment and fifteen to forty years for buildings and improvements. Costs incurred for routine maintenance and repairs are charged to operations as incurred. Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Corporation has purchased life insurance policies on certain officers and directors. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as a component of non-interest income within the Consolidated Statement of Income.
Goodwill
The Corporation performs an annual impairment analysis of goodwill for its purchased subsidiaries, Luzerne Bank and The M Group. Based on the fair value of these reporting units, estimated using the expected present value of future cash flows, an impairment of goodwill was recognized in 2022 of $653,000 related to The M Group. No impairment of goodwill was recognized in 2021 or 2020.
Intangible Assets
At December 31, 2022, the Corporation had intangible assets of $15,000 as a result of the acquisition of Luzerne National Bank Corporation, which is net of accumulated amortization of $1,999,000. These intangible assets will continue to be amortized using the sum-of-the-years digits method of amortization over ten years. The Corporation also had intangible assets of $312,000, which is net of accumulated amortization of $708,000, as a result of the purchase of two books of business related to investment product sales. The book of business intangible is being amortized using the straight-line method over a period of ten years.
Investments in Limited Partnerships
The Corporation was a limited partner in two partnerships at December 31, 2022 that provides low income elderly housing in the Corporation’s geographic market area. The carrying value of the Corporation’s investment in the limited partnerships was $8,656,000 at December 31, 2022 and $4,607,000 at December 31, 2021. The investments will be amortized over the ten-year tax credit receipt period. During 2021, one of the partnerships reached the level of occupancy needed to begin the ten year tax credit recognition period with $519,000 and $407,000 in amortization recognized in 2022 and 2021. The Corporation recognized a liability during 2022 in the amount of $3,873,000 for future equity contributions to be made to one of the partnerships.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Corporation enters into off-balance sheet financial instruments. Those instruments consist of commitments to extend credit and standby letters of credit. When those instruments are funded or become payable, the Corporation reports the amounts in its financial statements.
Marketing Cost
Marketing costs are generally expensed as incurred.
Income Taxes
The Corporation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Corporation analyzed its deferred tax asset position and determined that there was not a need for a valuation allowance due to the Corporation’s ability to generate future ordinary and capital taxable income.
The Corporation when applicable recognizes interest and penalties on income taxes as a component of income tax provision.
Earnings Per Share
The Corporation provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported in the numerator and weighted average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options are adjusted in the denominator.
Employee Benefits
Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the eligible employees of JSSB. The plan is funded on a current basis to the extent that it is deductible under existing federal tax regulations. Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering eligible employees. Contributions matching those made by eligible employees are funded throughout the year. In addition, an elective contribution may be made annually at the discretion of the board of directors.
The M Group Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds. The revenues generated from life insurance sales are commission only, as The M Group does not underwrite the policies. Life insurance sales include permanent and term policies with the majority of the policies written being permanent. Term life insurance policies are written for 10, 15, 20, and 30 year terms with the majority of the policies being written for 20 years. None of these products are offered as an integral part of lending activities.
Commissions from the sale of annuities are recognized at the time notice is received from the third party broker/dealer or an insurance company that the transaction has been accepted and approved, which is also the time when commission income is received.
Life insurance commissions are recognized at varying points based on the payment option chosen by the customer. Commissions from monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly and semi-annual premium payments are recognized quarterly and semi-annually when the earnings process is complete. For example, semi-annual payments on the first of January and July would result in commission income recognition on the first of January and July, while payments on the first of January, April, July, and October would result in commission income recognition on those dates. The potential for chargebacks only exists for those policies on a monthly payment plan since income is recognized at the beginning of the annual coverage period versus at the time of each monthly payment. No liability is maintained for chargebacks as these are removed from income at the time of the occurrence.
Accumulated Other Comprehensive Income (Loss)
The Corporation is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented. Accumulated other comprehensive income (loss) is comprised of unrealized holding gains (losses) on the available for sale securities portfolio and the unrecognized components of net periodic benefit costs of the defined benefit pension plan.
Segment Reporting
The Corporation has determined that its only reportable segment is Community Banking.
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect net income or shareholders’ equity.
Recent Accounting Pronouncements Not Yet Adopted
In 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 has completed the calculation and is in the process of finalizing the review over the January 1, 2023 assumptions and outputs of the model as well as the final qualitative factor adjustments, which will determine the total amount of the allowance for credit losses and the reserves for unfunded commitments. These estimates are subject to refinements based on our final review as well as prevailing economic conditions and forecasts as of the adoption date. While we do expect an adjustment related to the allowance for credit losses on our outstanding loans as well as our off-balance sheet commitments, we do not expect the impact of adoption to have a significant impact on the Company’s regulatory capital ratios.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional
expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one- time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
NOTE 2 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive (loss) income by component shown, net of tax and parenthesis indicating debits to net income, as of December 31, 2022, 2021, and 2020 were as follows:
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| | Twelve Months Ended December 31, 2022 | | Twelve Months Ended December 31, 2021 | | Twelve Months Ended December 31, 2020 |
(In Thousands) | | Net Unrealized (Loss) Gain on Available for Sale Securities* | | Defined Benefit Plan* | | Total* | | Net Unrealized Gain (Loss) on Available for Sale Securities* | | Defined Benefit Plan* | | Total* | | Net Unrealized Gain (Loss) on Available for Sale Securities* | | Defined Benefit Plan* | | Total* |
Beginning balance | | $ | 2,373 | | | $ | (3,485) | | | $ | (1,112) | | | $ | 4,714 | | | $ | (5,596) | | | $ | (882) | | | $ | 2,455 | | | $ | (5,232) | | | $ | (2,777) | |
Other comprehensive (loss) income before reclassifications | | (12,365) | | | (709) | | | (13,074) | | | (1,789) | | | 1,965 | | | 176 | | | 3,517 | | | (510) | | | 3,007 | |
Amounts reclassified from accumulated other comprehensive income (loss) | | 173 | | | 55 | | | 228 | | | (552) | | | 146 | | | (406) | | | (1,258) | | | 146 | | | (1,112) | |
Net current-period other comprehensive (loss) income | | (12,192) | | | (654) | | | (12,846) | | | (2,341) | | | 2,111 | | | (230) | | | 2,259 | | | (364) | | | 1,895 | |
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Ending balance | | $ | (9,819) | | | $ | (4,139) | | | $ | (13,958) | | | $ | 2,373 | | | $ | (3,485) | | | $ | (1,112) | | | $ | 4,714 | | | $ | (5,596) | | | $ | (882) | |
*Amounts net of 21% tax rate
The adoption of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities requires equity securities to run through the income statement and therefore the reclassification of prior accumulated losses are reflected above.
The reclassifications out of accumulated other comprehensive income shown, net of tax and parenthesis indicating debits to net income, as of December 31, 2022, 2021, and 2020 were as follows:
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(In Thousands) | | Amount Reclassified from Accumulated Other Comprehensive Income | | |
Details about Accumulated Other Comprehensive Income Components | | Twelve Months Ended | | Affected Line Item in the Consolidated Statement of Income |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 | |
Net realized (loss) gain on available for sale securities | | $ | (219) | | | $ | 699 | | | $ | 1,592 | | | Net debt securities (losses) gain, net available for sale |
Income tax effect | | 46 | | | (147) | | | (334) | | | Income tax provision |
| | $ | (173) | | | $ | 552 | | | $ | 1,258 | | | |
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Net unrecognized pension expense | | $ | (69) | | | $ | (186) | | | $ | (185) | | | Other non-interest expense |
Income tax effect | | 14 | | | 40 | | | 39 | | | Income tax provision |
| | $ | (55) | | | $ | (146) | | | $ | (146) | | | |
NOTE 3 - PER SHARE DATA
There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share; therefore, net income as presented on the consolidated statement of income will be used as the numerator. The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.
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| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Weighted average common shares issued | | 7,559,306 | | | 7,542,043 | | | 7,524,767 | |
Average treasury stock shares | | (499,869) | | | (480,225) | | | (480,225) | |
Weighted average common shares outstanding - basic | | 7,059,437 | | | 7,061,818 | | | 7,044,542 | |
Dilutive effect of outstanding stock options | | — | | | — | | | — | |
Weighted average common shares outstanding - diluted | | 7,059,437 | | | 7,061,818 | | | 7,044,542 | |
There were a total of 914,000 non-qualified employee stock options (Note 14) outstanding on December 31, 2022 that had a weighted average strike price of $25.34. Options on December 31, 2021 had an average strike price of $27.23 with a total of 1,034,525 options outstanding. Grants outstanding at year-end 2020 totaled to 841,275 options with an average strike price of $28.17. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the 2022, 2021, and 2020 periods presented due to the average market price of common shares being less than the strike price of the options.
NOTE 4 - INVESTMENT SECURITIES
The amortized cost, gross gains and losses, and fair values of investment securities at December 31, 2022 and 2021 are as follows:
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| | 2022 |
(In Thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale (AFS): | | | | | | | | |
U.S. Government and agency securities | | $ | 3,002 | | | $ | — | | | $ | (106) | | | $ | 2,896 | |
Mortgage-backed securities | | 1,496 | | | — | | | (214) | | | 1,282 | |
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State and political securities | | 151,426 | | | 157 | | | (8,774) | | | 142,809 | |
Other debt securities | | 50,178 | | | 58 | | | (3,550) | | | 46,686 | |
Total debt securities | | $ | 206,102 | | | $ | 215 | | | $ | (12,644) | | | $ | 193,673 | |
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Investment equity securities: | | | | | | | | |
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Other equity securities | | $ | 1,350 | | | $ | — | | | $ | (208) | | | $ | 1,142 | |
Total equity securities | | $ | 1,350 | | | $ | — | | | $ | (208) | | | $ | 1,142 | |
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| | 2021 |
(In Thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale (AFS): | | | | | | | | |
| | | | | | | | |
Mortgage-backed securities | | $ | 1,752 | | | $ | — | | | $ | (5) | | | $ | 1,747 | |
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State and political securities | | 113,852 | | | 3,500 | | | (694) | | | 116,658 | |
Other debt securities | | 47,802 | | | 524 | | | (321) | | | 48,005 | |
Total debt securities | | $ | 163,406 | | | $ | 4,024 | | | $ | (1,020) | | | $ | 166,410 | |
| | | | | | | | |
Investment equity securities: | | | | | | | | |
| | | | | | | | |
Other equity securities | | $ | 1,350 | | | $ | — | | | $ | (62) | | | $ | 1,288 | |
Total equity securities | | $ | 1,350 | | | $ | — | | | $ | (62) | | | $ | 1,288 | |
| | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The following tables show the Corporation’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | Less than Twelve Months | | Twelve Months or Greater | | Total |
| | | | Gross | | | | Gross | | | | Gross |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(In Thousands) | | Value | | Losses | | Value | | Losses | | Value | | Losses |
Available for sale (AFS) | | | | | | | | | | | | |
U.S. Government and agency securities | | $ | 2,896 | | | $ | (106) | | | $ | — | | | $ | — | | | $ | 2,896 | | | $ | (106) | |
Mortgage-backed securities | | — | | | — | | | 1,282 | | | (214) | | | 1,282 | | | (214) | |
| | | | | | | | | | | | |
State and political securities | | 95,444 | | | (4,797) | | | 36,283 | | | (3,977) | | | 131,727 | | | (8,774) | |
Other debt securities | | 16,896 | | | (664) | | | 25,144 | | | (2,886) | | | 42,040 | | | (3,550) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Debt Securities AFS | | $ | 115,236 | | | $ | (5,567) | | | $ | 62,709 | | | $ | (7,077) | | | $ | 177,945 | | | $ | (12,644) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | Less than Twelve Months | | Twelve Months or Greater | | Total |
| | | | Gross | | | | Gross | | | | Gross |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(In Thousands) | | Value | | Losses | | Value | | Losses | | Value | | Losses |
Available for sale (AFS) | | | | | | | | | | | | |
| | | | | | | | | | | | |
Mortgage-backed securities | | $ | 1,747 | | | $ | (5) | | | $ | — | | | $ | — | | | $ | 1,747 | | | $ | (5) | |
| | | | | | | | | | | | |
State and political securities | | 34,203 | | | (398) | | | 7,408 | | | (296) | | | 41,611 | | | (694) | |
Other debt securities | | 21,446 | | | (301) | | | 1,808 | | | (20) | | | 23,254 | | | (321) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Debt Securities AFS | | $ | 57,396 | | | $ | (704) | | | $ | 9,216 | | | $ | (316) | | | $ | 66,612 | | | $ | (1,020) | |
At December 31, 2022 there were 146 individual securities in a continuous unrealized loss position for less than twelve months and 98 individual securities in a continuous unrealized loss position for greater than twelve months.
The Corporation reviews its position quarterly and has asserted that at December 31, 2022 and 2021, the declines outlined in the above table represent temporary declines and the Corporation does not intend to sell and does not believe they will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Corporation has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at December 31, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | | | | | | | |
(In Thousands) | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 22,234 | | | $ | 21,880 | |
Due after one year to five years | | 109,695 | | | 103,436 | |
Due after five years to ten years | | 67,562 | | | 62,078 | |
Due after ten years | | 6,611 | | | 6,279 | |
Total | | $ | 206,102 | | | $ | 193,673 | |
Total gross proceeds from sales of securities available for sale were $5,557,000, $17,947,000, and $20,767,000 for 2022, 2021, and 2020, respectively. The following table represents gross realized gains and losses on those transactions:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(In Thousands) | | 2022 | | 2021 | | 2020 |
Gross realized gains: | | | | | | |
U.S. Government and agency securities | | $ | — | | | $ | — | | | $ | — | |
Mortgage-backed securities | | — | | | — | | | 83 | |
State and political securities | | 14 | | | 408 | | | 978 | |
Other debt securities | | — | | | 323 | | | 554 | |
| | | | | | |
| | | | | | |
Total gross realized gains | | $ | 14 | | | $ | 731 | | | $ | 1,615 | |
Gross realized losses: | | | | | | |
U.S. Government and agency securities | | $ | — | | | $ | — | | | $ | — | |
Mortgage-backed securities | | — | | | — | | | — | |
State and political securities | | 233 | | | 32 | | | 23 | |
Other debt securities | | — | | | — | | | — | |
| | | | | | |
| | | | | | |
Total gross realized losses | | $ | 233 | | | $ | 32 | | | $ | 23 | |
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There were no impairment charges included in gross realized losses for the years ended December 31, 2022, 2021, and 2020.
Investment securities with a carrying value of approximately $154,946,000 and $139,435,000 at December 31, 2022 and 2021, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
Equity securities consist of Community Reinvestment Act funds along with other smaller investments in other exchange traded equities. At December 31, 2022 and December 31, 2021, we had $1,142,000 and $1,288,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | 2022 | | 2021 | | 2020 | | |
Net loss recognized in equity securities during the period | | $ | (146) | | | $ | (40) | | | $ | 16 | | | |
Less: Net gains realized on the sale of equity securities during the period | | — | | | — | | | — | | | |
Unrealized loss recognized in equity securities held at reporting date | | $ | (146) | | | $ | (40) | | | $ | 16 | | | |
| | | | | | | | |
There is no concentration of investments that exceed ten percent of shareholders’ equity for any individual issuer, excluding those guaranteed by the U.S. Government.
NOTE 5 - FEDERAL HOME LOAN BANK STOCK
The Banks are members of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and as such, are required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment as necessary. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB.
Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management considered that the FHLB maintains regulatory capital ratios in excess of all regulatory capital requirements, liquidity appears adequate, new shares of FHLB stock continue to change hands at the $100 par value, and the payment of dividends.
NOTE 6 - LOAN CREDIT QUALITY AND RELATED ALLOWANCE FOR LOAN LOSSES
Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial, financial, and agricultural, real estate, consumer automobile, and other consumer installment loans. Real estate loans are further segmented into three categories: residential, commercial, and construction.
The following table presents the related aging categories of loans, by segment, as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
(In Thousands) | | Current | | Past Due 30 To 89 Days | | Past Due 90 Days Or More & Still Accruing | | Non-Accrual | | Total |
Commercial, financial, and agricultural | | $ | 189,935 | | | $ | 94 | | | $ | — | | | $ | 432 | | | $ | 190,461 |
Real estate mortgage: | | | | | | | | | | |
Residential | | 701,093 | | | 5,472 | | | 1,120 | | | 524 | | | 708,209 |
Commercial | | 495,349 | | | 2,564 | | | 60 | | | 2,659 | | | 500,632 |
Construction | | 42,797 | | | 511 | | | — | | | — | | | 43,308 |
Consumer automobile loans | | 183,943 | | | 2,089 | | | 80 | | | — | | | 186,112 |
Other consumer installment loans | | 10,194 | | | 152 | | | 15 | | | — | | | 10,361 |
| | 1,623,311 | | | $ | 10,882 | | | $ | 1,275 | | | $ | 3,615 | | | 1,639,083 |
Net deferred loan fees and discounts | | 648 | | | | | | | | | 648 |
Allowance for loan losses | | (15,637) | | | | | | | | | (15,637) |
Loans, net | | $ | 1,608,322 | | | | | | | | | $ | 1,624,094 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
(In Thousands) | | Current | | Past Due 30 To 89 Days | | Past Due 90 Days Or More & Still Accruing | | Non-Accrual | | Total |
Commercial, financial, and agricultural | | $ | 162,571 | | | $ | 139 | | | $ | — | | | $ | 575 | | | $ | 163,285 |
Real estate mortgage: | | | | | | | | | | |
Residential | | 590,240 | | | 4,083 | | | 687 | | | 837 | | | 595,847 |
Commercial | | 442,573 | | | 224 | | | — | | | 3,937 | | | 446,734 |
Construction | | 36,701 | | | 554 | | | — | | | 40 | | | 37,295 |
Consumer automobile loans | | 138,775 | | | 490 | | | 143 | | | — | | | 139,408 |
Other consumer installment loans | | 9,199 | | | 47 | | | 31 | | | — | | | 9,277 |
| | 1,380,059 | | | $ | 5,537 | | | $ | 861 | | | $ | 5,389 | | | 1,391,846 |
Net deferred loan fees and discounts | | 301 | | | | | | | | | 301 |
Allowance for loan losses | | (14,176) | | | | | | | | | (14,176) |
Loans, net | | $ | 1,366,184 | | | | | | | | | $ | 1,377,971 |
Impaired Loans
Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks individually evaluate such loans for impairment and do 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 Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of 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 collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard or worse. Management may also elect to measure an individual loan for impairment if less than $100,000 on a case by case basis.
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 with the exception of loans identified as troubled debt restructurings. Loans that experience insignificant payment delays, which are 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 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. Interest income for impaired loans is recorded consistent to the Banks' policy.
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 |
(In Thousands) | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance recorded: | | | | | | |
Commercial, financial, and agricultural | | $ | 295 | | | $ | 295 | | | $ | — | |
Real estate mortgage: | | | | | | |
Residential | | 3,388 | | | 3,388 | | | — | |
Commercial | | 2,588 | | | 2,588 | | | — | |
Construction | | — | | | — | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Other consumer installment loans | | — | | | — | | | — | |
| | 6,271 | | | 6,271 | | | — | |
With an allowance recorded: | | | | | | |
Commercial, financial, and agricultural | | 403 | | | 403 | | | 4 | |
Real estate mortgage: | | | | | | |
Residential | | 933 | | | 933 | | | 111 | |
Commercial | | 3,607 | | | 3,607 | | | 827 | |
Construction | | — | | | — | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Other consumer installment loans | | 19 | | | — | | | 19 | |
| | 4,962 | | | 4,943 | | | 961 | |
Total: | | | | | | |
Commercial, financial, and agricultural | | 698 | | | 698 | | | 4 | |
Real estate mortgage: | | | | | | |
Residential | | 4,321 | | | 4,321 | | | 111 | |
Commercial | | 6,195 | | | 6,195 | | | 827 | |
Construction | | — | | | — | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Other consumer installment loans | | 19 | | | — | | | 19 | |
| | $ | 11,233 | | | $ | 11,214 | | | $ | 961 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | 2021 |
(In Thousands) | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance recorded: | | | | | | |
Commercial, financial, and agricultural | | $ | 355 | | | $ | 355 | | | $ | — | |
Real estate mortgage: | | | | | | |
Residential | | 3,874 | | | 3,874 | | | — | |
Commercial | | 3,105 | | | 3,105 | | | — | |
Construction | | 105 | | | 105 | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Other consumer installment loans | | — | | | — | | | — | |
| | 7,439 | | | 7,439 | | | — | |
With an allowance recorded: | | | | | | |
Commercial, financial, and agricultural | | 534 | | | 3,321 | | | 2 | |
Real estate mortgage: | | | | | | |
Residential | | 1,178 | | | 1,178 | | | 201 | |
Commercial | | 4,814 | | | 4,814 | | | 800 | |
Construction | | — | | | — | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Other consumer installment loans | | 20 | | | 20 | | | 20 | |
| | 6,546 | | | 9,333 | | | 1,023 | |
Total: | | | | | | |
Commercial, financial, and agricultural | | 889 | | | 3,676 | | | 2 | |
Real estate mortgage: | | | | | | |
Residential | | 5,052 | | | 5,052 | | | 201 | |
Commercial | | 7,919 | | | 7,919 | | | 800 | |
Construction | | 105 | | | 105 | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Other consumer installment loans | | 20 | | | 20 | | | 20 | |
| | $ | 13,985 | | | $ | 16,772 | | | $ | 1,023 | |
| | | | | | |
The following table presents the average recorded investment in impaired loans and related interest income recognized for December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 |
(In Thousands) | | Average Investment in Impaired Loans | | Interest Income Recognized on an Accrual Basis on Impaired Loans | | Interest Income Recognized on a Cash Basis on Impaired Loans |
Commercial, financial, and agricultural | | $ | 765 | | | $ | 20 | | | $ | — | |
Real estate mortgage: | | | | | | |
Residential | | 4,676 | | | 192 | | | 3 | |
Commercial | | 7,233 | | | 201 | | | 26 | |
Construction | | 34 | | | 1 | | | — | |
Consumer automobile loans | | 3 | | | 1 | | | — | |
Other consumer installment loans | | 16 | | | — | | | — | |
| | $ | 12,727 | | | $ | 415 | | | $ | 29 | |
| | | | | | | | | | | | | | | | | | | | |
| | 2021 |
(In Thousands) | | Average Investment in Impaired Loans | | Interest Income Recognized on an Accrual Basis on Impaired Loans | | Interest Income Recognized on a Cash Basis on Impaired Loans |
Commercial, financial, and agricultural | | $ | 1,345 | | | $ | 13 | | | $ | — | |
Real estate mortgage: | | | | | | |
Residential | | 5,530 | | | 174 | | | — | |
Commercial | | 9,462 | | | 122 | | | — | |
Construction | | 116 | | | 2 | | | — | |
Consumer automobile loans | | 30 | | | — | | | — | |
Other consumer installment loans | | 12 | | | 1 | | | — | |
| | $ | 16,495 | | | $ | 312 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | 2020 |
(In Thousands) | | Average Investment in Impaired Loans | | Interest Income Recognized on an Accrual Basis on Impaired Loans | | Interest Income Recognized on a Cash Basis on Impaired Loans |
Commercial, financial, and agricultural | | $ | 1,653 | | | $ | 34 | | | $ | — | |
Real estate mortgage: | | | | | | |
Residential | | 5,692 | | | 234 | | | 15 | |
Commercial | | 7,937 | | | 158 | | | — | |
Construction | | 72 | | | 1 | | | 4 | |
Consumer automobile loans | | 89 | | | — | | | — | |
Other consumer installment loans | | 3 | | | 1 | | | — | |
| | $ | 15,446 | | | $ | 428 | | | $ | 19 | |
At December 31, 2022, additional funds totaling $2,000 are committed to be advanced in connection with impaired loans.
Modifications
The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.
Loan modifications that are considered TDRs completed during the twelve months ended December 31, 2022, 2021,and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | |
(In Thousands, Except Number of Contracts) | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | | | | | |
Commercial, financial, and agricultural | | — | | | $ | — | | | $ | — | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | |
Residential | | 1 | | | 220 | | | 220 | | | | | | | |
Commercial | | — | | | — | | | — | | | | | | | |
Construction | | — | | | — | | | — | | | | | | | |
Other consumer installment loans | | — | | | — | | | — | | | | | | | |
Total | | 1 | | | $ | 220 | | | $ | 220 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | |
(In Thousands, Except Number of Contracts) | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | | | | | |
Commercial, financial, and agricultural | | 1 | | | $ | 949 | | | $ | 949 | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | |
Residential | | 3 | | | 1,265 | | | 1,265 | | | | | | | |
Commercial | | 2 | | | 842 | | | 842 | | | | | | | |
Construction | | — | | | — | | | — | | | | | | | |
Other consumer installment loans | | — | | | — | | | — | | | | | | | |
Total | | 6 | | | $ | 3,056 | | | $ | 3,056 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | |
(In Thousands, Except Number of Contracts) | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | | | | | |
Commercial, financial, and agricultural | | 2 | | | $ | 1,028 | | | $ | 1,028 | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | |
Residential | | — | | | — | | | — | | | | | | | |
Commercial | | 3 | | | 1,263 | | | 1,263 | | | | | | | |
Construction | | — | | | — | | | — | | | | | | | |
Other consumer installment loans | | — | | | — | | | — | | | | | | | |
Total | | 5 | | | $ | 2,291 | | | $ | 2,291 | | | | | | | |
Of the one new troubled debt restructurings that were granted for the year ended December 31, 2022, one loans totaling $220,000 was granted rate concessions.
Of the six new troubled debt restructurings that were granted for the year ended December 31, 2021, two loans totaling $842,000 were granted payment concessions and one loan totaling $124,000 was granted a rate concession.
No loan modifications considered troubled debt restructurings made during the twelve months previous to December 31, 2022 defaulted. Loan modifications considered troubled debt restructurings made during the twelve months previous to December 31, 2021, that have defaulted during the corresponding twelve month period were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2021 |
(In Thousands, Except Number of Contracts) | | | | | | Number of Contracts | | Recorded Investment |
Commercial, financial, and agricultural | | | | | | — | | | $ | — | |
Real estate mortgage: | | | | | | | | |
Residential | | | | | | 1 | | | 687 | |
Commercial | | | | | | — | | | — | |
Total | | | | | | 1 | | | $ | 687 | |
Internal Risk Ratings
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated for Substandard classification. Loans in the Doubtful category exhibit the same weaknesses found in the Substandard loans, however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Loans classified Loss are considered uncollectible and charge-off is imminent.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 2022 loan review evaluated 55% of the Bank's average outstanding commercial portfolio which can consist of outstanding loans, commercial real estate mortgages and outstanding commitments. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.
The following table presents the credit quality categories identified above as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | Commercial, Finance, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | |
(In Thousands) | | | Residential | | Commercial | | Construction | | | | Totals |
Pass | | $ | 184,783 | | | $ | 705,515 | | | $ | 488,993 | | | $ | 43,209 | | | $ | 186,112 | | | $ | 10,361 | | | $ | 1,618,973 | |
Special Mention | | 125 | | | 266 | | | 4,526 | | | — | | | — | | | — | | | 4,917 | |
Substandard | | 5,553 | | | 2,428 | | | 7,113 | | | 99 | | | — | | | — | | | 15,193 | |
Total | | $ | 190,461 | | | $ | 708,209 | | | $ | 500,632 | | | $ | 43,308 | | | $ | 186,112 | | | $ | 10,361 | | | $ | 1,639,083 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | Commercial, Finance, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | |
(In Thousands) | | | Residential | | Commercial | | Construction | | | | Totals |
Pass | | $ | 160,899 | | | $ | 592,570 | | | $ | 432,158 | | | $ | 36,511 | | | $ | 139,408 | | | $ | 9,257 | | | $ | 1,370,803 | |
Special Mention | | 234 | | | 284 | | | 6,108 | | | 676 | | | — | | | — | | | 7,302 | |
Substandard | | 2,152 | | | 2,993 | | | 8,468 | | | 108 | | | — | | | 20 | | | 13,741 | |
Total | | $ | 163,285 | | | $ | 595,847 | | | $ | 446,734 | | | $ | 37,295 | | | $ | 139,408 | | | $ | 9,277 | | | $ | 1,391,846 | |
Allowance for Loan Losses
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.
The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Banks' ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that are collectively evaluated for impairment are grouped into two classes for evaluation. A general
allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.
For the general allowances historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing a twelve quarter moving average. However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the economic cycle. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; national and economic trends and conditions; concentrations of credit from a loan type, industry, and/or geographic standpoint; value of underlying collateral on collateral depended loans; effect of other external factors; and the quality of the loan review system. During 2022, certain qualitative factors were adjusted to account for economic changes and significant loan portfolio growth.
Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors. Management also monitors industry loss factors by loan segment for applicable adjustments to actual loss experience.
Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
Over the last three years, various quantitative and qualitative factors indicate changes in our provision for loan losses. The provision for commercial and agricultural loans decreased during 2022 due to levels and trends of nonaccrual loans in our portfolio and a decline in net charge-offs. The provision for residential real estate loans remained flat as the portfolio size increased but was offset by a decline in the level of net charge-offs. The provision for this loan type is adjusted by national indices as well as our historical losses. The provision for commercial real estate loans decreased primarily due to an improvement in portfolio credit metrics. The provision for consumer automobiles increased due to increased indirect loan volume and concerns regarding the impact of inflation on the customer base.
The provision for commercial and agricultural loans decreased during 2021 due to levels and trends of nonaccrual loans in our portfolio and a decline in net charge-offs. The provision for residential real estate loans remained flat as the porfolio size increased slightly and the level of net charge-offs declined modestly. The provision for this loan type is adjusted by national indices as well as our historical losses. The provision for commercial and construction real estate loans increased as the economic environment has continued to remain soft as the impact of the COVID-19 pandemic and associated supply chain issues is felt within the markets we serve. The provision for consumer automobiles decreased due to reduction in indirect loan volume and a decrease in portfolio size. The provision for other consumer installment loans has decreased as the portfolio declined to $9,277,000 at December 31, 2021 from $19,940,000 at December 31, 2020. The COVID-19 pandemic and associated supply chain issues has resulted in various businesses operating at less than 100% capacity. This has caused an increase in the risk profile of the commercial segment of the loan portfolio resulting in a provision shift from unallocated to the commercial real estate mortgage segment of the loan portfolio. Average loan amounts are calculated off of end of month balances.
Activity in the allowance is presented for the twelve months ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | Commercial, Finance, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | | | |
(In Thousands) | | Residential | | Commercial | | Construction | | | | Unallocated | | Totals |
Beginning Balance | | $ | 1,946 | | | $ | 4,701 | | | $ | 5,336 | | | $ | 179 | | | $ | 1,411 | | | $ | 111 | | | $ | 492 | | | $ | 14,176 | |
Charge-offs | | (21) | | | (21) | | | (154) | | | — | | | (386) | | | (267) | | | — | | | (849) | |
Recoveries | | 186 | | | 47 | | | 4 | | | 29 | | | 58 | | | 76 | | | — | | | 400 | |
Provision | | (197) | | | 334 | | | 924 | | | (20) | | | 534 | | | 189 | | | 146 | | | 1,910 | |
Ending Balance | | $ | 1,914 | | | $ | 5,061 | | | $ | 6,110 | | | $ | 188 | | | $ | 1,617 | | | $ | 109 | | | $ | 638 | | | $ | 15,637 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | Commercial, Finance, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | | | |
(In Thousands) | | | Residential | | Commercial | | Construction | | | | Unallocated | | Totals |
Beginning Balance | | $ | 1,936 | | | $ | 4,460 | | | $ | 3,635 | | | $ | 134 | | | $ | 1,906 | | | $ | 261 | | | $ | 1,471 | | | $ | 13,803 | |
Charge-offs | | (37) | | | (219) | | | (14) | | | — | | | (286) | | | (173) | | | — | | | (729) | |
Recoveries | | 27 | | | 112 | | | 109 | | | 10 | | | 143 | | | 61 | | | — | | | 462 | |
Provision | | 20 | | | 348 | | | 1,606 | | | 35 | | | (352) | | | (38) | | | (979) | | | 640 | |
Ending Balance | | $ | 1,946 | | | $ | 4,701 | | | $ | 5,336 | | | $ | 179 | | | $ | 1,411 | | | $ | 111 | | | $ | 492 | | | $ | 14,176 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| | Commercial, Finance, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | | | |
(In Thousands) | | | Residential | | Commercial | | Construction | | | | Unallocated | | Totals |
Beginning Balance | | $ | 1,779 | | | $ | 4,306 | | | $ | 3,210 | | | $ | 118 | | | $ | 1,780 | | | $ | 278 | | | $ | 423 | | | $ | 11,894 | |
Charge-offs | | (64) | | | (254) | | | (64) | | | — | | | (396) | | | (193) | | | — | | | (971) | |
Recoveries | | 36 | | | 49 | | | — | | | 11 | | | 75 | | | 84 | | | — | | | 255 | |
Provision | | 185 | | | 359 | | | 489 | | | 5 | | | 447 | | | 92 | | | 1,048 | | | 2,625 | |
Ending Balance | | $ | 1,936 | | | $ | 4,460 | | | $ | 3,635 | | | $ | 134 | | | $ | 1,906 | | | $ | 261 | | | $ | 1,471 | | | $ | 13,803 | |
| | | | | | | | | | | | | | | | |
The Corporation grants commercial, industrial, residential, and installment loans to customers throughout north-central and north-eastern Pennsylvania. Although the Corporation has 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 this region.
The amount of foreclosed residential real estate held at December 31, 2022 and December 31, 2021, totaled $950,000 and $339,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2022 and December 31, 2021, totaled $890,000 and $193,000, respectively.
The Corporation has a concentration of loans at December 31, 2022 and 2021 as follows:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Owners of residential rental properties | | 19.67 | % | | 19.21 | % |
Owners of commercial rental properties | | 15.63 | % | | 16.03 | % |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| Commercial, Finance, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | Unallocated | | Totals |
(In Thousands) | Residential | | Commercial | | Construction | |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | |
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 4 | | | $ | 111 | | | $ | 827 | | | $ | — | | | $ | — | | | $ | 19 | | | $ | — | | | $ | 961 | |
Collectively evaluated for impairment | | 1,910 | | | 4,950 | | | 5,283 | | | 188 | | | 1,617 | | | 90 | | | 638 | | | 14,676 | |
Total ending allowance balance | | $ | 1,914 | | | $ | 5,061 | | | $ | 6,110 | | | $ | 188 | | | $ | 1,617 | | | $ | 109 | | | $ | 638 | | | $ | 15,637 | |
Loans: | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 698 | | | $ | 4,321 | | | $ | 6,195 | | | $ | — | | | $ | — | | | $ | 19 | | | | | $ | 11,233 | |
| | | | | | | | | | | | | | | | |
Collectively evaluated for impairment | | 189,763 | | | 703,888 | | | 494,437 | | | 43,308 | | | 186,112 | | | 10,342 | | | | | 1,627,850 | |
Total ending loans balance | | $ | 190,461 | | | $ | 708,209 | | | $ | 500,632 | | | $ | 43,308 | | | $ | 186,112 | | | $ | 10,361 | | | | | $ | 1,639,083 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| Commercial, Finance, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | Unallocated | | Totals |
(In Thousands) | Residential | | Commercial | | Construction | |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | |
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 2 | | | $ | 201 | | | $ | 800 | | | $ | — | | | $ | — | | | $ | 20 | | | $ | — | | | $ | 1,023 | |
Collectively evaluated for impairment | | 1,944 | | | 4,500 | | | 4,536 | | | 179 | | | 1,411 | | | 91 | | | 492 | | | 13,153 | |
Total ending allowance balance | | $ | 1,946 | | | $ | 4,701 | | | $ | 5,336 | | | $ | 179 | | | $ | 1,411 | | | $ | 111 | | | $ | 492 | | | $ | 14,176 | |
Loans: | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 889 | | | $ | 5,052 | | | $ | 7,919 | | | $ | 105 | | | $ | — | | | $ | 20 | | | | | $ | 13,985 | |
| | | | | | | | | | | | | | | | |
Collectively evaluated for impairment | | 162,396 | | | 590,795 | | | 438,815 | | | 37,190 | | | 139,408 | | | 9,257 | | | | | 1,377,861 | |
Total ending loans balance | | $ | 163,285 | | | $ | 595,847 | | | $ | 446,734 | | | $ | 37,295 | | | $ | 139,408 | | | $ | 9,277 | | | | | $ | 1,391,846 | |
NOTE 7 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
(In Thousands) | | 2022 | | 2021 |
Land | | $ | 6,680 | | | $ | 6,741 | |
Premises | | 22,571 | | | 22,539 | |
Furniture and equipment | | 12,732 | | | 12,798 | |
Leasehold improvements | | 4,000 | | | 4,214 | |
Finance lease right-of-use assets | | 7,006 | | | 7,435 | |
Total | | 52,989 | | | 53,727 | |
Less accumulated depreciation and amortization | | 21,145 | | | 19,702 | |
Net premises and equipment | | $ | 31,844 | | | $ | 34,025 | |
Depreciation and amortization related to premises and equipment for the years ended 2022, 2021, and 2020 was $2,107,000, $2,436,000, and $2,098,000, respectively.
NOTE 8 - GOODWILL AND OTHER INTANGIBLES
As of December 31, 2022 and 2021, goodwill had a gross carrying value of $17,380,000 and accumulated amortization of $276,000. During 2022 an impairment charge of $653,000 was recognized resulting in a net carrying amount of $16,450,000 at December 31, 2022 compared to $17,104,000 at December 31, 2021. The impairment charge occurred due to a decline in revenue that was experienced during 2022.
The gross carrying amount of goodwill is tested for impairment annually. Based on the fair value of the reporting unit, estimated using the expected present value of future cash flows, there was no evidence of impairment of the carrying amount at December 31, 2022 or 2021.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. Since the acquisition, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible and a trade name intangible which are being amortized on an accelerated basis, and also book of business intangible that is being amortized on a straight-line basis over the useful life of such assets. The net carrying amount of the core deposit intangible, the trade name intangible, and the book of business intangible at December 31, 2022 was $14,000, $1,000, and $312,000 respectively, with $1,867,000, $132,000, and $708,000 accumulated amortization as of that date.
As of December 31, 2022, the estimated future amortization expense for the core deposit and trade name intangible was:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | Core Deposit Intangible | | Trade Name Intangible | | Book of Business Intangible | | Total |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
2023 | | $ | 14 | | | $ | 1 | | | $ | 102 | | | $ | 117 | |
2024 | | — | | | — | | | 102 | | | 102 | |
2025 | | — | | | — | | | 102 | | | 102 | |
2026 | | — | | | — | | | 6 | | | 6 | |
| | | | | | | | |
| | | | | | | | |
| | $ | 14 | | | $ | 1 | | | $ | 312 | | | $ | 327 | |
NOTE 9 - DEPOSITS
Time deposits of $250,000 or more totaled approximately $31,501,000 on December 31, 2022 and $54,343,000 on December 31, 2021.
At December 31, 2022, the scheduled maturities on time deposits of $100,000 or more are as follows:
| | | | | | | | |
(In Thousands) | | 2022 |
Three months or less | | $ | 14,661 | |
Three months to six months | | 14,678 | |
Six months to twelve months | | 18,028 | |
Over twelve months | | 33,824 | |
Total | | $ | 81,191 | |
Total time deposit maturities are as follows at December 31, 2022:
| | | | | | | | |
(In Thousands) | | 2022 |
2023 | | $ | 80,101 | |
2024 | | 39,230 | |
2025 | | 15,816 | |
2026 | | 9,343 | |
2027 | | 424 | |
Thereafter | | 1,368 | |
Total | | $ | 146,282 | |
Total deposits at December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | |
(In Thousands) | | Amount | | | | Amount | | | | | | |
Noninterest-bearing | | $ | 519,063 | | | | | $ | 494,360 | | | | | | | |
Savings | | 247,952 | | | | | 236,312 | | | | | | | |
Super Now | | 372,574 | | | | | 366,399 | | | | | | | |
Money Market | | 270,589 | | | | | 318,877 | | | | | | | |
Time | | 146,282 | | | | | 205,367 | | | | | | | |
Total deposits | | $ | 1,556,460 | | | | | $ | 1,621,315 | | | | | | | |
NOTE 10 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase and primarily FHLB advances, which generally represent overnight or less than six month borrowings. In addition to the outstanding balances noted below, the Banks also have additional lines of credit totaling $100,000,000 available from correspondent banks other than the FHLB. The outstanding balances and related information for short-term borrowings are summarized as follows at December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | |
(In Thousands) | | 2022 | | 2021 | | |
Repurchase Agreements: | | | | | | |
Balance at year end | | $ | 5,153 | | | $ | 5,747 | | | |
Maximum amount outstanding at any month end | | 6,634 | | | 9,757 | | | |
Average balance outstanding during the year | | 5,216 | | | 7,178 | | | |
Weighted-average interest rate: | | | | | | |
At year end | | 0.29 | % | | 0.12 | % | | |
Paid during the year | | 0.16 | % | | 0.13 | % | | |
Overnight: | | | | | | |
Balance at year end | | $ | 148,196 | | | $ | — | | | |
Maximum amount outstanding at any month end | | 148,196 | | | — | | | |
Average balance outstanding during the year | | 24,099 | | | — | | | |
Weighted-average interest rate: | | | | | | |
At year end | | 4.45 | % | | — | % | | |
Paid during the year | | 4.14 | % | | — | % | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The remaining contractual maturity of repurchase agreements in the consolidated balance sheets as of December 31, 2022 and December 31, 2021 is presented in the following tables.
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | Remaining Contractual Maturity of the Agreements |
(In Thousands) | | Overnight and Continuous | | Overnight and Continuous |
Repurchase Agreements: | | | | |
| | | | |
| | | | |
| | | | |
State and political securities | | $ | 6,193 | | | $ | 7,871 | |
Other debt securities | | 972 | | | 1,010 | |
Total carrying value of collateral pledged | | $ | 7,165 | | | $ | 8,881 | |
| | | | |
Total liability recognized for repurchase agreements | | $ | 5,153 | | | $ | 5,747 | |
| | | | |
NOTE 11 - LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | | | Weighted Average Interest Rate | | Stated Interest Rate Range | | | | |
Description | | Maturity | | 2022 | | 2021 | | From | | To | | 2022 | | 2021 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Fixed | | 2022 | | — | % | | 2.24 | % | | 1.98 | % | | 2.56 | % | | $ | — | | | $ | 23,000 | |
Fixed | | 2023 | | 2.60 | % | | 2.60 | % | | 1.84 | % | | 3.10 | % | | 25,000 | | | 25,000 | |
Fixed | | 2024 | | 2.24 | % | | 2.24 | % | | 1.50 | % | | 2.96 | % | | 40,000 | | | 40,000 | |
Fixed | | 2025 | | 1.62 | % | | 1.62 | % | | 1.14 | % | | 1.88 | % | | 30,000 | | | 30,000 | |
Total Fixed | | | | 2.14 | % | | 2.32 | % | | | | | | 95,000 | | | 118,000 | |
Total | | | | 2.14 | % | | 2.32 | % | | | | | | $ | 95,000 | | | $ | 118,000 | |
| | | | | | | | | | | | | | |
(In Thousands) Year Ending December 31, | | Amount | | Weighted Average Rate |
2023 | | $ | 25,000 | | | 2.60 | % |
2024 | | 40,000 | | | 2.24 | % |
2025 | | 30,000 | | | 1.62 | % |
| | | | |
| | | | |
| | $ | 95,000 | | | 2.14 | % |
The Banks maintain a credit arrangement which includes a revolving line of credit with the FHLB. Under this credit arrangement, at December 31, 2022, JSSB has a remaining borrowing capacity of $271,247,000 and Luzerne has a remaining capacity of $199,553,000, which are subject to annual renewal and typically incur no service charges. Under terms of a blanket agreement, collateral for the FHLB borrowings must be secured by certain qualifying assets of each Bank which consist principally of first mortgage loans and state and political securities, along with other securities. Total outstanding letters of credit at December 31, 2022 with the FHLB for JSSB are $39,100,000 while Luzerne has $0 outstanding.
NOTE 12 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax asset position at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
(In Thousands) | | 2022 | | 2021 |
Deferred tax assets: | | | | |
Allowance for loan losses | | $ | 3,314 | | | $ | 2,997 | |
Deferred compensation | | 1,788 | | | 1,655 | |
Lease liability | | 2,203 | | | 2,324 | |
Fair value adjustment on equity securities | | 40 | | | — | |
| | | | |
Unrealized loss on available for sale securities | | 2,610 | | | 9 | |
Non-qualified Stock Options | | 883 | | | — | |
| | | | |
Capital loss carryforward | | 380 | | | 211 | |
Other | | 202 | | | 961 | |
Total | | 11,420 | | | 8,157 | |
Deferred tax liabilities: | | | | |
Lease right of use asset | | 2,028 | | | 2,203 | |
Defined pension | | 914 | | | 872 | |
Unrealized gain on available for sale securities | | — | | | 630 | |
Investment security accretion | | 177 | | | 118 | |
Deferred loan fees and discounts | | 135 | | | 63 | |
Depreciation | | 481 | | | 533 | |
Amortization | | 437 | | | 581 | |
Valuation allowance | | 380 | | | 211 | |
Total | | 4,552 | | | 5,211 | |
Deferred tax asset, net | | $ | 6,868 | | | $ | 2,946 | |
A valuation allowance was established on the $1,003,000 of capital loss carryforwards in 2021. The valuation allowance was increased by $807,000 to a total of $1,810,000 due to additional capital losses resulting when the Corporation's federal tax return was filed in October of 2022. There were no other valuation allowances established at December 31, 2021, because of the Corporation’s ability to carry back losses to recover taxes paid in previous years and certain tax strategies, together with the anticipated future taxable income as evidenced by the Corporation’s earning potential. The Corporation is no longer subject to federal, state, and local examinations by tax authorities for years before 2019.
The provision or benefit for income taxes is comprised of the following for the year ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | 2022 | | 2021 | | 2020 |
Currently payable | | $ | 4,671 | | | $ | 4,153 | | | $ | 3,165 | |
Deferred (benefit) expense | | (508) | | | (359) | | | 309 | |
| | | | | | |
Total provision | | $ | 4,163 | | | $ | 3,794 | | | $ | 3,474 | |
A reconciliation between the expected income tax or benefit and the effective income tax rate on income before income tax provision or benefit follows for the year ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
(In Thousands) | | Amount | | % | | Amount | | % | | Amount | | % |
Provision at expected rate | | $ | 4,532 | | | 21.00 | % | | $ | 4,167 | | | 21.00 | % | | $ | 3,927 | | | 21.00 | % |
(Decrease) increase in tax resulting from: | | | | | | | | | | | | |
Tax-exempt income | | (516) | | | (2.39) | | | (520) | | | (2.62) | | | (475) | | | (2.54) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other, net | | 147 | | | 0.68 | | | 147 | | | 0.74 | | | 22 | | | 0.12 | |
Effective income tax provision and rate | | $ | 4,163 | | | 19.29 | % | | $ | 3,794 | | | 19.12 | % | | $ | 3,474 | | | 18.58 | % |
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Corporation has a noncontributory defined benefit pension plan (the “Plan”) for all employees meeting certain age and length of service requirements that were hired prior to January 1, 2004, at which time entrance into the Plan was frozen. The benefit accrual for the Plan was subsequently frozen at December 31, 2014. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten years of employment, until December 31, 2014 when the benefit accrual was frozen.
The following table sets forth the obligation and funded status as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
(In Thousands) | | 2022 | | 2021 |
Change in benefit obligation: | | | | |
Benefit obligation at beginning of year | | $ | 21,923 | | | $ | 23,553 | |
| | | | |
Interest cost | | 553 | | | 509 | |
Actuarial (gain) loss | | (209) | | | (269) | |
Benefits paid | | (904) | | | (896) | |
| | | | |
Change in actuarial assumptions | | (4,819) | | | (974) | |
Benefit obligation at end of year | | $ | 16,544 | | | $ | 21,923 | |
| | | | |
Change in plan assets: | | | | |
Fair value of plan assets at beginning of year | | $ | 26,073 | | | $ | 23,484 | |
Actual return on plan assets | | (4,272) | | | 2,785 | |
Employer contribution | | — | | | 700 | |
Benefits paid | | (904) | | | (896) | |
Adjustment to fair value of plan assets | | (3) | | | — | |
Fair value of plan assets at end of year | | 20,894 | | | 26,073 | |
Funded status | | $ | 4,350 | | | $ | 4,150 | |
| | | | |
Accounts recognized on balance sheet as: | | | | |
Total assets | | $ | 4,350 | | | $ | 4,150 | |
| | | | |
Amounts not yet recognized as a component of net periodic pension cost: | | | | |
Amounts recognized in accumulated other comprehensive income (loss) consist of: | | | | |
Net loss | | $ | 5,240 | | | $ | 4,412 | |
The accumulated benefit obligation for the Plan was $16,543,000 and $21,923,000 at December 31, 2022 and 2021, respectively.
Components of Net Periodic Cost and Other Amounts Recognized in Other Comprehensive Income (Loss) as of December 31, 2022, 2021, and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | 2022 | | 2021 | | 2020 |
Net periodic pension cost: | | | | | | |
| | | | | | |
Interest cost | | $ | 553 | | | $ | 509 | | | $ | 641 | |
Expected return on plan assets | | (1,652) | | | (1,542) | | | (1,274) | |
| | | | | | |
| | | | | | |
Amortization of unrecognized net loss | | 69 | | | 186 | | | 185 | |
Net periodic (benefit) cost | | $ | (1,030) | | | $ | (847) | | | $ | (448) | |
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Discount rate | 4.93 | % | | 2.61 | % | | 2.24 | % |
Rate of compensation increase | N/A | | N/A | | N/A |
Weighted-average assumptions used to determine net periodic cost for years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Discount rate | 2.61 | % | | 2.24 | % | | 3.04 | % |
Expected long-term return on plan assets | 7.00 | % | | 7.00 | % | | 7.00 | % |
| | | | | |
The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower future returns on similar investments compared to past periods.
Plan Assets
The Plan’s weighted-average asset allocations at December 31, 2022 and 2021 by asset category are as follows:
| | | | | | | | | | | | | | |
Asset Category | | 2022 | | 2021 |
Cash | | 4.84 | % | | 5.09 | % |
Fixed income securities | | 15.05 | % | | 12.29 | % |
Equity | | 66.36 | % | | 68.76 | % |
Inflation Hedges/Real Assets | | 3.92 | % | | 5.23 | % |
Hedged Strategies | | 9.83 | % | | 8.63 | % |
Total | | 100.00 | % | | 100.00 | % |
The investment objective for the Plan is to maximize total return with tolerance for slightly above average risk, meaning the fund is able to tolerate short-term volatility to achieve above-average returns over the long term.
Asset allocation favors equities, with target allocation of approximately 62% equity securities, 15.0% fixed income securities, 10% inflation hedges/real assets, 10% hedged strategies, and 3% cash. Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between the acceptable ranges. The equity portfolio’s exposure is primarily in mid and large capitalization domestic equities with limited exposure to small capitalization and international stocks.
It is management’s intent to give the investment managers flexibility, within the overall guidelines, with respect to investment decisions and their timing. However, certain investments require specific review and approval by management. Management is also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives to execute investment strategies.
The following table sets forth by level, within the fair value hierarchy detailed in Note 21 - Fair Value Measurements, the Plan’s assets at fair value as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 1,012 | | | $ | — | | | $ | — | | | $ | 1,012 | |
Mutual funds - taxable fixed income | | 3,144 | | | — | | | — | | | 3,144 | |
Mutual funds - domestic equity | | 8,393 | | | — | | | — | | | 8,393 | |
Mutual funds - international equity | | 5,472 | | | — | | | — | | | 5,472 | |
Inflation Hedges/Real Assets | | 819 | | | — | | | — | | | 819 | |
Hedged Strategies | | 2,054 | | | — | | | — | | | 2,054 | |
Total assets at fair value | | $ | 20,894 | | | $ | — | | | $ | — | | | $ | 20,894 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 1,326 | | | $ | — | | | $ | — | | | $ | 1,326 | |
Mutual funds - taxable fixed income | | 3,205 | | | — | | | — | | | 3,205 | |
Mutual funds - domestic equity | | 11,422 | | | — | | | — | | | 11,422 | |
Mutual funds - international equity | | 6,505 | | | — | | | — | | | 6,505 | |
Inflation Hedges/Real Assets | | 1,364 | | | — | | | — | | | 1,364 | |
Hedged Strategies | | 2,251 | | | — | | | — | | | 2,251 | |
Total assets at fair value | | $ | 26,073 | | | $ | — | | | $ | — | | | $ | 26,073 | |
The following future benefit payments are expected to be paid:
| | | | | |
(In Thousands) | |
2023 | $ | 1,063 | |
2024 | 1,067 | |
2025 | 1,120 | |
2026 | 1,179 | |
2027 | 1,193 | |
2028-2032 | 6,002 | |
| $ | 11,624 | |
The Corporation does not expect to contribute to its Pension Plan in 2023.
401(k) Savings Plan
The Corporation also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k), 404, and 415. The Corporation may make matching contributions equal to a discretionary percentage that is determined by the Board of Directors. Participants are at all times fully vested in their contributions and vest over a period of five years regarding the employer contribution. Contribution expense was approximately $548,000, $500,000, and $502,000 for the years ended December 31, 2022, 2021, and 2020, respectively.
Deferred Compensation Plan
The Corporation has a deferred compensation plan whereby participating directors elect to forego directors’ fees paid in cash. Under this plan, the Corporation will make payments for a ten-year period beginning at the later of age 65 or ceasing to be a director in most cases or at death, if earlier, at which time payments would be made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the Corporation has acquired bank-owned life insurance policies on the lives of the participating directors for which insurance benefits are payable to the Corporation. The Corporation incurred expenses related to the plan of $588,000, $463,000, and $431,000 for the years ended December 31, 2022, 2021, and 2020, respectively. Benefits paid under the plan were approximately $267,000, $57,000, and $57,000 in 2022, 2021, and 2020, respectively.
NOTE 14 - STOCK OPTIONS
In 2020, the Corporation adopted the 2020 Equity Incentive Plan which replaced the 2014 Equity Incentive Plan. The Equity Incentive Plans are designed to help the Corporation attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, and restricted stock may be granted as part of the plan.
A summary of stock option activity for the year ended December 31, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Outstanding at January 1, 2022 | | 1,034,525 | | | $ | 27.23 | | | 7.48 | | $ | — | | | | |
Granted | | 234,000 | | | 24.10 | | | 9.05 | | | | | |
Cash Settlement | | (346,725) | | | 30.07 | | | | | | | | |
Forfeited | | (7,800) | | | 28.37 | | | | | | | | |
Expired | | — | | | — | | | | | | | | |
Outstanding at December 31, 2022 | | 914,000 | | | $ | 25.34 | | | 7.71 | | $ | 1,455,000 | | | | |
| | | | | | | | | | | |
Options exercisable at December 31, 2022 | | 105,600 | | | $ | 28.01 | | | 6.11 | | $ | — | | | | |
On December 31, 2022, a total of 914,000 options were outstanding. Outstanding options at December 31, 2022 and the related vesting schedules are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Options Granted |
Date | | Shares | | Forfeited | | Cash Settlement | | Outstanding | | Strike Price | | Vesting Period | | Expiration |
| | | | | | | | | | | | | | |
January 18, 2022 | | 156,000 | | | — | | | — | | | 156,000 | | | $ | 24.10 | | | 3 years | | 10 years |
January 18, 2022 | | 78,000 | | | — | | | — | | | 78,000 | | | 24.10 | | | 5 years | | 10 years |
April 9, 2021 | | 156,500 | | | — | | | — | | | 156,500 | | | 24.23 | | | 3 years | | 10 years |
April 9, 2021 | | 78,000 | | | — | | | — | | | 78,000 | | | 24.23 | | | 5 years | | 10 years |
March 11, 2020 | | 119,300 | | | — | | | — | | | 119,300 | | | 25.34 | | | 3 years | | 10 years |
March 11, 2020 | | 119,200 | | | — | | | — | | | 119,200 | | | 25.34 | | | 5 years | | 10 years |
March 15, 2019 | | 120,900 | | | (18,300) | | | — | | | 102,600 | | | 28.01 | | | 3 years | | 10 years |
March 15, 2019 | | 119,100 | | | (17,700) | | | — | | | 101,400 | | | 28.01 | | | 5 years | | 10 years |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
August 27, 2015 | | 58,125 | | | (26,250) | | | (28,875) | | | 3,000 | | | 28.02 | | | 5 years | | 10 years |
| | | | | | | | | | | | | | |
The fair value of stock options is estimated using the Black-Scholes option pricing model. The following is a summary of the assumptions used in this model for the stock options granted during 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Risk-free interest rate | 1.23 | % | | 0.82 | % | | 1.32 | % |
Expected volatility | 33.50 | % | | 36.56 | % | | 28.29 | % |
Expected annual dividend | $ | 1.28 | | | $ | 1.28 | | | $ | 1.28 | |
Expected life | 6.84 years | | 6.84 years | | 7.00 years |
Weighted average grant date fair value per option | $ | 4.28 | | | $ | 4.72 | | | $ | 3.80 | |
The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straightline basis over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the value of the vested portion of the award at that date. The Corporation determines the fair value of options granted using the Black-Scholes option-pricing model. The risk-free interest rate is based on the United States Treasury bond with a similar term to the expected life of the options at the grant date. Expected volatility was estimated based on the adjusted historic volatility of the Corporation’s shares. The expected life was estimated to equal the contractual life of the options. The dividend yield rate was based upon recent historical dividends paid on shares.
For the years ended December 31, 2022, 2021, and 2020 there was $1,231,000, $960,000, and $854,000 in total share-based compensation expense, respectively. There was additional compensation expense of $183,000 (after-tax $145,000) associated with the voluntary cash settlement of 346,725 outstanding stock options that occurred in June of 2022. The compensation expense is recorded as part of the non-interest expenses in the Consolidated Statement of Income.
As of December 31, 2022, total unrecognized compensation costs related to non-vested options was $1,615,000 which is expected to be recognized over a period of 2.34 years. Exercisable stock awards at December 31, 2022 were 105,600 with a weighted average remaining exercisable contractual life of 6.11 years.
NOTE 15 - EMPLOYEE STOCK PURCHASE PLAN
The Corporation maintains the Penns Woods Bancorp, Inc. Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Corporation. The Plan allows for up to 1,500,000 shares to be purchased by employees. The purchase price of the shares is 95% of fair value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in fair value annually. There were 3,617, 3,850 and 3,972 shares issued under the plan for the years ended December 31, 2022, 2021 and 2020 respectively.
NOTE 16 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Corporation and the Banks, including their immediate families and companies in which they are principal owners (more than ten percent), are indebted to the Corporation. Such indebtedness was incurred in the ordinary course of business on the same terms and at those rates prevailing at the time for comparable transactions with others.
A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | Beginning Balance | | New Loans | | Other | | Repayments | | Ending Balance | |
2021 | | $ | 16,246 | | | $ | 10,546 | | | $ | (3,177) | | | $ | (11,249) | | | $ | 12,366 | | |
2022 | | 12,366 | | | 10,651 | | | (5,266) | | | (6,206) | | | 11,545 | | |
Loan balances that are no longer considered part of a related party relationship are shown as other activity.
Deposits from related parties held by the Banks amounted to $19,694,000 at December 31, 2022 and $27,669,000 at December 31, 2021.
NOTE 17 - OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Corporation
uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Corporation may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
(In Thousands) | | 2022 | | 2021 |
Commitments to extend credit | | $ | 169,365 | | | $ | 184,364 | |
Standby letters of credit | | 9,915 | | | 7,027 | |
Credit exposure from the sale of assets with recourse | | 7,358 | | | 10,248 | |
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, on an extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
NOTE 18 - CAPITAL REQUIREMENTS
Federal regulations require the Corporation and the Banks to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Common Equity Tier 1, Total, and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.
As of December 31, 2022 and 2021, the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, common equity tier I risk-based, tier I risked-based, total risk-based, and tier I leverage capital ratios must be at least 6.5%, 8%, 10%, and 5%, respectively.
The Corporation’s and the Banks' actual capital ratios (using the definitions from the prompt corrective action rules) are presented in the following tables, which shows that the Corporation and both Banks met all regulatory capital requirements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Corporation |
| | | | | | | | |
| | 2022 | | 2021 |
(In Thousands) | | Amount | | Ratio | | Amount | | Ratio |
Common Equity Tier I Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 165,346 | | | 9.973 | % | | $ | 156,439 | | | 10.791 | % |
For Capital Adequacy Purposes | | 74,607 | | | 4.500 | % | | 65,237 | | | 4.500 | % |
Minimum To Maintain Capital Conservation Buffer | | 116,056 | | | 7.000 | % | | 101,480 | | | 7.000 | % |
To Be Well Capitalized | | 107,766 | | | 6.500 | % | | 94,232 | | | 6.500 | % |
Total Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 181,127 | | | 10.925 | % | | $ | 170,708 | | | 11.776 | % |
For Capital Adequacy Purposes | | 132,633 | | | 8.000 | % | | 115,970 | | | 8.000 | % |
Minimum To Maintain Capital Conservation Buffer | | 174,081 | | | 10.500 | % | | 152,211 | | | 10.500 | % |
To Be Well Capitalized | | 165,791 | | | 10.000 | % | | 144,963 | | | 10.000 | % |
Tier I Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 165,346 | | | 9.973 | % | | $ | 156,439 | | | 10.791 | % |
For Capital Adequacy Purposes | | 99,476 | | | 6.000 | % | | 86,983 | | | 6.000 | % |
Minimum To Maintain Capital Conservation Buffer | | 140,925 | | | 8.500 | % | | 123,226 | | | 8.500 | % |
To Be Well Capitalized | | 132,635 | | | 8.000 | % | | 115,977 | | | 8.000 | % |
Tier I Capital (to Average Assets) | | | | | | | | |
Actual | | $ | 165,346 | | | 8.636 | % | | $ | 156,439 | | | 8.397 | % |
For Capital Adequacy Purposes | | 76,585 | | | 4.000 | % | | 74,521 | | | 4.000 | % |
To Be Well Capitalized | | 95,731 | | | 5.000 | % | | 93,152 | | | 5.000 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Jersey Shore State Bank |
| | | | |
| | 2022 | | 2021 |
(In Thousands) | | Amount | | Ratio | | Amount | | Ratio |
Common Equity Tier I Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 119,783 | | | 9.781 | % | | $ | 110,682 | | | 10.337 | % |
For Capital Adequacy Purposes | | 55,109 | | | 4.500 | % | | 48,183 | | | 4.500 | % |
Minimum To Maintain Capital Conservation Buffer | | 85,725 | | | 7.000 | % | | 74,952 | | | 7.000 | % |
To Be Well Capitalized | | 79,602 | | | 6.500 | % | | 69,598 | | | 6.500 | % |
Total Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 131,379 | | | 10.728 | % | | $ | 121,094 | | | 11.309 | % |
For Capital Adequacy Purposes | | 97,971 | | | 8.000 | % | | 85,662 | | | 8.000 | % |
Minimum To Maintain Capital Conservation Buffer | | 128,587 | | | 10.500 | % | | 112,431 | | | 10.500 | % |
To Be Well Capitalized | | 122,464 | | | 10.000 | % | | 107,078 | | | 10.000 | % |
Tier I Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 119,783 | | | 9.781 | % | | $ | 110,682 | | | 10.337 | % |
For Capital Adequacy Purposes | | 73,479 | | | 6.000 | % | | 64,244 | | | 6.000 | % |
Minimum To Maintain Capital Conservation Buffer | | 104,095 | | | 8.500 | % | | 91,013 | | | 8.500 | % |
To Be Well Capitalized | | 97,972 | | | 8.000 | % | | 85,659 | | | 8.000 | % |
Tier I Capital (to Average Assets) | | | | | | | | |
Actual | | $ | 119,783 | | | 8.383 | % | | $ | 110,682 | | | 8.326 | % |
For Capital Adequacy Purposes | | 57,155 | | | 4.000 | % | | 53,174 | | | 4.000 | % |
To Be Well Capitalized | | 71,444 | | | 5.000 | % | | 66,468 | | | 5.000 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Luzerne Bank |
| | | | | | |
| | 2022 | | 2021 |
(In Thousands) | | Amount | | Ratio | | Amount | | Ratio |
Common Equity Tier I Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 43,364 | | | 9.877 | % | | $ | 42,291 | | | 11.164 | % |
For Capital Adequacy Purposes | | 19,757 | | | 4.500 | % | | 17,047 | | | 4.500 | % |
Minimum To Maintain Capital Conservation Buffer | | 30,733 | | | 7.000 | % | | 26,517 | | | 7.000 | % |
To Be Well Capitalized | | 28,538 | | | 6.500 | % | | 24,623 | | | 6.500 | % |
Total Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 47,549 | | | 10.830 | % | | $ | 46,148 | | | 12.182 | % |
For Capital Adequacy Purposes | | 35,124 | | | 8.000 | % | | 30,306 | | | 8.000 | % |
Minimum To Maintain Capital Conservation Buffer | | 46,100 | | | 10.500 | % | | 39,776 | | | 10.500 | % |
To Be Well Capitalized | | 43,905 | | | 10.000 | % | | 37,882 | | | 10.000 | % |
Tier I Capital (to Risk-weighted Assets) | | | | | | | | |
Actual | | $ | 43,364 | | | 9.877 | % | | $ | 42,291 | | | 11.164 | % |
For Capital Adequacy Purposes | | 26,342 | | | 6.000 | % | | 22,729 | | | 6.000 | % |
Minimum To Maintain Capital Conservation Buffer | | 37,318 | | | 8.500 | % | | 32,199 | | | 8.500 | % |
To Be Well Capitalized | | 35,123 | | | 8.000 | % | | 30,305 | | | 8.000 | % |
Tier I Capital (to Average Assets) | | | | | | | | |
Actual | | $ | 43,364 | | | 8.260 | % | | $ | 42,291 | | | 7.537 | % |
For Capital Adequacy Purposes | | 21,000 | | | 4.000 | % | | 22,444 | | | 4.000 | % |
To Be Well Capitalized | | 26,249 | | | 5.000 | % | | 28,056 | | | 5.000 | % |
NOTE 19 - REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks. Accordingly, at December 31, 2022, the balance in the additional paid in capital account totaling $11,657,000 for JSSB and $42,214,000 for Luzerne is unavailable for dividends.
The Banks are subject to regulatory restrictions, which limit the ability to loan funds to Penns Woods Bancorp, Inc. At December 31, 2022, the regulatory lending limit amounted to approximately $26,839,000.
Cash and Due from Banks
JSSB and Luzerne had no reserve requirements by the district Federal Reserve Bank at December 31, 2022 or 2021; however, if they did they would be reported with cash and due from banks. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of cash on hand and a balance maintained directly with the Federal Reserve Bank.
NOTE 20 - FAIR VALUE MEASUREMENTS
The following disclosures show the hierarchical disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows:
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Level I: | | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
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Level II: | | Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. |
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Level III: | | Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the balance sheet at their fair value on a recurring basis as of December 31, 2022 and 2021, 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.
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| | 2022 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets measured on a recurring basis: | | | | | | | | |
Investment securities, available for sale: | | | | | | | | |
U.S. Government and agency securities | | $ | — | | | $ | 2,896 | | | $ | — | | | $ | 2,896 | |
Mortgage-backed securities | | — | | | 1,282 | | | — | | | 1,282 | |
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State and political securities | | — | | | 142,809 | | | — | | | 142,809 | |
Other debt securities | | — | | | 46,686 | | | — | | | 46,686 | |
Investment equity securities: | | | | | | | | |
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Other equity securities | | 1,142 | | | — | | | — | | | 1,142 | |
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| | 2021 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets measured on a recurring basis: | | | | | | | | |
Investment securities, available for sale: | | | | | | | | |
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Mortgage-backed securities | | $ | — | | | $ | 1,747 | | | $ | — | | | $ | 1,747 | |
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State and political securities | | — | | | 116,658 | | | — | | | 116,658 | |
Other debt securities | | — | | | 48,005 | | | — | | | 48,005 | |
Investment equity securities: | | | | | | | | |
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Other equity securities | | 1,288 | | | — | | | — | | | 1,288 | |
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The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of December 31, 2022 and 2021, 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.
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| | 2022 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets measured on a non-recurring basis: | | | | | | | | |
Impaired loans | | $ | — | | | $ | — | | | $ | 1,923 | | | $ | 1,923 | |
Other real estate owned | | — | | | — | | | 83 | | | 83 | |
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| | 2021 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets measured on a non-recurring basis: | | | | | | | | |
Impaired loans | | $ | — | | | $ | — | | | $ | 2,360 | | | $ | 2,360 | |
Other real estate owned | | — | | | — | | | 83 | | | 83 | |
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The following table provides a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of December 31, 2022 and 2021:
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| | 2022 |
| | Quantitative Information About Level III Fair Value Measurements |
(In Thousands) | | Fair Value | | Valuation Technique(s) | | Unobservable Inputs | | Range | | Weighted Average |
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Impaired loans | | $ | 1,923 | | | Appraisal of collateral (1) | | Appraisal adjustments (1) | | 0 to (34)% | | (14)% |
Other real estate owned | | $ | 83 | | | Appraisal of collateral (1) | | Appraisal adjustments (1) | | (20)% | | (20)% |
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| | 2021 |
| | Quantitative Information About Level III Fair Value Measurements |
(In Thousands) | | Fair Value | | Valuation Technique(s) | | Unobservable Inputs | | Range | | Weighted Average |
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Impaired loans | | $ | 2,360 | | | Appraisal of collateral (1) | | Appraisal adjustments (1) | | 0 to (34)% | | (15)% |
Other real estate owned | | $ | 83 | | | Appraisal of collateral (1) | | Appraisal adjustments (1) | | (20)% | | (20)% |
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
The significant unobservable inputs used in the fair value measurement of the Corporation’s impaired loans using the discounted cash flow valuation technique include temporary changes in payment amounts and the probability of default. Significant increases (decreases) in payment amounts would result in significantly higher (lower) fair value measurements. The probability of default is 0% for impaired loans using the discounted cash flow valuation technique because all defaulted impaired loans are valued using the appraisal of collateral valuation technique.
The significant unobservable input used in the fair value measurement of the Corporation’s impaired loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses. The significant unobservable input used in the fair value measurement of the Corporation’s other real estate owned are the same inputs used to value impaired loans using the appraisal of collateral valuation technique.
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. These fair values do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Also, it is the Corporation’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities. Because no market exists for a significant portion of the Corporation’s financial instruments, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair values. The carrying amounts for cash and cash equivalents, restricted investments in bank stock, bank-owned life insurance, non-time deposits, accrued interest receivable and payable approximate fair value and are considered Level I measurements.
Fair values have been determined by the Corporation using historical data and an estimation methodology suitable for each category of financial instruments. The Corporation’s fair values, methods, and assumptions are set forth below for the Corporation’s other financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Corporation, are not considered financial instruments but have value, the fair value of financial instruments would not represent the full fair value of the Corporation.
The fair values of the Corporation’s financial instruments not required to be measured or reported at fair value are as follows at December 31, 2022 and 2021:
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| | | | | | Fair Value Measurements at December 31, 2022 |
(In Thousands) | | Carrying Value | | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level I) | | Significant Other Observable Inputs (Level II) | | Significant Unobservable Inputs (Level III) |
Financial assets: | | | | | | | | | | |
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Loans held for sale | | $ | 3,298 | | | $ | 3,298 | | | $ | 3,298 | | | $ | — | | | $ | — | |
Loans, net | | 1,624,094 | | | 1,594,073 | | | — | | | — | | | 1,594,073 | |
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Financial liabilities: | | | | | | | | | | |
Time deposits | | $ | 146,282 | | | $ | 137,559 | | | $ | — | | | $ | — | | | $ | 137,559 | |
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Short-term borrowings | | 153,349 | | | 153,349 | | | 153,349 | | | — | | | — | |
Long-term borrowings | | 102,783 | | | 99,118 | | | — | | | — | | | 99,118 | |
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| | | | | | Fair Value Measurements at December 31, 2021 |
(In Thousands) | | Carrying Value | | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level I) | | Significant Other Observable Inputs (Level II) | | Significant Unobservable Inputs (Level III) |
Financial assets: | | | | | | | | | | |
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Loans held for sale | | $ | 3,725 | | | $ | 3,725 | | | $ | 3,725 | | | $ | — | | | $ | — | |
Loans, net | | 1,377,971 | | | 1,379,787 | | | — | | | — | | | 1,379,787 | |
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Financial liabilities: | | | | | | | | | | |
Time deposits | | $ | 205,367 | | | $ | 204,512 | | | $ | — | | | $ | — | | | $ | 204,512 | |
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Short-term borrowings | | 5,747 | | | 5,747 | | | 5,747 | | | — | | | — | |
Long-term borrowings | | 125,963 | | | 127,679 | | | — | | | — | | | 127,679 | |
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NOTE 22 - REVENUE RECOGNITION
On January 1, 2018, the Corporation adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 using the modified retrospective method, and applied the guidance to all contracts in scope that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
The core principle of Topic 606, Revenue from Contracts with Customers, is that an entity recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. Topic 606 requires entities to exercise more judgment when considering the terms of a contract than under Topic 605, Revenue Recognition. Topic 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope.
Topic 606 does not apply to revenue associated with interest income on financial instruments, including loans and securities. Additionally, certain noninterest income streams such as certain credit and debit card fees, income from bank owned life insurance, and gain and losses on sales of loans, equity, lending, and investment securities are out of scope of Topic 606.
Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, merchant income, wire transfer income, check cashing fees, check printing fees, safe deposit box rental fees, life insurance, broker fee's, and brokerage commissions. These revenue streams are largely transactional based and revenue is recognized upon completion of transaction.
Principal versus Agent Considerations
When more than one party is involved in providing goods or services to a customer, Topic 606 requires the Corporation to determine whether it is the principal or an agent in these transactions by evaluating the nature of its promise to the customer. An entity is a principal and therefore records revenue on a gross basis if it controls a promised good or service before transferring that good or service to the customer. An entity is an agent and records as revenue the net amount it retains for its agency services if its role is to arrange for another entity to provide the goods or services. The Corporation most commonly acts as a principal and records revenue on a gross basis, except in certain circumstances. As an example, revenues earned from interchange fees, in which the Corporation acts as an agent, are recorded as non-interest income, net of the related expenses paid to the principal. Brokerage and insurance commissions are recognized when The M Group's services to the broker dealer and investment representative are complete.
Debit Card Fees
Interchange fees are one source of debit and credit card income that is comprised of an amount merchants pay card-issuing banks for the processing of their electronic transactions as a form of payment. ATM service charges, check card usage, and POS debit card transactions generate interchange and debit card income. Per Topic 606 interchange and debit card transaction fees are reported net of related network costs. See Note 1 - Recent Accounting Pronouncements. Prior to the adoption of Topic 606, non-interest expense included network costs. Interchange and debit card transaction fees at December 31, 2022, 2021, and 2020 are reported on a net basis of $1,464,000 $1,511,000, and $1,280,000, respectively. The below table compares gross interchange and debit card transaction fees net network costs for 2022, 2021, and 2020:
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(In Thousands) | | 2022 | | 2021 | | 2020 | |
Debit card transaction fees | | $ | 2,539 | | | $ | 2,684 | | | $ | 1,775 | | |
Other processing service fees | | 357 | | | 236 | | | 306 | | |
Gross interchange and card based transaction fees | | 2,896 | | | 2,920 | | | 2,081 | | |
Network costs | | 1,432 | | | 1,409 | | | 801 | | |
Net interchange and card based transaction fees | | $ | 1,464 | | | $ | 1,511 | | | $ | 1,280 | | |
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NOTE 23 - LEASES
The following table shows finance lease right of use assets and finance lease liabilities as of December 31, 2022:
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(In Thousands) | | Statement of Financial Condition classification | | December 31, 2022 | | December 31, 2021 |
Finance lease right of use assets | | Premises and equipment, net | | $ | 7,006 | | | $ | 7,435 | |
Finance lease liabilities | | Long-term borrowings | | 7,783 | | | 7,963 | |
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The following table shows the components of finance and operating lease expense for the year ended December 31, 2022.
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(In Thousands) | | 2022 | | 2021 | | 2020 |
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Finance Lease Cost: | | | | | | |
Amortization of right-of-use asset | | $ | 429 | | | $ | 474 | | | $ | 199 | |
Interest expense | | 244 | | | 257 | | | 212 | |
Operating lease cost | | 285 | | | 297 | | | 318 | |
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Total Lease Cost | | $ | 958 | | | $ | 1,028 | | | $ | 729 | |
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A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
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(In Thousands) | | Operating | | Finance |
2023 | | $ | 265 | | | $ | 421 | |
2024 | | 255 | | | 427 | |
2025 | | 257 | | | 929 | |
2026 | | 260 | | | 387 | |
2027 | | 268 | | | 388 | |
2028 and thereafter | | 2,300 | | | 8,888 | |
Total undiscounted cash flows | | 3,605 | | | 11,440 | |
Discount on cash flows | | (897) | | | (3,657) | |
Total lease liability | | $ | 2,708 | | | $ | 7,783 | |
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The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of December 31, 2022.
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| | Operating | | Finance |
Weighted-average term (years) | | 17.01 | | 23.44 |
Weighted-average discount rate | | 3.54 | % | | 3.20 | % |
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