ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to taxable equivalents based on the marginal corporate federal tax rate of 21%. The tax equivalent adjustments to net interest income for 2024, 2023, and 2022 were $486,000, $525,000, and $522,000, respectively.
Reported net interest income increased $3,916,000 to $58,880,000 for the year ended December 31, 2024 compared to the year ended December 31, 2023, as the impact of growth in the earning asset portfolio balance and yield more than offset the increases in rate paid and average balance of interest-bearing liabilities. Total interest income increased $18,103,000 or $18,064,000 on a tax equivalent basis, primarily from growth in the loan portfolio balance and yield. Tax equivalent interest income on the investment portfolio increased as legacy assets matured with the proceeds reinvested predominately into short and medium term bonds carrying a higher yield than the legacy assets.
Interest expense increased $14,187,000 to $50,818,000 for the year ended December 31, 2024 compared to 2023. The increase in interest expense was driven by a 96 bp increase in the average rate paid on interest-bearing deposits led by a 93 bp increase in the average rate paid on money market deposits coupled with an increase of 87 bp in the average rate paid on time deposits. Impacting the increase in time deposit expense was the increased utilization of brokered time deposits that were utilized in place of higher cost short-term borrowings. Interest expense on total borrowings increased $356,000 as the increase in rate paid on borrowings more than offset the decrease in average balance of total borrowings of $4,338,000 from 2023 levels.
Reported net interest income decreased $2,816,000 to $54,964,000 for the year ended December 31, 2023 compared to the year ended December 31, 2022, as the growth in the earning asset portfolio balance and yield was more than offset by an increase in rate paid on interest-bearing liabilities. Total interest income increased $26,667,000 or $26,670,000 on a tax equivalent basis, primarily from growth in the loan portfolio balance and yield. Tax equivalent interest income on the investment portfolio increased as legacy assets matured with the proceeds reinvested predominately into short and medium term bonds carrying a higher yield than the legacy assets. The overall increase in the yield on the earning asset portfolio was driven by the impact of the rate increases enacted by the Federal Open Market Committee ("FOMC").
Interest expense increased $29,483,000 to $36,631,000 for the year ended December 31, 2023 compared to 2022. The increase in interest expense was driven by a 168 bp increase in the average rate paid on interest-bearing deposits led by a 282 bp increase in the average rate paid on time deposits coupled with an increase of $131,270,000 in average time deposit balances as deposits shifted from lower cost core deposits and the use of brokered deposits increased. Interest expense on total borrowings increased $11,042,000 as utilization of borrowings increased to supplement the funding of the loan portfolio growth.
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AVERAGE BALANCES AND INTEREST RATES
The following tables set forth certain information relating to the Corporation’s average balance sheet and reflect the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
(Dollars In Thousands)
Average Balance (1)
Interest
Average Rate
Average Balance (1)
Interest
Average Rate
Average Balance (1)
Interest
Average Rate
Assets:
Tax-exempt loans (3)
All other loans (4)
Total loans (2)
Fed funds sold
Taxable securities
Tax-exempt securities (3)
Total securities
Interest-bearing deposits
Total interest-earning assets
Other assets
Total assets
Liabilities and shareholders’ equity:
Savings
Super Now deposits
Money market deposits
Time deposits
Total interest-bearing deposits
Short-term borrowings
Long-term borrowings
Total borrowings
Total interest-bearing liabilities
Demand deposits
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Interest rate spread
Net interest income/margin
1. Information on this table has been calculated using average daily balance sheets to obtain average balances.
2. Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.
3. Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% see reconciliation below.
4. Fees on loans are included with interest on loans as follows: 2024 - $639,000; 2023 - $301,000; 2022 - $529,000.
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Reconciliation of Taxable Equivalent Net Interest Income
(In Thousands)
Total interest income
Total interest expense
Net interest income
Tax equivalent adjustment
Net interest income (fully taxable equivalent)
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated. For interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average volume). Increases and decreases due to both interest rate and volume, which cannot be separated, have been allocated proportionally to the change due to volume and the change due to interest rate. Income and interest rates are on a taxable equivalent basis.
Year Ended December 31,
Increase (Decrease) Due To
Increase (Decrease) Due To
(In Thousands)
Volume
Rate
Net
Volume
Rate
Net
Interest income:
Loans, tax-exempt
Loans
Fed funds sold
Taxable investment securities
Tax-exempt investment securities
Interest-bearing deposits
Total interest-earning assets
Interest expense:
Savings deposits
Super Now deposits
Money market deposits
Time deposits
Short-term borrowings
Long-term borrowings
Total interest-bearing liabilities
Change in net interest income
PROVISION FOR CREDIT LOSSES
The provision for credit losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed semi-annually for the Corporation. Management remains committed to an aggressive program of problem loan identification and resolution.
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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 discounted cash flow calculations made on each loan in the segment, adjusted for changes in the internal and external environment through qualitative adjustments and forecasts. In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for credit losses is adequate at December 31, 2024, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy or employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased credit loss provisions and reductions in interest income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' credit loss allowance. The banking regulators could require additions to the credit loss allowance based on their judgment of information available to them at the time of their examination.
When determining the appropriate allowance level, management has attributed the allowance for credit losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.
The allowance for credit losses increased from $11,446,000 at December 31, 2023 to $11,848,000 at December 31, 2024. At December 31, 2024, the allowance for credit losses was 0.63% of total loans compared to 0.62% of total loans at December 31, 2023. The allowance increased from December 31, 2023 to December 31, 2024 by $402,000, which was affected by net charge offs of $540,000 and growth within the portfolio for the 2024 period.
The provision for loan credit losses totaled $942,000 for the year ended December 31, 2024 compared to a recovery of $927,000 for the year ended December 31, 2023. The increase in the provision was appropriate when considering the impact of the net charge offs during 2024, and gross loan growth of $37,314,000. Net charge offs of $540,000 represented 0.03% of average loans for the year ended December 31, 2024 compared to net recoveries of $525,000 or 0.03% of average loans for the year ended December 31, 2023 which increased the historical loss rate in the model. The provision related to the commercial, financial and agricultural segment of the loan portfolio decreased due to net recoveries of $582,000 at December 31, 2024 for the segment. An increase occurred in the automobile segment of the loan portfolio due an increase of $316,000 in net charge-offs. Non-performing loans increased due to an addition of a commercial relationship during 2024. The majority of the non-performing loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within the allowance for credit losses. Significant loan portfolio growth, internal loan review and analysis, level of net charge offs, and an increased level of non-performing loans noted previously, dictated an increase in the provision for credit losses resulting in the allowance for loan as a percentage of gross loans to increase. Utilizing both internal and external resources, as noted, senior management has concluded that the allowance for credit remains at a level adequate to provide for expected credit inherent in the loan portfolio.
The allowance for credit losses decreased from $15,637,000 at December 31, 2022 to $11,446,000 at December 31, 2023. At December 31, 2023, the allowance for credit losses was 0.62% of total loans compared to 0.95% of total loans at December 31, 2022. The decrease in allowance was primarily due to the adoption of CECL on January 1, 2023 which decreased the reserve by $3,789,000 coupled with net recoveries of $525,000 for the period ended December 31, 2023.
The provision for loan credit losses was a recovery of $927,000 for the year ended December 31, 2023 compared to $1,910,000 for the year ended December 31, 2022. The decrease in the provision was appropriate when considering the impact of CECL adoption, net recoveries during 2023, and gross loan growth of $200,033,000. Net recoveries of $525,000 represented 0.03% of average loans for the year ended December 31, 2023 compared to net charge-offs of $449,000 or 0.03% of average loans for the year ended December 31, 2022 which reduced the historical loss rate in the model. The provision related to the commercial, financial and agricultural segment of the loan portfolio decreased due to an increase in net recoveries of $1,332,000 coupled with the adoption of CECL. An increase occurred in the automobile segment of the loan portfolio due to portfolio growth and an increase in net charge-offs. Non-performing loans decreased due to a payoff of a non-performing loan during 2023. The majority of the non-performing loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within the allowance for credit losses. Significant loan portfolio growth, impact of CECL adoption, internal loan review and analysis, level of net recoveries, and decreased level of non-performing loans noted previously, dictated a decrease in the provision for credit resulting in the allowance for loan as a percentage of gross loans to decrease. Utilizing both internal and external resources, as noted, senior management
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has concluded that the allowance for credit losses remains at a level adequate to provide for expected credit losses inherent in the loan portfolio.
NON-INTEREST INCOME
Total non-interest income increased $1,243,000 from the year ended December 31, 2023 to December 31, 2024. Excluding net security losses, non-interest income increased $1,125,000 year over year. Gain on sale of loans and loan broker income increased as mortgage volume increased due to the decrease in interest rates caused by the rate decreases enacted by the FOMC. Brokerage commissions increased primarily due to the performance of the stock market which led to increased portfolio values and associated fees. Debit card income increased as usage increased.
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
Service charges
Net debt securities losses, available for sale
Net equity securities (losses) gains
Bank owned life insurance
Gain on sale of loans
Insurance commissions
Brokerage commissions
Loan broker income
Debit card income
Other
Total non-interest income
Total non-interest income decreased $338,000 from the year ended December 31, 2022 to December 31, 2023. Excluding net security losses, non-interest income decreased $525,000 year over year. Bank owned life insurance increased primarily due to a gain recognized on the receipt of death benefit in 2023 of $381,000. Gain on sale of loans and loan broker income decreased significantly as mortgage volume decreased due to the increase in interest rates caused by the rate increases enacted by the FOMC. Brokerage commissions decreased primarily due to the downturn and volatility the stock market which led to decreased portfolio values and associated fees. Debit card income decreased as usage declined.
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
Service charges
Net debt securities losses, available for sale
Net equity securities gains (losses)
Bank owned life insurance
Gain on sale of loans
Insurance commissions
Brokerage commissions
Loan broker income
Debit card income
Other
Total non-interest income
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NON-INTEREST EXPENSE
Total non-interest expenses increased $1,988,000 from the year ended December 31, 2023 to December 31, 2024. The increase in salaries and employee benefits was attributable to routine wage and benefit increases. Furniture and equipment expense increase primarily due to increased maintenance. Contributing to the increase in Pennsylvania shares tax expense was the increase in net income. Marketing expense decreased as marketing efforts continued to shift away form print and billboards to social media campaigns. Professional fees decreased primarily as legal and audit expenses related to the At-The-Market stock offering declined. Other expenses increased primarily due to the level of expenses associated with the defined benefit pension plan. The announced agreement for Northwest Bancshares, Inc. to acquire the Corporation resulted merger related expenses of $735,000 during the fourth quarter of 2024.
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
Salaries and employee benefits
Occupancy
Furniture and equipment
Software amortization
Pennsylvania shares tax
Professional fees
Federal Deposit Insurance Corporation deposit insurance
Marketing
Intangible amortization
Merger expense
Other
Total non-interest expense
Total non-interest expenses increased $1,498,000 from the year ended December 31, 2022 to December 31, 2023. The increase in salaries and employee benefits was attributable to routine wage and benefit increases coupled with the hiring of additional commercial lenders. Occupancy and furniture and equipment expense increased primarily due to increased maintenance costs. Contributing to the decrease in Pennsylvania shares tax expense was a tax credit purchasing program that was started in 2022. Professional fees increased as internal and external audit fees increased along with an increase in general legal expenses. FDIC deposit insurance increased primarily due to an increase in the assessment rate. Other expenses increased primarily due to the level of expenses associated with the defined benefit pension plan.
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Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
Salaries and employee benefits
Occupancy
Furniture and equipment
Software amortization
Pennsylvania shares tax
Professional fees
Federal Deposit Insurance Corporation deposit insurance
Marketing
Intangible amortization
Goodwill impairment
Other
Total non-interest expense
INCOME TAXES
The provision for income taxes for the year ended December 31, 2024 resulted in an effective income tax rate of 18.97% compared to 18.28% for 2023.
The provision for income taxes for the year ended December 31, 2023 resulted in an effective income tax rate of 18.28% compared to 19.29% for 2022.
FINANCIAL CONDITION
INVESTMENTS
The fair value of the investment portfolio decreased $6,414,000 from December 31, 2023 to December 31, 2024. The decrease in value is the result of a decrease in the municipal and other debt segments of the portfolio as the investment portfolio continues to be actively managed in order to reduce interest rate and market risk along with required capital allocation. This strategy is being deployed through selective purchasing of bonds that mature within ten years with an emphasis on those carrying a regulatory capital risk weighting of 0-20% which resulted in an increase in the mortgage-backed segment of the portfolio. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 82% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.
The fair value of the investment portfolio decreased $2,748,000 from December 31, 2022 to December 31, 2023. The decrease in value is the result of a decrease in the municipal segment of the portfolio as the investment portfolio continues to be actively managed in order to reduce interest rate and market risk along with required capital allocation. This strategy is being deployed through selective purchasing of bonds that mature within ten years with an emphasis on those carrying a regulatory capital risk weighting of 0-20%. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 79% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.
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The carrying amounts of investment securities are summarized as follows for the years ended December 31, 2024 and 2023:
Change
(In Thousands)
Balance
% Portfolio
Balance
% Portfolio
Amount
Available for sale (AFS):
U.S. Government agency securities
Mortgage-backed securities
State and political securities
Other debt securities
Total debt securities
Investment equity securities:
Other equity securities
Total equity securities
Total
The following table shows the maturities and repricing of investment securities, at amortized cost and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 21% tax rate) at December 31, 2024:
(In Thousands)
One Year or Less
Over One Year Through Five Years
Over Five Years Through Ten Years
Over Ten Years
Amortized Cost Total
U.S. Government agency securities:
Amortized cost
Yield
Mortgage-backed securities:
Amortized cost
Yield
State and political securities:
Amortized cost
Yield
Other debt securities:
Amortized cost
Yield
Total Amount
Total Yield
Equity Securities
Investment equity amortized cost
Total Investment Portfolio Amortized Cost
Total Investment Portfolio Yield
All yields represent weighted average yields expressed on a tax equivalent basis. They are calculated on the basis of the cost, adjusted for amortization of premium and accretion of discount, and effective yields weighted for the scheduled maturity of each security. The taxable equivalent adjustment represents the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 21% tax rate (derived by dividing tax-exempt interest by 79%).
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The distribution of credit ratings by amortized cost and estimated fair value for the debt security portfolio at December 31, 2024 follows:
A- to AAA
B- to BBB+
C to CCC+
Not Rated
Total
(In Thousands)
Amortized Cost
Fair
Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair
Value
Available for sale
U.S. Government and agency securities
Mortgage-backed securities
State and political securities
Other debt securities
Total debt securities
LOAN PORTFOLIO
Gross loans of $1,877,078,000 at December 31, 2024 represented an increase of $37,314,000 from December 31, 2023. The residential segment increased primarily due to continued growth in home equity products. In addition the commercial real estate segment of the loan portfolio increased from the previous year as emphasis remains on this segment of the portfolio.
Gross loans of $1,839,764,000 at December 31, 2023 represented an increase of $200,033,000 from December 31, 2022. The residential segment increased primarily due to continued growth in home equity products. In addition the commercial real estate segment of the loan portfolio increased from the previous year as emphasis remains on this segment of the portfolio. Indirect auto lending increased as this segment of the portfolio is emphasized as its characteristics provide diversification.
The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loan at December 31, 2024 and 2023:
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
Commercial, financial, and agricultural
Real estate mortgage:
Residential
Commercial
Construction
Consumer Automobile
Other consumer installment loans
Net deferred loan fees and discounts
Gross loans
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The amounts of domestic loans at December 31, 2024 are presented below by category and maturity:
Commercial, financial, and agricultural
Real Estate
Consumer automobile
Other consumer installment
(In Thousands)
Residential
Commercial
Construction
Total
Loans with variable interest rates:
1 year or less
1 through 5 years
5 through 15 years
After 15 years
Total floating interest rate loans
Loans with fixed interest rates:
1 year or less
1 through 5 years
5 through 15 years
After 15 years
Total fixed interest rate loans
Total
Net deferred loan fees and discounts
Total, net
· The loan maturity information is based upon original loan terms and is not adjusted for “rollovers.” In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, at interest rates prevailing at the date of renewal.
· Scheduled repayments are reported in maturity categories in which the payment is due.
The Banks do not make loans that provide for negative amortization, nor do any loans contain conversion features. The Banks did not have any foreign loans outstanding at December 31, 2024.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents the amount which management estimates is adequate to provide for future expected losses inherent in its loan portfolio as of the consolidated balance sheet date. All loan losses are charged to the allowance and all recoveries are credited to it per the allowance method of providing for credit losses. The allowance for credit losses is established through a provision for credit losses charged to operations. The provision for credit losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, individually evaluated loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed semi-annually for the Banks. Management remains committed to an aggressive program of problem loan identification and resolution.
Maintaining an appropriate allowance for credit losses is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, residential construction, commercial and industrial, and commercial real estate, an internal credit rating process is used. Management believes that internal credit ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal credit rating categories is a significant component of the allowance for credit losses methodology for these loans, which bases the probability of default on this migration. Assigning credit ratings involves judgment. The Company's loan review process provide a separate assessment of credit rating accuracy. Credit ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff or if specific loan review assessments identify a deterioration or an improvement in the loans.
Management considers the performance of the loan portfolio and its impact on the allowance for credit losses. Management does not assign internal credit ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, and
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consumer automobile loans. For these loans, the most relevant credit quality indicator is delinquency status and management evaluates credit quality based on the aging status of the loan.
Historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A base life time loss within the portfolio is calculated utilizing discounted cash flows driven by the charge-off and recovery data over the past ten years and certain credit quality indicators within the portfolio including borrower credit scores and loan-to-value ratios. Management has identified a number of additional qualitative factors which it uses to supplement the base loss lifetime rate because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.
The allowance for credit losses increased from $11,446,000 at December 31, 2023 to $11,848,000 at December 31, 2024. At December 31, 2024 and 2023, the allowance for credit losses to total loans was 0.63% and 0.62%, respectively. The fluctuations in credit losses was primarily affected by a net charge offs of $540,000 or 0.03% of average loans for year ended December 31, 2024.
The allowance for credit losses decreased from $15,637,000 at December 31, 2022 to $11,446,000 at December 31, 2023. At December 31, 2023 and 2022, the allowance for credit losses to total loans was 0.62% and 0.95%, respectively. The drivers of the decrease were the change in the ACL model upon the adoption of CECL on January 1, 2023 coupled with net loan recoveries of $525,000 or 0.03% of average loans for the year ended December 31, 2023.Management concluded that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date as noted in the provision for loan losses discussion.
Allocation of the Allowance For Credit Losses
December 31, 2024
December 31, 2023
(In Thousands)
Amount
Percentage of Loans in Each Category to Total Loans
Amount
Percentage of Loans in Each Category to Total Loans
Balance at end of period applicable to:
Commercial, financial, and agricultural
Real estate mortgage:
Residential
Commercial
Construction
Consumer automobiles
Other consumer installment loans
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Additional allowance for credit losses and net (charge-offs) recoveries information is presented by loan portfolio segment in the tables below. The twelve months ending December 31, 2023 was impacted by the CECL adoption reclassification entry disclosed in Note 6. Loan Credit Quality and Related Allowance for Credit Losses.
Amount of Allowance for Credit Losses Allocated
Total loans
Allowance for Credit Losses to Total Loans Ratio
Net (Charge-Offs) Recoveries
Average Loans
Ratio of Net (Charge-Offs) Recoveries to Average Loans
(In Thousands)
December 31, 2024
Commercial, financial, and agricultural
Real estate mortgage:
Residential
Commercial
Construction
Consumer automobiles
Other consumer installment loans
Total non-accrual loans outstanding
Non-accrual loans to total loans outstanding
Allowance for loan losses to non-accrual loans
Amount of Allowance Allocated
Total loans
Allowance for Credit Losses to Total Loans Ratio
Net (Charge-Offs) Recoveries
Average Loans
Ratio of Net (Charge-Offs) Recoveries to Average Loans
(In Thousands)
December 31, 2023
Commercial, financial, and agricultural
Real estate mortgage:
Residential
Commercial
Construction
Consumer automobiles
Other consumer installment loans
Total non-accrual loans outstanding
Non-accrual loans to total loans outstanding
Allowance for loan losses to non-accrual loans
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Amount of Allowance Allocated
Total loans
Allowance for Credit Losses to Total Loans Ratio
Net (Charge-Offs) Recoveries
Average Loans
Ratio of Net (Charge-Offs) Recoveries to Average Loans
(In Thousands)
December 31, 2022
Commercial, financial, and agricultural
Real estate mortgage:
Residential
Commercial
Construction
Consumer automobiles
Other consumer installment loans
Unallocated
Total non-accrual loans outstanding
Non-accrual loans to total loans outstanding
Allowance for loan losses to non-accrual loans
The negative provision for commercial and agricultural loans was primarily the result of the level of net recoveries. The provision for residential real estate loans decreased as the portfolio metrics continue to improve. The provision for commercial real estate loans increased primarily due to the credit downgrading of several loan relationships. The provision for consumer automobiles decreased slightly as the provision approximated the level of net charge-offs while the portfolio balance remained stable.
The provision for all segments of the loan portfolio were impacted by the adoption of CECL on January 1, 2023. The provision for commercial and agricultural loans decreased during 2023 due to an increase in the level of net recoveries. The provision for residential real estate loans decreased primarily due to the adoption of CECL. The provision for commercial real estate loans decreased primarily due to the adoption of CECL and a minimal amount of net charge-offs. The provision for consumer automobiles increased due to increased indirect loan volume and an increase in net charge-offs.
The provision for commercial and agricultural loans decreased during 2022 due to levels and trends of non-accrual loans in our portfolio and a decline in net charge-offs. The provision for residential real estate loans remained flat as the portfolio size increased but was offset by a decline in the level of net charge-offs. The provision for this loan type is adjusted by national indices as well as our historical losses. The provision for commercial real estate loans decreased primarily due to an 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.
NON-PERFORMING LOANS
The increase in non-performing loans during 2024 is primarily due to the addition of a commercial relationship being placed on non-accrual status which has been individually evaluated within the allowance for credit losses. The majority of the non-performing loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within the allowance for credit losses.
The following table presents information concerning non-performing loans. The accrual of interest will be discontinued when the principal or interest of a loan is in default for 90 days or more, or as soon as payment is questionable, unless the loan is well secured and in the process of collection. Consumer loans and residential real estate loans secured by 1 to 4 family dwellings are not ordinarily subject to those guidelines. The reversal of previously accrued but uncollected interest applicable to any loan placed in a non-accrual status and the treatment of subsequent payments of either principal or interest is handled in accordance with GAAP. These principles do not require a write-off of previously accrued interest if principal and interest are ultimately protected by sound collateral values. A non-performing loan may be restored to accruing status when:
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1. Principal and interest is no longer due and unpaid;
2. It becomes well secured and in the process of collection; and
3. Prospects for future contractual payments are no longer in doubt.
Total Nonperforming Loans
(In Thousands)
90 Days Past Due
Nonaccrual
Total
The level of non-accruing loans continues to fluctuate annually and is attributed to the various economic factors experienced both regionally and nationally. Overall, the portfolio is well secured with a majority of the balance making regular payments or scheduled to be satisfied in the near future. Presently, there are no significant loans where serious doubts exist as to the ability of the borrower to comply with the current loan payment terms which are not included in the nonperforming categories as indicated above.
Management’s judgment in determining the amount of the additions to the allowance charged to operating expense includes but is not limited to the following factors with no single factor being determinative:
1. Economic conditions and the impact on the loan portfolio;
2. Analysis of past loan charge-offs experienced by category and comparison to outstanding loans;
3. Effect of problem loans on overall portfolio quality; and
4. Reports of examination of the loan portfolio by the Department and the FDIC.
DEPOSITS
Total average deposits increased $89,919,000 or 5.72% from 2023 to 2024. Noninterest-bearing deposits average balance decreased $22,950,000 as deposits shifted from non-interest bearing and lower rate deposit products into time deposits. This shift in deposits, along with utilization of brokered deposits, resulted in time deposits increasing $167,617,000. The Bank had no major deposit customers at December 31, 2024 and 2023, respectively.
Total average deposits decreased $33,661,000 or 2.10% from 2022 to 2023. Noninterest-bearing deposits average balance decreased $41,361,000 as deposits shifted from non-interest bearing and lower rate deposit products into time deposits. This shift in deposits, along with utilization of brokered deposits, resulted in time deposits increasing $131,270,000. The Bank had major deposit customers with a combined outstanding balances of approximately $0 and $112,228,000 at December 31, 2023 and 2022, respectively.
(In Thousands)
Average
Amount
Rate
Average
Amount
Rate
Average
Amount
Rate
Noninterest-bearing
Savings
Super Now
Money Market
Time
Total average deposits
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The following table shows the scheduled maturities of time deposits that are in excess of the FDIC insurance limit as of December 31, 2024.
(In Thousands)
Due within 3 months or less
Due after 3 months and within 6 months
Due after 6 months and within 12 months
Due after 12 months
Total
As of December 31, 2024 and 2023 the Company had $429,964,000 and $436,074,000, respectively, in uninsured deposits. Included in the total uninsured deposits is a concentration of public funds which were collateralized by the Banks in the amount of $77,429,000 and $77,687,000 at December 31, 2024 and 2023, respectively. Total uninsured deposits less collateralized public funds was $352,535,000 and $358,387,000 at December 31, 2024 and 2023.
SHAREHOLDERS’ EQUITY
Shareholders’ equity increased $13,675,000 to $205,231,000 at December 31, 2024 compared to December 31, 2023. During the twelve months ended December 31, 2024 the Company issued a total of 31,066 shares for net proceeds of $632,000 as part of the Dividend Reinvestment Plan. Accumulated other comprehensive loss of $5,293,000 at December 31, 2024 decreased from a loss of $9,150,000 at December 31, 2023 as a result of a decrease in net unrealized loss on available for sale securities to $4,567,000 at December 31, 2024 from a net unrealized loss of $6,396,000 at December 31, 2023 coupled with a decrease in loss of $2,028,000 in the defined benefit plan obligation. The current level of shareholders’ equity equates to a book value per share of $27.16 at December 31, 2024 compared to $25.51 at December 31, 2023, and an equity to asset ratio of 9.19% at December 31, 2024 and 8.69% at December 31, 2023. Dividends declared for the twelve months ended December 31, 2024 and 2023 were $1.28 per share.
Shareholders’ equity increased $23,891,000 to $191,556,000 at December 31, 2023 compared to December 31, 2022. During the twelve months ended December 31, 2023 the Company sold 420,069 shares of common stock, for net proceeds of $8,291,000, in a registered at-the-market offering. An additional 17,929 shares for net proceeds of $406,000 were issued as part of the Dividend Reinvestment Plan during the twelve months ended December 31, 2023. Accumulated other comprehensive loss of $9,150,000 at December 31, 2023 decreased from a loss of $13,958,000 at December 31, 2022 as a result of a decrease in net unrealized loss on available for sale securities to $6,396,000 at December 31, 2023 from a net unrealized loss of $9,819,000 at December 31, 2022 coupled with a decrease in loss of $1,385,000 in the defined benefit plan obligation. The current level of shareholders’ equity equates to a book value per share of $25.51 at December 31, 2023 compared to $23.76 at December 31, 2022, and an equity to asset ratio of 8.69% at December 31, 2023 and 8.38% at December 31, 2022. Dividends declared for the twelve months ended December 31, 2023 and 2022 were $1.28 per share.
Bank regulators have risk based capital guidelines. Under these guidelines the Corporation and each Bank are required to maintain minimum ratios of core capital and total qualifying capital as a percentage of risk weighted assets and certain off-balance sheet items. At December 31, 2024, both the Corporation’s and each Bank’s required ratios were well above the minimum ratios (and including the current capital conservation buffer where applicable) as follows:
Corporation
Jersey Shore State Bank
Luzerne Bank
Minimum
Standards
Common equity tier 1 capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Tier 1 capital to average assets
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For a more comprehensive discussion of these requirements, see “Regulation and Supervision” in Item 1 of the Annual Report on Form 10-K and Note 18 to the consolidated financial statements. Management believes that the Corporation and the Banks will continue to exceed regulatory capital requirements.
RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average shareholders’ equity, and other certain equity ratios are presented as follows:
Percentage of net income to:
Average total assets
Average shareholders’ equity
Percentage of dividends declared to net income
Percentage of average shareholders’ equity to average total assets
LIQUIDITY, INTEREST RATE SENSITIVITY, AND MARKET RISK
The Asset/Liability Committee addresses the liquidity needs of the Corporation to ensure that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.
The following liquidity measures are monitored for compliance and were within the limits cited at December 31, 2024, except for net loans to total deposits which was 109%.
1. Net Loans to Total Assets, 85% maximum
2. Net Loans to Total Deposits, 100% maximum
3. Cumulative 90 day Maturity GAP %, +/- 20% maximum
4. Cumulative 1 Year Maturity GAP %, +/- 25% maximum
Fundamental objectives of the Corporation’s asset/liability management process are to maintain adequate liquidity while minimizing interest rate risk. The maintenance of adequate liquidity provides the Corporation with the ability to meet its financial obligations to depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.
The Corporation, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments, and expenses. In order to control cash flow, the Corporation estimates future flows of cash from deposits and loan payments. The primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, as well as FHLB borrowings. Funds generated are used principally to fund loans and purchase investment securities. Management believes the Corporation has adequate resources to meet its normal funding requirements.
Management monitors the Corporation’s liquidity on both a short and long-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long term funding needs are addressed by cash on hand, maturities and sales of available for sale investment securities, loan repayments and maturities, loan sales, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides core ingredients to satisfy depositor, borrower, and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Corporation has a current borrowing capacity at the FHLB of $856,562,000 with a total credit exposure of $297,382,000 utilized, leaving $559,180,000 available. In addition to this credit arrangement, the Corporation has additional lines of credit with correspondent banks of $90,000,000. The Corporation’s management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs through the utilization of cash on hand, borrowing lines, sale of investments and loans, and property sale leasebacks,
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Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Corporation’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by segmenting both assets and liabilities into future time periods (usually 12 months or less) based upon when repricing can be effected. Repriceable assets are subtracted from repriceable liabilities for a specific time period to determine the “gap” or difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In addition to gap management, the Corporation has an asset liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Corporation’s balance sheet.
The Corporation currently maintains a gap position of being asset sensitive due to the relative short duration of the loan and investment portfolios. A slight lengthening of the investment portfolio is being undertaken due to the higher yields on current investment products. The liability portfolio is being shortened with emphasis being placed on short term funding in addition to the focus on time deposits shifting towards five to ten month products.
A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Corporation’s balance sheet and more specifically shareholders’ equity. The Corporation does not manage the balance sheet structure in order to maintain compliance with this calculation. The calculation serves as a guideline with greater emphasis placed on interest rate sensitivity. Changes to calculation results from period to period are reviewed as changes in results could be a signal of future events.
INTEREST RATE SENSITIVITY
In this analysis the Corporation examines the result of various changes in market interest rates in 100 basis point increments and their effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner. Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.
The following is a rate shock forecast for the twelve month period ending December 31, 2025 assuming a static balance sheet as of December 31, 2024.
Parallel Rate Shock in Basis Points
(In Thousands)
Static
Net interest income
Change from static
Percent change from static
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. Generally, management believes the Corporation is well positioned to respond expeditiously when the market interest rate outlook changes.
INFLATION
The asset and liability structure of a financial institution is primarily monetary in nature; therefore, interest rates rather than inflation have a more significant impact on the Corporation’s performance. Interest rates are not always affected in the same direction or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors that are not measured by a price index.
CRITICAL ACCOUNTING POLICIES
The Corporation’s accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the “Notes to Consolidated Financial Statements” included in Item 8 of this Annual Report on Form 10-K.
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Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments, and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.
Allowance for Credit Losses
Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. Areas that require Managements judgment in calculating the ACL include cash flow assumptions such as prepayment speeds, probability of default, forecast of economic events, and other adjustments for qualitative factors. The Corporation’s allowance for credit losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for credit losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for credit losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Corporation’s methodology of assessing the adequacy of the reserve for allowance for loan losses, refer to Note 1 of the “Notes to Consolidated Financial Statements” included in Item 8 of this Annual Report on Form 10-K.
Goodwill and Other Intangible Assets
As discussed in Note 8 of the “Notes to Consolidated Financial Statements,” the Corporation must assess goodwill and other intangible assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill and other intangible assets balances, we would be required to take a charge against earnings to write down the assets to the lower value.
CONTRACTUAL OBLIGATIONS
The Corporation has various financial obligations, including contractual obligations which may require future cash payments. The following table presents, as of December 31, 2024, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the “Notes to Consolidated Financial Statements” included in Item 8 of this Annual Report on Form 10-K.
Payments Due In
(In Thousands)
One Year or Less
One to Three Years
Three to Five Years
Over Five Years
Total
Deposits without a stated maturity
Time deposits
Repurchase agreements
Short-term borrowings
Long-term borrowings
Operating leases
The Corporation’s operating lease obligations represent short and long-term lease and rental payments for branch facilities and equipment. The Bank leases certain facilities under operating leases which expire on various dates through 2049. Renewal options are available on the majority of these leases.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Corporation cautions readers that the following important factors, among others in addition to the factors discussed in Item 1 - "Business" and in Item 1A - "Risk Factors", may have affected and could in the future affect the Corporation’s actual results and could cause the Corporation’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Corporation herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Corporation must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as
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may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board; (iii) the effect on the Corporation’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the effect of changes in the business cycle and downturns in the local, regional or national economies; (vi) the effects of health emergencies, including the spread of infectious diseases or pandemics, and other external events, such as armed conflicts in other parts of the world, that could affect regional or global economies; and (vii) any potential adverse events or developments resulting from the merger agreement, dated December 16, 2024, between Penns Woods Bancorp, Inc. and Northwest Bancshares, Inc., including, without limitation, any event, change, or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement or the possibility that the parties may be unable to achieve expected synergies and operating in the merger within the expected timeframes or to integrate the business and operations of Jersey Shore State Bank and Luzerne Bank with those of Northwest Savings Bank after .
