Critical Accounting Policies
See Note 1, "Basis of Presentation" for additional information on the adoption of ASC 326, which changes the methodology under which management
calculates its reserve for loans and investment securities, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy.
Introduction
The following is management's discussion and analysis of the financial condition and results of operations at the dates and for the periods presented in the accompanying consolidated financial statements for the
Company. Our consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with the preceding
financial statements presented under Part I. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results you may expect for the full year.
The Company currently engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Bradford and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster
and Chester counties in south central Pennsylvania and Allegany County in southern New York and with the MidCoast acquisition, the Cities of Wilmington and Dover, Delaware. We also have a limited branch office in Union county, Pennsylvania, which
primarily serves agricultural and commercial customers in the central Pennsylvania market. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 36 banking facilities, 33 of which operate as bank branches. In
Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven,
Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square and two branches near the city of Lebanon, Pennsylvania. The limited branch office is located in Winfield, Pennsylvania. In New York, our
office is in Wellsville. In Delaware, we have three branches in Wilmington and one in Dover. We have received approval to open a branch in Williamsport, Pennsylvania, which we expect to open in the second half of 2023.
Risk Management
Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate,
credit, liquidity, reputational and regulatory risk.
Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction, frequency and magnitude of changes in market interest rates. Interest rate risk results from
various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company. The Company uses its asset/liability and funds management policy to control and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from loans with customers and the purchasing of securities. The Company’s primary
credit risk is in the loan portfolio. The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for credit losses. Also, the investment policy limits the
amount of credit risk that may be taken in the investment portfolio.
Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Company has established guidelines within its
asset/liability and funds management policy to manage liquidity risk. These guidelines include, among other things, contingent funding alternatives.
Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion, could result from our actual or alleged conduct in a variety of areas, including legal and
regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information, including fraudulent activity outside the Company’s control. We expend significant resources to comply
with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers, and adversely impact our
earnings and liquidity.
Regulatory and compliance risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company. We cannot predict what legislation might be
enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.
Competition
The banking industry in the Bank’s service areas continue to be extremely competitive, both among commercial banks and with other financial service providers such as consumer finance companies,
thrifts, investment firms, mutual funds, insurance companies, credit unions, agricultural cooperatives and internet entities for loans and deposits. Competition in our north central Pennsylvania market has increased as a result of other financial
institutions looking to expand into new markets. With larger population centers in our central and south central markets, as well as in our Delaware market, we experience more competition to gather deposits and to make loans. Mortgage banking
firms, financial companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms and even government agencies provide additional competition for loans, deposits and other financial services. Fintech and
blockchain entities offering crypto services are also increasing competition for the Company’s financial services. The Bank is generally competitive with all competing financial institutions in its service areas with respect to interest rates paid
on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.
Trust and Investment Services; Oil and Gas Lease Services
Our Investment and Trust Services Division offers professional trust administration, investment management services, estate planning and administration, and custody of securities. In
addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. Assets
held by the Company in a fiduciary or agency capacity for its customers are not included in the Consolidated Balance Sheets since such items are not assets of the Company. Revenues and fees of the Trust Department are reflected in trust income in
the Consolidated Statement of Income. As of March 31, 2023 and December 31, 2022, the Trust Department had $156.6 million and $150.0 million of assets under management, respectively.
Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such as mutual funds, annuities, health and life insurance are made available
through our insurance subsidiary, First Citizens Insurance Agency, Inc. The assets associated with these products are not included in the Consolidated Balance Sheets since such items are not assets of the Company. Assets owned and invested by
customers of the Bank through the Bank’s Investment Representatives increased from $283.5 million at December 31, 2022 to $294.9 million at March 31, 2023. Fee income from the sale of these products is reflected in brokerage and insurance income in
the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central and south central Pennsylvania markets.
Results of Operations
Overview of the Income Statement
The Company had net income of $6,867,000 for the first three months of 2023 compared to $6,740,000 for last year’s comparable period, an increase of $127,000, or 1.9%. Basic earnings per share for the
first three months of 2023 were $1.73, compared to $1.69 for last year’s comparable period, representing a 2.4% increase. Annualized return on assets and return on equity for the three months of 2023 were 1.26% and 11.49%, respectively, compared
with 1.26% and 12.46% for last year’s comparable period.
Net Interest Income
Net interest income, the most significant component of the Company’s earnings, is the amount by which interest income generated from interest-earning assets exceeds interest expense paid on interest-bearing
liabilities.
Net interest income for the first three months of 2023 was $18,080,000, an increase of $1,818,000, or 11.2%, compared to the same period in 2022. For the first three months of 2023, we did not record a provision for
credit losses compared to a provision of $250,000 for the comparable period in 2022. Consequently, net interest income after the provision for credit losses was $18,080,000 in the first three months of 2023 compared to $16,262,000 during the first
three months of 2022.
The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and
interest rate spread created for the three months ended March 31, 2023 and 2022 on a tax equivalent basis (dollars in thousands):
|
|
Analysis of Average Balances and Interest Rates
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2023
|
|
|
March 31, 2022
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance (1)
|
|
|
Interest
|
|
|
Rate
|
|
(dollars in thousands)
|
|
|
$
|
|
|
$ |
|
|
|
%
|
|
|
|
$
|
|
|
$ |
|
|
|
%
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits at banks
|
|
|
14,129
|
|
|
|
27
|
|
|
|
0.78
|
|
|
|
123,379
|
|
|
|
46
|
|
|
|
0.15
|
|
Total short-term investments
|
|
|
14,129
|
|
|
|
27
|
|
|
|
0.78
|
|
|
|
123,379
|
|
|
|
46
|
|
|
|
0.15
|
|
Interest bearing time deposits at banks
|
|
|
6,055
|
|
|
|
44
|
|
|
|
3.00
|
|
|
|
10,957
|
|
|
|
70
|
|
|
|
2.59
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
380,537
|
|
|
|
1,870
|
|
|
|
1.97
|
|
|
|
339,097
|
|
|
|
1,196
|
|
|
|
1.41
|
|
Tax-exempt (3)
|
|
|
120,413
|
|
|
|
781
|
|
|
|
2.59
|
|
|
|
115,020
|
|
|
|
738
|
|
|
|
2.57
|
|
Total investment securities
|
|
|
500,950
|
|
|
|
2,651
|
|
|
|
2.12
|
|
|
|
454,117
|
|
|
|
1,934
|
|
|
|
1.70
|
|
Loans (2)(3)(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
|
212,015
|
|
|
|
2,704
|
|
|
|
5.17
|
|
|
|
200,838
|
|
|
|
2,331
|
|
|
|
4.71
|
|
Construction
|
|
|
85,432
|
|
|
|
1,139
|
|
|
|
5.41
|
|
|
|
61,518
|
|
|
|
607
|
|
|
|
4.00
|
|
Commercial Loans
|
|
|
935,212
|
|
|
|
12,325
|
|
|
|
5.34
|
|
|
|
767,830
|
|
|
|
8,582
|
|
|
|
4.53
|
|
Agricultural Loans
|
|
|
344,291
|
|
|
|
4,253
|
|
|
|
5.01
|
|
|
|
350,784
|
|
|
|
3,749
|
|
|
|
4.33
|
|
Loans to state & political subdivisions
|
|
|
59,318
|
|
|
|
543
|
|
|
|
3.71
|
|
|
|
46,984
|
|
|
|
367
|
|
|
|
3.17
|
|
Other loans
|
|
|
97,833
|
|
|
|
1,692
|
|
|
|
7.01
|
|
|
|
27,193
|
|
|
|
349
|
|
|
|
5.20
|
|
Loans, net of discount
|
|
|
1,734,101
|
|
|
|
22,656
|
|
|
|
5.30
|
|
|
|
1,455,147
|
|
|
|
15,985
|
|
|
|
4.46
|
|
Total interest-earning assets
|
|
|
2,255,235
|
|
|
|
25,378
|
|
|
|
4.56
|
|
|
|
2,043,600
|
|
|
|
18,035
|
|
|
|
3.58
|
|
Cash and due from banks
|
|
|
7,039
|
|
|
|
|
|
|
|
|
|
|
|
6,393
|
|
|
|
|
|
|
|
|
|
Bank premises and equipment
|
|
|
17,617
|
|
|
|
|
|
|
|
|
|
|
|
16,976
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
90,409
|
|
|
|
|
|
|
|
|
|
|
|
79,371
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets
|
|
|
115,065
|
|
|
|
|
|
|
|
|
|
|
|
102,740
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
2,370,300
|
|
|
|
|
|
|
|
|
|
|
|
2,146,340
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
510,198
|
|
|
|
1,517
|
|
|
|
1.21
|
|
|
|
501,502
|
|
|
|
319
|
|
|
|
0.26
|
|
Savings accounts
|
|
|
319,408
|
|
|
|
206
|
|
|
|
0.26
|
|
|
|
317,176
|
|
|
|
74
|
|
|
|
0.09
|
|
Money market accounts
|
|
|
321,178
|
|
|
|
1,274
|
|
|
|
1.61
|
|
|
|
346,073
|
|
|
|
223
|
|
|
|
0.26
|
|
Certificates of deposit
|
|
|
279,244
|
|
|
|
942
|
|
|
|
1.37
|
|
|
|
322,867
|
|
|
|
659
|
|
|
|
0.83
|
|
Total interest-bearing deposits
|
|
|
1,430,028
|
|
|
|
3,939
|
|
|
|
1.12
|
|
|
|
1,487,618
|
|
|
|
1,275
|
|
|
|
0.35
|
|
Other borrowed funds
|
|
|
299,119
|
|
|
|
3,088
|
|
|
|
4.19
|
|
|
|
68,295
|
|
|
|
278
|
|
|
|
1.65
|
|
Total interest-bearing liabilities
|
|
|
1,729,147
|
|
|
|
7,027
|
|
|
|
1.65
|
|
|
|
1,555,913
|
|
|
|
1,553
|
|
|
|
0.40
|
|
Demand deposits
|
|
|
375,003
|
|
|
|
|
|
|
|
|
|
|
|
356,444
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
27,064
|
|
|
|
|
|
|
|
|
|
|
|
17,569
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
402,067
|
|
|
|
|
|
|
|
|
|
|
|
374,013
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
239,086
|
|
|
|
|
|
|
|
|
|
|
|
216,414
|
|
|
|
|
|
|
|
|
|
Total liabilities & stockholders' equity
|
|
|
2,370,300
|
|
|
|
|
|
|
|
|
|
|
|
2,146,340
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
18,351
|
|
|
|
|
|
|
|
|
|
|
|
16,482
|
|
|
|
|
|
Net interest spread (5)
|
|
|
|
|
|
|
|
|
|
|
2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
3.17
|
%
|
Net interest income as a percentage of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
|
3.27
|
%
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
130
|
%
|
|
|
|
|
|
|
|
|
|
|
131
|
%
|
(1)
|
Averages are based on daily averages.
|
(2)
|
Includes loan origination and commitment fees.
|
(3)
|
Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 21%.
|
(4)
|
Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
|
(5)
|
Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
|
Tax exempt revenue is shown on a tax-equivalent basis (non-Gaap) for proper comparison using a federal statutory income tax rate of 21% for the three months ended March 31, 2023 and 2022. For purposes of the
comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been
paid if this income were taxable at the Company’s Federal statutory rate during the corresponding period. The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for
the periods ended March 31, 2023 and 2022 (in thousands):
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2023
|
|
|
2022
|
|
Interest and dividend income from investment securities and interest bearing deposits at banks (non-tax adjusted)
|
|
$
|
2,558
|
|
|
$
|
1,895
|
|
Tax equivalent adjustment
|
|
|
164
|
|
|
|
155
|
|
Interest and dividend income from investment securities and interest bearing deposits at banks (tax equivalent basis)
|
|
$
|
2,722
|
|
|
$
|
2,050
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans (non-tax adjusted)
|
|
$
|
22,549
|
|
|
$
|
15,920
|
|
Tax equivalent adjustment
|
|
|
107
|
|
|
|
65
|
|
Interest and fees on loans (tax equivalent basis)
|
|
$
|
22,656
|
|
|
$
|
15,985
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
25,107
|
|
|
$
|
17,815
|
|
Total interest expense
|
|
|
7,027
|
|
|
|
1,553
|
|
Net interest income
|
|
|
18,080
|
|
|
|
16,262
|
|
Total tax equivalent adjustment
|
|
|
271
|
|
|
|
220
|
|
Net interest income (tax equivalent basis)
|
|
$
|
18,351
|
|
|
$
|
16,482
|
|
The following table shows the tax-equivalent effect of changes in volume and rate on interest income and expense (in thousands):
|
|
Three months ended March 31, 2023 vs 2022 (1)
|
|
|
|
Change in
|
|
|
Change
|
|
|
Total
|
|
|
|
Volume
|
|
|
in Rate
|
|
|
Change
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits at banks
|
|
$
|
5
|
|
|
$
|
(24
|
)
|
|
$
|
(19
|
)
|
Interest bearing time deposits at banks
|
|
|
(39
|
)
|
|
|
13
|
|
|
|
(26
|
)
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
160
|
|
|
|
514
|
|
|
|
674
|
|
Tax-exempt
|
|
|
35
|
|
|
|
8
|
|
|
|
43
|
|
Total investments
|
|
|
195
|
|
|
|
522
|
|
|
|
717
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
|
134
|
|
|
|
239
|
|
|
|
373
|
|
Construction
|
|
|
279
|
|
|
|
253
|
|
|
|
532
|
|
Commercial Loans
|
|
|
2,055
|
|
|
|
1,688
|
|
|
|
3,743
|
|
Agricultural Loans
|
|
|
(68
|
)
|
|
|
572
|
|
|
|
504
|
|
Loans to state & political subdivisions
|
|
|
106
|
|
|
|
70
|
|
|
|
176
|
|
Other loans
|
|
|
1,184
|
|
|
|
159
|
|
|
|
1,343
|
|
Total loans, net of discount
|
|
|
3,690
|
|
|
|
2,981
|
|
|
|
6,671
|
|
Total Interest Income
|
|
|
3,851
|
|
|
|
3,492
|
|
|
|
7,343
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
6
|
|
|
|
1,192
|
|
|
|
1,198
|
|
Savings accounts
|
|
|
1
|
|
|
|
131
|
|
|
|
132
|
|
Money Market accounts
|
|
|
(15
|
)
|
|
|
1,066
|
|
|
|
1,051
|
|
Certificates of deposit
|
|
|
(74
|
)
|
|
|
357
|
|
|
|
283
|
|
Total interest-bearing deposits
|
|
|
(82
|
)
|
|
|
2,746
|
|
|
|
2,664
|
|
Other borrowed funds
|
|
|
1,932
|
|
|
|
878
|
|
|
|
2,810
|
|
Total interest expense
|
|
|
1,850
|
|
|
|
3,624
|
|
|
|
5,474
|
|
Net interest income
|
|
$
|
2,001
|
|
|
$
|
(132
|
)
|
|
$
|
1,869
|
|
Tax equivalent net interest income increased from $16,482,000 for the three month period ended March 31, 2022 to $18,351,000 for the three month period ended March 31, 2023, an increase of $1,869,000. The tax
equivalent net interest margin increased from 3.27% for the first three months of 2022 to 3.30% for the comparable period in 2023. The increase is primarily caused by the increase in the yield of interest-earning assets due to higher market
interest rates in 2023 compared to 2022.
Total tax equivalent interest income for the 2023 three month period increased $7,343,000 as compared to the 2022 three month period. This increase was a result of an increase of $3,851,000 due to a change in volume as
average interest-bearing assets increased $211.6 million. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 98 basis point from 3.58% to 4.56% resulting in an increase interest income
of $3,492,000.
Tax equivalent investment income for the three months ended March 31, 2023 increased $717,000 over the same period last year. The primary cause of the increase is the average rate paid on investment securities
increased 42 basis points to 2.12%.
|
• |
The average balance of taxable securities increased $41.4 million due to purchases made in the first quarter of 2022 due to deposit growth during that period, which resulted in an increase in investment income of $160,000. The yield on
taxable securities increased 56 basis points from 1.41% to 1.97% as a result of the purchases made during 2022 in a higher rate environment. This resulted in an increase in investment income of $514,000.
|
|
• |
The average balance of tax-exempt securities increased by $5.4 million, which resulted in an increase in investment income of $35,000. The yield on tax-exempt securities increased 2 basis points from 2.57% to 2.59%, which corresponds to
an increase in interest income of $8,000. For a discussion of the Company’s current investment strategy, see the “Financial Condition – Investments”.
|
Total loan interest income increased $6,671,000 for the three months ended March 31, 2023 compared to the same period last year, as a result of a loan growth experienced in 2022.
|
• |
Interest income on residential mortgage loans increased $373,000. The change due to rate was an increase of $239,000 as the average yield on residential mortgages increased from 4.71% to 5.17% as a result of the higher rate environment
during the second half of 2022 and all of 2023
|
|
• |
The average balance of construction loans increased $23.9 million as a result of projects in our Delaware market. This resulted in an increase of $279,000 on total interest income due to volume.
|
|
• |
The average balance of commercial loans increased $167.4 million from a year ago. The growth was primarily attributable to growth in the Delaware market. This had a positive impact of $2,055,000 on total interest income due to volume.
The yield increased 81 basis points to 5.34% due to the higher rate environment experienced during the second half of 2022 and all of 2023, which increased loan interest income $1,688,000.
|
|
• |
The average yield of agricultural loans increased 68 basis points to 5.01% due to the higher rate environment resulting in an increase in income of $572,000.
|
|
• |
The average yield of state and political subdivision loans increased 54 basis points to 3.71% due to the higher rate environment resulting in an increase in income of $70,000. The average balance of state and political subdivision loans
increased $12.3 million resulting in an increase in loan interest income of $106,000.
|
|
• |
The average balance of other loans increased $70.6 million as a result of outstanding student loans. This resulted in an increase of $1,184,000 on total interest income due to volume. The average yield on other loans increased 181 basis
points to 7.01% due to the rate earned on the student loans, resulting in an increase in interest income of $159,000.
|
Total interest expense increased $5,474,000 for the three months ended March 31, 2023 compared with the comparative period last year as a result of an increase in the volume of other borrowed funds and an increase in rate on interest-bearing
liabilities. Interest expense increased $1,932,000 due to volume as a result of an increase in the average balance of other borrowed funds of $230.8 million. The average rate paid on interest-bearing liabilities increased from 0.40% to 1.65%. The
increase was driven by the Federal Reserve interest rate increases in 2022 and 2023, which caused interest expenses to increased $3,624,000.
|
• |
The average balance of interest bearing deposits decreased $57.6 million from March 31, 2022 to March 31, 2023. The reduction in average deposits resulted from customer funds transferred to
higher-yielding investment alternatives as well as a reduction in municipal deposits to fund projects in various municipalities. The effect of these volume changes was a decrease in interest expense of $82,000. The average rate
paid on interest bearing deposits was 1.12% for the first three months of 2023 and 0.35% for the comparable period in 2022. This resulted in an increase in interest expense of $2,746,000. The increase was due to the Federal Reserve
increasing interest rates during 2022 and 2023.
|
|
• |
The average balance of other borrowed funds increased $230.8 million to fund loan growth experienced in 2022 and 2023. This resulted in an increase in interest expense of $1,932,000. There was an increase in the average rate paid on
other borrowed funds from 1.65% to 4.19% due to the interest rate increases by the Federal Reserve that increased borrowings costs resulting in an increase in interest expense of $878,000.
|
Provision for Credit Losses
For the three month period ended March 31, 2023, no provision was recorded due to limited loan activity, which compares to a provision of $250,000 for the comparable period in 2022. The provision was lower in 2023 due
to limited loan activity for the first three months of 2023. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).
Non-interest Income
The following table shows the breakdown of non-interest income for the three months ended March 31, 2023 and 2022 (dollars in thousands):
|
|
Three months ended March 31,
|
|
|
Change
|
|
|
|
2023
|
|
|
2022
|
|
|
Amount
|
|
|
%
|
|
Service charges
|
|
$
|
1,211
|
|
|
$
|
1,248
|
|
|
$
|
(37
|
)
|
|
|
(3.0
|
)
|
Trust
|
|
|
230
|
|
|
|
249
|
|
|
|
(19
|
)
|
|
|
(7.6
|
)
|
Brokerage and insurance
|
|
|
514
|
|
|
|
481
|
|
|
|
33
|
|
|
|
6.9
|
|
Gains on loans sold
|
|
|
45
|
|
|
|
105
|
|
|
|
(60
|
)
|
|
|
(57.1
|
)
|
Equity security gains, net
|
|
|
(218
|
)
|
|
|
(45
|
)
|
|
|
(173
|
)
|
|
|
384.4
|
|
Earnings on bank owned life insurance
|
|
|
218
|
|
|
|
207
|
|
|
|
11
|
|
|
|
5.3
|
|
Other
|
|
|
174
|
|
|
|
186
|
|
|
|
(12
|
)
|
|
|
(6.5
|
)
|
Total
|
|
$
|
2,174
|
|
|
$
|
2,431
|
|
|
$
|
(257
|
)
|
|
|
(10.6
|
)
|
Non-interest income for the three months ended March 31, 2023 totaled $2,174,000, a decrease of $257,000 when compared to the same period in 2022. During the first three months of 2023, net equity
security losses amounted to $218,000 as a result of market losses associated with general bank stock market losses compared with a $45,000 loss in the comparable 2022 period associated with market conditions for that period.
The decrease in Trust revenues is due to lower estate settlement fees in 2023 compared to 2022. The decrease in gains on loans sold is attributable to a reduced level of loan sales as rates on the
secondary market have increased, which has resulted in a significant decrease in refinancings of mortgages.
Non-interest Expense
The following tables reflect the breakdown of non-interest expense for the three months ended March 31, 2023 and 2022 (dollars in thousands):
|
|
Three months ended March 31,
|
|
|
Change
|
|
|
|
|
|
|
2023
|
|
|
2022
|
|
|
Amount
|
|
|
%
|
|
Salaries and employee benefits
|
|
$
|
7,677
|
|
|
$
|
6,913
|
|
|
$
|
764
|
|
|
|
11.1
|
|
Occupancy
|
|
|
835
|
|
|
|
794
|
|
|
|
41
|
|
|
|
5.2
|
|
Furniture and equipment
|
|
|
151
|
|
|
|
129
|
|
|
|
22
|
|
|
|
17.1
|
|
Professional fees
|
|
|
381
|
|
|
|
339
|
|
|
|
42
|
|
|
|
12.4
|
|
FDIC insurance
|
|
|
300
|
|
|
|
135
|
|
|
|
165
|
|
|
|
122.2
|
|
Pennsylvania shares tax
|
|
|
298
|
|
|
|
339
|
|
|
|
(41
|
)
|
|
|
(12.1
|
)
|
Amortization of intangibles
|
|
|
31
|
|
|
|
40
|
|
|
|
(9
|
)
|
|
|
(22.5
|
)
|
Merger and acquisition
|
|
|
244
|
|
|
|
-
|
|
|
|
244
|
|
|
#DIV/0!
|
|
Software expenses
|
|
|
351
|
|
|
|
341
|
|
|
|
10
|
|
|
|
2.9
|
|
ORE expenses (recovery)
|
|
|
26
|
|
|
|
(367
|
)
|
|
|
393
|
|
|
|
(107.1
|
)
|
Other
|
|
|
1,484
|
|
|
|
1,568
|
|
|
|
(84
|
)
|
|
|
(5.4
|
)
|
Total
|
|
$
|
11,778
|
|
|
$
|
10,231
|
|
|
$
|
1,547
|
|
|
|
15.1
|
|
Non-interest expenses increased $1,547,000 for the three months ended March 31, 2023 compared to the same period in 2022. Salaries and employee benefits increased $764,000 or 11.1%. The increase
was due to merit increases effective at the beginning of 2023, additional full time equivalent employees of 8.4, which is an increase of 2.8%, and an increase in health care expenses due to higher claims on the Company’s partially self-funded plan.
The increase in merger and acquisition expenses was due to fees associated with the acquisition of HVB announced in the fourth quarter of 2022 that is expected to close in the second quarter of
2023. The increase in ORE expenses was due to the sales of OREO properties in 2022 for a gain of $481,000. The decrease in other expenses is due to insurance proceeds received in 2023 for charge-offs associated with fraudulent customer account
activity recorded in 2022.
Provision for Income Taxes
The provision for income taxes was $1,609,000 for the three month period ended March 31, 2023 compared to $1,472,000 for the same period in 2022. The increase is primarily attributable an increase in income before the
provision for income taxes and certain merger and acquisition expenses not being tax deductible. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate. Our effective tax rate was
19.0% and 17.9% for the first three months of 2023 and 2022, respectively, compared to the statutory rate of 21%. The increase in the effective tax rate is due to certain expense not being tax deductible and having no tax credits from low income
housing partnerships in the first quarter of 2023 as discussed more below.
We are invested in seven limited partnerships that have established low-income housing projects in our market areas with our most recent investments made in the second half of 2022. Three project are currently in
construction phase with the expectation credits will be available in the second half of 2023. The remaining four partnership credits are fully utilized as of December 31, 2023. We anticipate recognizing an aggregate of $6.6 million of tax credits
over the next 13 years.
Financial Condition
Total assets were $2.34 billion at March 31, 2023, an increase of $2.0 million from $2.33 billion at December 31, 2022, due primarily to changes in market interest rates that impacted the fair value of the investment
portfolio. Cash and cash equivalents remained steady at $26.2 million. Available for sale securities increased $3.9 million and net loans increased $1.8 million to $1.71 billion at March 31, 2023. Total deposits decreased $44.5 million to $1.80
billion since year-end 2022, while borrowed funds increased $30.8 million to $288.1 million.
Cash and Cash Equivalents
Cash and cash equivalents totaled $23.2 million at March 31, 2023 and December 31, 2022. Management actively measures and evaluates the Company’s liquidity position through our Asset–Liability Committee and believes
the Company’s liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources including the Bank’s core deposits, Federal Home Loan Bank financing, federal funds lines with
correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet
commitments as they come due.
Investments
The following table shows the composition of the investment portfolio (including debt and equity securities) as of March 31, 2023 and December 31, 2022 (dollars in thousands):
|
|
March 31, 2023
|
|
|
December 31, 2022
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Agency securities
|
|
$
|
70,849
|
|
|
|
15.9
|
|
|
$
|
70,677
|
|
|
|
16.0
|
|
U. S. Treasury notes
|
|
|
151,710
|
|
|
|
34.2
|
|
|
|
148,570
|
|
|
|
33.6
|
|
Obligations of state & political subdivisions
|
|
|
111,538
|
|
|
|
25.0
|
|
|
|
110,300
|
|
|
|
25.0
|
|
Corporate obligations
|
|
|
9,352
|
|
|
|
2.1
|
|
|
|
9,383
|
|
|
|
2.1
|
|
Mortgage-backed securities in government sponsored entities
|
|
|
99,966
|
|
|
|
22.4
|
|
|
|
100,576
|
|
|
|
22.8
|
|
Equity securities
|
|
|
1,923
|
|
|
|
0.4
|
|
|
|
2,208
|
|
|
|
0.5
|
|
Total
|
|
$
|
445,338
|
|
|
|
100.0
|
|
|
$
|
441,714
|
|
|
|
100.0
|
|
|
|
March 31, 2023/
|
|
|
|
December 31, 2022
|
|
|
|
Change
|
|
|
|
Amount
|
|
|
%
|
|
Debt securities:
|
|
|
|
|
|
|
U. S. Agency securities
|
|
$
|
172
|
|
|
|
0.2
|
|
U. S. Treasury notes
|
|
|
3,140
|
|
|
|
2.1
|
|
Obligations of state & political subdivisions
|
|
|
1,238
|
|
|
|
1.1
|
|
Corporate obligations
|
|
|
(31
|
)
|
|
|
(0.3
|
)
|
Mortgage-backed securities in government sponsored entities
|
|
|
(610
|
)
|
|
|
(0.6
|
)
|
Equity securities
|
|
|
(285
|
)
|
|
|
(12.9
|
)
|
Total
|
|
$
|
3,624
|
|
|
|
0.8
|
|
Our investment portfolio increased by $3.6 million, or 0.8%, from December 31, 2022 to March 31, 2023. During 2023, we did not purchase any investment securities. We experienced $3.1 million of principal repayments and
$1.5 million of calls and maturities. As a result of decreases in market interest rates, the unrealized loss on available for sale investment portfolio decreased $9.0 million. Excluding our short-term investments consisting of monies held primarily
at the Federal Reserve for liquidity purposes, our investment portfolio for the three month period ended March 31, 2023 yielded 2.12%, compared to 1.70% in the comparable period in 2022, on a tax equivalent basis.
The investment strategy for 2023 has been to utilize cashflows from the investment portfolio to repay overnight borrowings. The increase in the investment portfolio was due to long-term interest rates decreasing in the
first quarter of 2023 compared to December 31, 2022. We continually monitor interest rate trading ranges and seek to time investment security purchases when rates are in the top third of the trading range. The Bank believes its investment strategy
has appropriately mitigated its interest rate risk exposure for various rate environments, including a rising rate environment, while providing sufficient cashflows to meet liquidity needs.
Management continues to monitor the earnings performance and the liquidity of the investment portfolio on a regular basis. Through active balance sheet management and analysis of the investment portfolio, the Company
believes it maintains sufficient liquidity to satisfy depositor withdrawal requirements and various credit needs of its customers.
Loans
The following table shows the composition of the loan portfolio as of March 31, 2023 and December 31, 2022 (dollars in thousands):
|
|
March 31, 2023
|
|
|
December 31, 2022
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
212,793
|
|
|
|
12.3
|
|
|
$
|
210,213
|
|
|
|
12.2
|
|
Commercial
|
|
|
878,972
|
|
|
|
51.0
|
|
|
|
876,569
|
|
|
|
50.8
|
|
Agricultural
|
|
|
312,793
|
|
|
|
18.1
|
|
|
|
313,614
|
|
|
|
18.2
|
|
Construction
|
|
|
75,745
|
|
|
|
4.4
|
|
|
|
80,691
|
|
|
|
4.7
|
|
Consumer
|
|
|
87,101
|
|
|
|
5.1
|
|
|
|
86,650
|
|
|
|
5.0
|
|
Other commercial loans
|
|
|
64,133
|
|
|
|
3.7
|
|
|
|
63,222
|
|
|
|
3.7
|
|
Other agricultural loans
|
|
|
32,052
|
|
|
|
1.9
|
|
|
|
34,832
|
|
|
|
2.0
|
|
State & political subdivision loans
|
|
|
59,886
|
|
|
|
3.5
|
|
|
|
59,208
|
|
|
|
3.4
|
|
Total loans
|
|
|
1,723,475
|
|
|
|
100.0
|
|
|
|
1,724,999
|
|
|
|
100.0
|
|
Less allowance for credit losses - loans
|
|
|
15,250
|
|
|
|
|
|
|
|
18,552
|
|
|
|
|
|
Net loans
|
|
$
|
1,708,225
|
|
|
|
|
|
|
$
|
1,706,447
|
|
|
|
|
|
|
|
March 31, 2023/
|
|
|
|
December 31, 2022
|
|
|
|
Change
|
|
|
|
Amount
|
|
|
%
|
|
Real estate:
|
|
|
|
|
|
|
Residential
|
|
$
|
2,580
|
|
|
|
1.2
|
|
Commercial
|
|
|
2,403
|
|
|
|
0.3
|
|
Agricultural
|
|
|
(821
|
)
|
|
|
(0.3
|
)
|
Construction
|
|
|
(4,946
|
)
|
|
|
(6.1
|
)
|
Consumer
|
|
|
451
|
|
|
|
0.5
|
|
Other commercial loans
|
|
|
911
|
|
|
|
1.4
|
|
Other agricultural loans
|
|
|
(2,780
|
)
|
|
|
(8.0
|
)
|
State & political subdivision loans
|
|
|
678
|
|
|
|
1.1
|
|
Total loans
|
|
$
|
(1,524
|
)
|
|
|
(0.1
|
)
|
The Bank’s lending efforts have historically been focused in north central Pennsylvania and southern New York. With the acquisition of FNB and the opening of offices in Lancaster County, this focus has grown to include
Lebanon, Schuylkill, Berks and Lancaster County markets of south central, Pennsylvania. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities in central Pennsylvania. In
December 2017, we completed a branch acquisition in State College, which provides us with opportunities in Centre County, Pennsylvania and other areas of central Pennsylvania. In April 2020, we completed the MidCoast acquisition, which expanded our
markets into the State of Delaware with activity centered around the cities of Wilmington and Dover, Delaware. Since the MidCoast acquisition, we have opened two additional branches in the Delaware market to better serve customers in the Wilmington
market, as well as the surrounding area of Chester County, Pennsylvania. We have received approval to open an office in Williamsport, Pennsylvania. We originate loans primarily through direct loans to our existing customer base, with new customers
generated through the strong relationships our lending teams have with their customers and our lenders expertise in certain areas, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and
advisory board members, existing customers and the Bank’s website. The Bank offers a variety of loans although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction
loans. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors. As of March 31, 2023, the Company had one industry specific loan concentration to the dairy industry,
totaling $116.8 million or 6.8% of total loans compared to $120.1 million or 7.0% of total loans at December 31, 2022.
During the first three months of 2023, loan activity has been limited. We have experienced several large pay-downs, which were expected at the time of repayment. The rise in market interest rates has had an impact and
slowed activity, especially in the first quarter of 2023.
While the Bank lends to companies that service companies that explore for natural gas in our market area, the Bank has not originated any loans to companies performing the actual drilling and exploration activities.
Loans made by the Bank are to service industry customers which include trucking companies, stone quarries and other support businesses, favoring customers that have had a relationship with the Bank prior to supporting the exploration for natural
gas. We also have originated loans to businesses and individuals for restaurants, hotels and apartment rentals that have been developed and expanded to meet the housing and living needs of the gas industry workers. Due to our understanding of the
industry and its cyclical nature, the loans made for natural gas-related activities have been originated in accordance with specific policies and procedures for lending to these entities, which include more stringent loan to value thresholds,
shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.
For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income.
Allowance for Credit Losses - Loans
The allowance for credit losses - loans is maintained at a level which, in management’s judgment, is adequate to absorb losses in the loan portfolio. The provision for credit losses - loans is charged against current
income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for credit losses - loans was $15,250,000 or 0.88% of total loans as of March 31, 2023 as compared to
$18,552,000 or 1.08% of loans as of December 31, 2022. During the first quarter of 2023, the Company adopted CECL, which resulted in a decrease in the allowance for credit losses – loans of $3.3 million, which accounts for the majority of the
change in the allowance since December 31, 2022. The Company did not record a provision during the first quarter of 2023 due to limited loan activity. Net charge-offs for the first quarter of 2023 totaled $2,000. The following table shows the
distribution of the allowance for credit losses - loans and the percentage of loans compared to total loans by loan category as of March 31, 2023 and December 31, 2022 (dollars in thousands):
|
|
March 31,
|
|
|
December 31
|
|
|
|
2023
|
|
|
2022
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
1,195
|
|
|
|
12.3
|
|
|
$
|
1,056
|
|
|
|
12.2
|
|
Commercial
|
|
|
6,747
|
|
|
|
51.0
|
|
|
|
10,120
|
|
|
|
50.8
|
|
Agricultural
|
|
|
3,409
|
|
|
|
18.1
|
|
|
|
4,589
|
|
|
|
18.2
|
|
Construction
|
|
|
851
|
|
|
|
4.4
|
|
|
|
801
|
|
|
|
4.7
|
|
Consumer
|
|
|
1,220
|
|
|
|
5.1
|
|
|
|
135
|
|
|
|
5.0
|
|
Other commercial loans
|
|
|
712
|
|
|
|
3.7
|
|
|
|
1,040
|
|
|
|
3.7
|
|
Other agricultural loans
|
|
|
250
|
|
|
|
1.9
|
|
|
|
489
|
|
|
|
2.0
|
|
State & political subdivision loans
|
|
|
42
|
|
|
|
3.5
|
|
|
|
322
|
|
|
|
3.4
|
|
Unallocated
|
|
|
824
|
|
|
|
N/A
|
|
|
|
0
|
|
|
|
N/A
|
|
Total allowance for credit losses - loans
|
|
$
|
15,250
|
|
|
|
100.0
|
|
|
$
|
18,552
|
|
|
|
100.0
|
|
The following table provides information related to credit loss experience and loan quality for the three months ended March 31, 2023 and the year ended December 31, 2022 (dollars in thousands).
March 31, 2023
|
|
Credit Loss Expense (Benefit)
|
|
|
Net (charge-
offs) Recoveries
|
|
|
Average Loans
|
|
|
Ratio of net
(charge-offs)
recoveries to
Average loans
|
|
|
Allowance
to total
loans
|
|
|
Non-
accrual
loans as a
percent of
loans
|
|
|
Allowance to
total non-
accrual
loans
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
60
|
|
|
$
|
-
|
|
|
$
|
212,015
|
|
|
|
0.00
|
%
|
|
|
0.56
|
%
|
|
|
0.24
|
%
|
|
|
232.49
|
%
|
Commercial
|
|
|
(303
|
)
|
|
|
-
|
|
|
|
867,520
|
|
|
|
0.00
|
%
|
|
|
0.77
|
%
|
|
|
0.28
|
%
|
|
|
278.46
|
%
|
Agricultural
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
311,321
|
|
|
|
0.00
|
%
|
|
|
1.09
|
%
|
|
|
0.98
|
%
|
|
|
111.08
|
%
|
Construction
|
|
|
153
|
|
|
|
-
|
|
|
|
85,432
|
|
|
|
0.00
|
%
|
|
|
1.12
|
%
|
|
|
3.11
|
%
|
|
|
36.11
|
%
|
Consumer
|
|
|
48
|
|
|
|
(3
|
)
|
|
|
97,833
|
|
|
|
0.00
|
%
|
|
|
1.40
|
%
|
|
|
0.00
|
%
|
|
NA
|
|
Other commercial loans
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
67,692
|
|
|
|
0.00
|
%
|
|
|
1.11
|
%
|
|
|
2.66
|
%
|
|
|
41.69
|
%
|
Other agricultural loans
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
32,970
|
|
|
|
0.00
|
%
|
|
|
0.78
|
%
|
|
|
1.04
|
%
|
|
|
75.08
|
%
|
State & political subdivision loans
|
|
|
-
|
|
|
|
-
|
|
|
|
59,318
|
|
|
|
0.00
|
%
|
|
|
0.07
|
%
|
|
|
0.00
|
%
|
|
NA
|
|
Unallocated
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Total
|
|
$
|
-
|
|
|
$
|
(2
|
)
|
|
$
|
1,734,101
|
|
|
|
0.00
|
%
|
|
|
0.88
|
%
|
|
|
0.60
|
%
|
|
|
146.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
(91
|
)
|
|
$
|
-
|
|
|
$
|
204,063
|
|
|
|
0.00
|
%
|
|
|
0.50
|
%
|
|
|
0.28
|
%
|
|
|
178.68
|
%
|
Commercial
|
|
|
2,018
|
|
|
|
3
|
|
|
|
782,016
|
|
|
|
0.00
|
%
|
|
|
1.15
|
%
|
|
|
0.32
|
%
|
|
|
364.29
|
%
|
Agricultural
|
|
|
(140
|
)
|
|
|
-
|
|
|
|
312,999
|
|
|
|
0.00
|
%
|
|
|
1.46
|
%
|
|
|
1.03
|
%
|
|
|
142.43
|
%
|
Construction
|
|
|
367
|
|
|
|
-
|
|
|
|
73,214
|
|
|
|
0.00
|
%
|
|
|
0.99
|
%
|
|
|
0.00
|
%
|
|
NA
|
|
Consumer
|
|
|
(111
|
)
|
|
|
(16
|
)
|
|
|
58,715
|
|
|
|
-0.03
|
%
|
|
|
0.16
|
%
|
|
|
0.00
|
%
|
|
NA
|
|
Other commercial loans
|
|
|
439
|
|
|
|
(422
|
)
|
|
|
72,444
|
|
|
|
-0.58
|
%
|
|
|
1.64
|
%
|
|
|
0.10
|
%
|
|
|
1677.42
|
%
|
Other agricultural loans
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
34,421
|
|
|
|
0.00
|
%
|
|
|
1.40
|
%
|
|
|
0.82
|
%
|
|
|
171.58
|
%
|
State & political subdivision loans
|
|
|
41
|
|
|
|
-
|
|
|
|
56,004
|
|
|
|
0.00
|
%
|
|
|
0.54
|
%
|
|
|
0.00
|
%
|
|
NA
|
|
Unallocated
|
|
|
(771
|
)
|
|
|
-
|
|
|
|
-
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Total
|
|
$
|
1,683
|
|
|
$
|
(435
|
)
|
|
$
|
1,593,876
|
|
|
|
-0.03
|
%
|
|
|
1.08
|
%
|
|
|
0.40
|
%
|
|
|
267.40
|
%
|
The Company believes it utilizes a disciplined and thorough loan review process based upon its internal loan policy approved by the Company’s Board of Directors. The purpose of the review is to assess loan quality,
analyze delinquencies, identify problem loans, evaluate potential charge-offs and recoveries, and assess general overall economic conditions in the markets served. An external independent loan review is performed on our commercial portfolio at
least semi-annually for the Company. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) new loans originated for over $1.0 million in the last year, 3)
review a sample of borrowers with commitments greater than or equal to $1.0 million, 4) selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other
loans which management or the consultant deems appropriate. As part of this review, our underwriting process and loan grading system is evaluated.
Management believes it uses the best information available to make such determinations and that the allowance for credit losses - loans is adequate as of March 31, 2023. However, future adjustments could be required if
circumstances differ substantially from assumptions and estimates used in making the initial determination. A prolonged downturn in the economy, changes in the economies of various segments of our agricultural and commercial portfolios, high
unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, loan loss provisions and reduction in income.
Additionally, bank regulatory agencies periodically examine the Bank’s allowance for credit losses. The banking agencies could require the recognition of additions to the allowance for credit losses - loans based upon their judgment of information
available to them at the time of their examination.
On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports. Based on data surrounding the collection process of each identified loan, the loan may be added or
deleted from the monthly watch list. The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may choose to include. Watch list loans are continually monitored going
forward until satisfactory conditions exist that allow management to upgrade and remove the loan from the watchlist. In certain cases, loans may be placed on non-accrual status or charged-off based upon management’s evaluation of the borrower’s
ability to pay. All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans, other commercial loans and other agricultural loans, on non-accrual are evaluated quarterly for
impairment.
See also “Note 5 – Loans and Related Allowance for Credit Loan Losses - Loans” to the consolidated financial statements.
The following table is a summary of our non-performing assets as of March 31, 2023 and December 31, 2022.
|
|
March 31, 2023
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
2023
|
|
|
2022
|
|
Non-performing loans:
|
|
|
|
|
|
|
Non-accruing loans
|
|
$
|
10,404
|
|
|
$
|
6,938
|
|
Accrual loans - 90 days or
|
|
|
|
|
|
|
|
|
more past due
|
|
|
48
|
|
|
|
7
|
|
Total non-performing loans
|
|
|
10,452
|
|
|
|
6,945
|
|
Foreclosed assets held for sale
|
|
|
428
|
|
|
|
543
|
|
Total non-performing assets
|
|
$
|
10,880
|
|
|
$
|
7,488
|
|
The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2022 to March 31, 2023 in non-performing loans (in
thousands). Non-performing loans include those accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding
principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.
|
|
March 31, 2023
|
|
|
December 31, 2022
|
|
|
|
|
|
|
Non-Performing Loans
|
|
|
|
|
|
Non-Performing Loans
|
|
|
|
30 - 89 Days
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
30 - 89 Days
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Non-
|
|
|
Total Non-
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Non-
|
|
|
Total Non-
|
|
(in thousands)
|
|
Accruing
|
|
|
Accruing
|
|
|
accrual
|
|
|
Performing
|
|
|
Accruing
|
|
|
Accruing
|
|
|
accrual
|
|
|
Performing
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
453
|
|
|
$
|
-
|
|
|
$
|
514
|
|
|
$
|
528
|
|
|
$
|
469
|
|
|
$
|
-
|
|
|
$
|
591
|
|
|
$
|
591
|
|
Commercial
|
|
|
328
|
|
|
|
6
|
|
|
|
2,423
|
|
|
|
2,429
|
|
|
|
1,018
|
|
|
|
-
|
|
|
|
2,778
|
|
|
|
2,778
|
|
Agricultural
|
|
|
59
|
|
|
|
-
|
|
|
|
3,069
|
|
|
|
3,069
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,222
|
|
|
|
3,222
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
2,357
|
|
|
|
2,357
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
Other commercial loans
|
|
|
65
|
|
|
|
35
|
|
|
|
1,708
|
|
|
|
1,743
|
|
|
|
1695
|
|
|
|
-
|
|
|
|
62
|
|
|
|
62
|
|
Other agricultural loans
|
|
|
307
|
|
|
|
-
|
|
|
|
333
|
|
|
|
333
|
|
|
|
-
|
|
|
|
-
|
|
|
|
285
|
|
|
|
285
|
|
Total nonperforming loans
|
|
$
|
1,336
|
|
|
$
|
48
|
|
|
$
|
10,404
|
|
|
$
|
10,452
|
|
|
$
|
3,329
|
|
|
$
|
7
|
|
|
$
|
6,938
|
|
|
$
|
6,945
|
|
|
|
Change in Non-Performing Loans
|
|
|
|
March 31, 2023 /December 31, 2022
|
|
(in thousands)
|
|
Amount
|
|
|
%
|
|
Real estate:
|
|
|
|
|
|
|
Residential
|
|
$
|
(70
|
)
|
|
|
(11.8
|
)
|
Commercial
|
|
|
(349
|
)
|
|
|
(12.6
|
)
|
Agricultural
|
|
|
(153
|
)
|
|
|
(4.7
|
)
|
Construction
|
|
|
2,357
|
|
|
#DIV/0!
|
|
Consumer
|
|
|
(7
|
)
|
|
|
(100.0
|
)
|
Other commercial loans
|
|
|
1,681
|
|
|
|
2,711.3
|
|
Other agricultural loans
|
|
|
48
|
|
|
|
16.8
|
|
Total nonperforming loans
|
|
$
|
3,507
|
|
|
|
50.5
|
|
The Company worked with customers directly affected by the COVID-19 pandemic. The Company offered assistance in accordance with regulatory guidelines. As a result of the COVID-19
pandemic, the Company is engaging in more frequent communication with borrowers to better understand their financial situation and the challenges they face allowing it to respond proactively as needs and issues arise. Should economic conditions
worsen, the Company could experience increases in non-performing loans and further increases in its required allowance for credit losses - loans and record additional provision expense. It is possible that the Company's asset quality measures could
worsen at future measurement periods if the effects of the COVID-19 pandemic and inflation are prolonged.
For the three months ended March 31, 2023, we did not record a provision for credit losses, which compares to $250,000 for the same period in 2022. The decrease is primarily attributable to limited
loan activity that occurred in 2023. Non-performing loans increased $3,500,000 from December 31, 2022 to March 31, 2023 due primarily to two commercial loan relationships secured by real estate, being placed on non-accrual status in the first
quarter of 2023. At March 31, 2023, approximately 73.8% of the Bank’s non-performing loans are associated with the following five customer relationships:
|
• |
A commercial loan relationship with $773,000 outstanding, and additional letters of credit of $1.2 million available, secured by undeveloped land, stone quarries and equipment, was on non-accrual status as of March 31, 2023. The Company
services the natural gas industry, as well as local municipalities. As a result, the reduced exploration for natural gas in north central Pennsylvania has significantly impacted the cash flows of the customer, who provides excavation
services and stone for pad construction related to these activities. During 2020, the Company had the underlying equipment collateral appraised and in the first quarter of 2022, the Company had the quarry appraised. The appraisals indicated
a decrease in collateral values compared to the appraisal ordered for the loan origination, however, the loan was still considered well secured on a loan to value basis at March 31, 2023. In 2021 and 2022, the customer liquidated some
excess equipment and the funds have been utilized to pay down a portion of the loans. Management determined that no specific reserve was required as of March 31, 2023.
|
|
• |
An agricultural loan customer with a total loan relationship of $1.8 million, secured by real estate, equipment and cattle, was on non-accrual status as of March 31, 2023. The customer declared bankruptcy during the fourth quarter of
2018 and developed a workout plan that was approved by the bankruptcy court in the fourth quarter of 2019 and resulted in monthly payments resuming in late 2019 that continues into 2023. Included within these loans to this customer are
loans which are subject to Farm Service Agency guarantees in excess of $700,000. Depressed milk prices and the pandemic have created cash flow difficulties for this customer. Absent a sizable and sustained increase in milk prices, which is
not assured, we will need to rely upon the collateral for repayment of interest and principal. During 2020, the Company had the underlying collateral appraised. Management determined that no specific reserve was required as of March 31,
2023.
|
|
• |
An agricultural loan customer with a total loan relationship of $1.2 million, secured by real estate was on non-accrual status as of March 31, 2023. The customer filed bankruptcy in the first quarter of 2023. The COVID-19 pandemic
escalated the cash flow difficulties this customer was experiencing. We expect that we will need to rely upon the collateral for repayment of interest and principal. Management reviewed the collateral and determined that no specific reserve
was required as of March 31, 2023.
|
|
• |
A commercial customer with a total loan relationship of $1.6 million, secured by airplanes and camera equipment was on non-accrual status as of March 31, 2023. The customer is in the process of selling its business, which has taken
longer than expected causing cashflow difficulties. Management reviewed the collateral and determined that no specific reserve was required as of March 31, 2023.
|
|
• |
A construction customer with a total loan relationship of $2.4 million, secured by partially developed real estate, was on non-accrual status as of March 31, 2023. The customer has experienced delays in developing the real estate for
resale resulting in financing difficulties. Management reviewed the collateral and determined that a specific reserve of $257,000 was required as of March 31, 2023.
|
Management believes that the allowance for credit losses - loans at March 31, 2023 was adequate at that date, which was based on the following factors:
|
• |
Five loan relationships comprise 73.80% of the non-performing loan balance, which required a specific reserve of $257,000 as of March 31, 2023.
|
|
• |
The Company has a history of low charge-offs, which were 0.00% of average loans on an annualized basis for 2023 and 0.3% for 2022.
|
Bank Owned Life Insurance
The Company holds bank owned life insurance policies to offset future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and
eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits. As of March 31, 2023, and December 31, 2022, the cash surrender value of the life insurance was $39.6 million and $39.4 million,
respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $218,000 and $207,000 for the three month
periods ended March 31, 2023 and 2022, respectively. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers’ credit ratings.
The Company policies that were purchased directly from insurance companies are structured so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with
the beneficiary of the policy. Under these agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The net amount at risk is the total death benefit payable less the cash surrender value
of the policy as of the date of death. The policies acquired as part of the acquisition of FNB provide a fixed split-dollar benefit for the beneficiary’s estate, which is dependent on several factors including whether the covered individual was a
former Director of First National Bank of Fredericksburg (“FNB”) or a former employee of FNB and their salary level. As of March 31, 2023, and December 31, 2022, included in other liabilities on the Consolidated Balance Sheet was a liability of
$643,000 and $660,000, respectively, for the obligation under the split-dollar benefit agreements.
Premises and Equipment
Premises and equipment decreased $31,000 to $17.6 million as of March 31, 2023 from December 31, 2022 as a result of a depreciation.
Deposits
The following table shows the composition of deposits as of March 31, 2023 and December 31, 2022 (dollars in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2023
|
|
|
2022
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Non-interest-bearing deposits
|
|
$
|
369,658
|
|
|
|
20.5
|
|
|
$
|
396,260
|
|
|
|
21.5
|
|
NOW accounts
|
|
|
500,133
|
|
|
|
27.8
|
|
|
|
512,502
|
|
|
|
27.8
|
|
Savings deposits
|
|
|
321,589
|
|
|
|
17.9
|
|
|
|
321,917
|
|
|
|
17.5
|
|
Money market deposit accounts
|
|
|
326,665
|
|
|
|
18.2
|
|
|
|
335,838
|
|
|
|
18.2
|
|
Certificates of deposit
|
|
|
281,642
|
|
|
|
15.6
|
|
|
|
277,691
|
|
|
|
15.0
|
|
Total
|
|
$
|
1,799,687
|
|
|
|
100.0
|
|
|
$
|
1,844,208
|
|
|
|
100.0
|
|
|
|
March 31, 2023/
|
|
|
|
December 31, 2022
|
|
|
|
Change
|
|
|
|
Amount
|
|
|
%
|
|
Non-interest-bearing deposits
|
|
$
|
(26,602
|
)
|
|
|
(6.7
|
)
|
NOW accounts
|
|
|
(12,369
|
)
|
|
|
(2.4
|
)
|
Savings deposits
|
|
|
(328
|
)
|
|
|
(0.1
|
)
|
Money market deposit accounts
|
|
|
(9,173
|
)
|
|
|
(2.7
|
)
|
Certificates of deposit
|
|
|
3,951
|
|
|
|
1.4
|
|
Total
|
|
$
|
(44,521
|
)
|
|
|
(2.4
|
)
|
Deposits decreased $44.5 million since December 31, 2022. The reduction in deposits resulted from customer funds transferred to higher-yielding investment alternatives; and seasonal
reductions in municipal deposits as well as funds used for various projects within municipalities. Brokered deposits totaled $11.0 million and $16.0 million as of March 31, 2023 and December 31, 2022,
respectively.
Borrowed Funds
Borrowed funds were $288.1 million and $257.3 million as of March 31, 2023 and December 31, 2022, respectively. The increase in borrowed funds was due additional borrowings as a result of the decrease in deposits
during the first quarter of 2023. During 2023, short term advances from the Federal Home Loan Bank of Pittsburgh increased $30.7 million and repurchase agreements increased $61,000. As of March 31, 2023, long-term advances total $27.4 million,
short-term advances total $242.8 million and repurchase agreements total $17.8 million.
In April 2020, the Bank entered into two interest rate swap agreements to convert floating-rate debt to fixed rate debt on notional amounts of $15.0 million and $10.0 million. The interest rate swap
instruments involve an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amounts. The differentials paid or received on interest rate swap agreements are recognized as
adjustments to interest expense in the period. The interest rate swap agreements were entered into on April 1, 2020 and expire on April 1, 2025 and April 1, 2027. In April 2020, the Company entered into an interest rate swap agreement to convert
floating-rate debt to fixed rate debt on a notional amounts of $7.5 million. The interest rate swap instrument involves an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional
amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on April 13, 2020 and expire on June 17, 2027. In May
of 2020, the Bank entered into three two year forward interest rate swaps that will convert floating rate debt to fixed rate debt on notional amounts of $6.0 million each. The interest rate swap instruments involves an agreement to receive a
floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The
interest rate swap agreements were entered into on May 14, 2020 and expire on May 14, 2027, 2029 and 2032. The fair value of the interest rate swaps at March 31, 2023 was $5,963,000 and is included within fair value of derivative instruments on the
consolidated balance sheets.
The Company’s current strategy for borrowings is to consider terms and structures to manage interest rate risk and liquidity in a rising rate environment. The Company's daily cash requirements or short-term investments
are primarily met by using the financial instruments available through the Federal Home Loan Bank of Pittsburgh.
Stockholders’ Equity
We evaluate stockholders’ equity in relation to total assets and the risks associated with those assets. The greater the capital resource, the more likely a corporation will meet its cash obligations and absorb
unforeseen losses. For these reasons, capital adequacy has been, and will continue to be, of paramount importance to the Company. As such, the Company has implemented policies and procedures to ensure that it has adequate capital levels. As part
of this process, we routinely stress test our capital levels and identify potential risk and alternative sources of additional capital should the need arise.
Total stockholders’ equity was $213.2 million at March 31, 2023 compared to $200.1 million at December 31, 2022, an increase of $13,091,000, or 6.5%. Excluding accumulated other comprehensive loss, stockholders’
equity increased $6.7 million, or 2.9%. The accumulated comprehensive loss decreased $6.4 million, which was primarily the result of the increase in fair value of the Company’s available for sale investment portfolio caused by the decrease in
longer term market interest rates. For the three months of 2023, the Company had net income of $6.9 million and declared cash dividends of $1.9 million, or $0.485 per share, representing a cash dividend payout ratio of 28.0%. As a result of
implementing CECL, retained earnings increased $1,766,000.
All of the Company’s debt investment securities are classified as available-for-sale, making this portion of the Company’s balance sheet more sensitive to the changing market value of investments. As a result of
decreases in longer term market interest rates, the defined benefit plan obligations and the interest rate swaps entered into during 2020, accumulated other comprehensive loss increased approximately $6.4 million from December 31, 2022.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements, and regulatory capital standards. The
Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as
defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As permitted by applicable federal
regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1
capital divided by average total consolidated assets) exceeds 9%. Following the passage of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in response to the COVID-19 pandemic, the federal banking regulators revised the CBLR
framework as follows: (i) beginning in the second quarter of 2020, a qualifying community bank need only have a leverage ratio of at least 8%, subject to the other qualifying requirements, and (ii) if a qualifying community bank’s leverage ratio
falls below 8%, then it will have two calendar quarters to maintain a leverage ratio of 7% or greater. These revisions under the CARES Act are effective April 23, 2020 and terminated on December 31, 2020. Following such termination there is a
grace period for returning to the 9% CBLR threshold. The CBLR was set at 8.5% for 2021, and 9% thereafter. The grace period is also adjusted to account for the graduating increase. As a result, in 2021, a qualifying community bank utilizing the
grace period must maintain a CBLR of at least 7.5%. Thereafter, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the
grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply. At March 31, 2023, the Bank
leverage ratio under the CBLR framework was 9.02%, which meets the 9.0% requirement to be considered “well-capitalized” under the CBLR. The Bank leverage ratio as of December 31, 2022 was 8.77%, which did not meet the ratio to be considered “well-capitalized” under the CBLR as of December 31, 2022. As such, the following table provides the Bank’s computed risk‑based capital ratios as of December 31, 2022, which
reflects the Bank being well capitalized on that date (dollars in thousands):
|
|
Actual
|
|
|
For Capital Adequacy Purposes
|
|
|
To Be Well Capitalized Under
Prompt Corrective Action Provisions
|
|
December 31, 2022
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total Capital (to Risk Weighted Assets):
|
|
Company
|
|
$
|
238,966
|
|
|
|
12.87
|
%
|
|
$
|
148,567
|
|
|
|
8.00
|
%
|
|
$
|
185,709
|
|
|
|
10.00
|
%
|
Bank
|
|
$
|
222,714
|
|
|
|
12.01
|
%
|
|
$
|
148,348
|
|
|
|
8.00
|
%
|
|
$
|
185,435
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to Risk Weighted Assets):
|
|
Company
|
|
$
|
210,250
|
|
|
|
11.32
|
%
|
|
$
|
111,425
|
|
|
|
6.00
|
%
|
|
$
|
148,567
|
|
|
|
8.00
|
%
|
Bank
|
|
$
|
203,998
|
|
|
|
11.00
|
%
|
|
$
|
111,261
|
|
|
|
6.00
|
%
|
|
$
|
148,348
|
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital (to Risk Weighted Assets):
|
|
Company
|
|
$
|
202,750
|
|
|
|
10.92
|
%
|
|
$
|
83,569
|
|
|
|
4.50
|
%
|
|
$
|
120,711
|
|
|
|
6.50
|
%
|
Bank
|
|
$
|
203,998
|
|
|
|
11.00
|
%
|
|
$
|
83,446
|
|
|
|
4.50
|
%
|
|
$
|
120,533
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to Average Assets):
|
|
Company
|
|
$
|
210,250
|
|
|
|
9.03
|
%
|
|
$
|
93,161
|
|
|
|
4.00
|
%
|
|
$
|
116,451
|
|
|
|
5.00
|
%
|
Bank
|
|
$
|
203,998
|
|
|
|
8.77
|
%
|
|
$
|
93,075
|
|
|
|
4.00
|
%
|
|
$
|
116,344
|
|
|
|
5.00
|
%
|