UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
Or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________to_______________.
No.
(Commission file number)
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company
| |
| Emerging growth
company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act Yes ☐ No ☒
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:
Common stock, $1.25 par value, shares outstanding as of November 9, 2023.
CCFNB Bancorp, Inc. and Subsidiary
Index to Quarterly Report on Form 10-Q
PART I Financial Information
Item 1. Financial Statements
CCFNB Bancorp, Inc.
Consolidated Balance Sheets
| (In Thousands, except share data) | (Unaudited) September 30, 2023 | December 31, 2022 | ||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits in other banks | ||||||||
| Federal funds sold | ||||||||
| Total cash and cash equivalents | ||||||||
| Investment debt securities, available-for-sale, at fair value | ||||||||
| Investment equity securities, at fair value | ||||||||
| Restricted securities | ||||||||
| Loans held for sale | ||||||||
| Loans, net of unearned income | ||||||||
| Less: Allowance for credit losses | ||||||||
| Loans, net | ||||||||
| Premises and equipment: | ||||||||
| Operating lease right-of-use | ||||||||
| Other premises and equipment, net | ||||||||
| Accrued interest receivable | ||||||||
| Cash surrender value of bank-owned life insurance | ||||||||
| Investment in limited partnerships | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES | ||||||||
| Interest-bearing deposits | $ | $ | ||||||
| Noninterest-bearing deposits | ||||||||
| Total deposits | ||||||||
| Short-term borrowings | ||||||||
| Long-term borrowings | ||||||||
| Accrued interest payable | ||||||||
| Operating lease liability | ||||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock, par value $ per share; authorized shares, issued and outstanding and shares in 2023, respectively; and and shares in 2022, respectively | ||||||||
| Surplus | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost; shares in 2023 and 2022 | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
3
CCFNB Bancorp, Inc.
Consolidated Statements of Income
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| (In Thousands, Except Share and Per Share Data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| INTEREST AND DIVIDEND INCOME | ||||||||||||||||
| Interest and fees on loans: | ||||||||||||||||
| Taxable | $ | $ | $ | $ | ||||||||||||
| Tax-exempt | ||||||||||||||||
| Interest and dividends on investment securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax-exempt | ||||||||||||||||
| Dividend and other interest income | ||||||||||||||||
| Federal funds sold | ||||||||||||||||
| Deposits in other banks | ||||||||||||||||
| TOTAL INTEREST AND DIVIDEND INCOME | ||||||||||||||||
| INTEREST EXPENSE | ||||||||||||||||
| Deposits | ||||||||||||||||
| Short-term borrowings | ||||||||||||||||
| Long-term borrowings | ||||||||||||||||
| TOTAL INTEREST EXPENSE | ||||||||||||||||
| NET INTEREST INCOME | ||||||||||||||||
| CREDIT LOSS EXPENSE | ||||||||||||||||
| (Credit) Provision for credit losses - loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Credit) Provision for credit losses - investment debt securities | ||||||||||||||||
| (Credit) Provision for credit losses - off-balance sheet commitments | ||||||||||||||||
| TOTAL CREDIT LOSS EXPENSE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET
INTEREST INCOME AFTER (CREDIT) PROVISION FOR CREDIT LOSSES | ||||||||||||||||
| NON-INTEREST INCOME | ||||||||||||||||
| Service charges and fees | ||||||||||||||||
| Gain on sale of loans | ||||||||||||||||
| Earnings on bank-owned life insurance | ||||||||||||||||
| Brokerage | ||||||||||||||||
| Trust | ||||||||||||||||
| Loss on equity securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investment security losses, net | ( | ) | ( | ) | ||||||||||||
| Interchange fees | ||||||||||||||||
| Other | ||||||||||||||||
| TOTAL NON-INTEREST INCOME | ||||||||||||||||
| NON-INTEREST EXPENSE | ||||||||||||||||
| Salaries | ||||||||||||||||
| Employee benefits | ||||||||||||||||
| Occupancy | ||||||||||||||||
| Furniture and equipment | ||||||||||||||||
| State shares tax | ( | ) | ||||||||||||||
| Professional fees | ||||||||||||||||
| Director’s fees | ||||||||||||||||
| FDIC assessments | ||||||||||||||||
| Telecommunications | ||||||||||||||||
| Automated teller machine and interchange | ||||||||||||||||
| Merger related expenses | ||||||||||||||||
| Other | ||||||||||||||||
| TOTAL NON-INTEREST EXPENSE | ||||||||||||||||
| INCOME BEFORE INCOME TAX PROVISION | ||||||||||||||||
| INCOME TAX PROVISION | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| EARNINGS PER SHARE | $ | $ | $ | $ | ||||||||||||
| CASH DIVIDENDS PER SHARE | $ | $ | $ | $ | ||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
CCFNB Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| For the Three Months Ended
September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| (In Thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Change in unrealized gain (loss) on investment debt securities available-for-sale | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Tax effect | ||||||||||||||||
| Realized loss included in net income | ( | ) | ( | ) | ||||||||||||
| Tax effect | ||||||||||||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
See accompanying notes to the consolidated financial statements.
5
CCFNB Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
| Common Stock | Retained | Accumulated Other Comprehensive | Treasury | Total Stockholders’ | |||||||||||||||||||||||
| (In Thousands Except Share and Per Share Data) | Shares | Amount | Surplus | Earnngs | Income (Loss) | Stock | Equity | ||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Net income | |||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | |||||||||||||||||||||||
| Common stock issuance under employee stock purchase plans | |||||||||||||||||||||||||||
| Recognition of employee stock purchase plan expense | |||||||||||||||||||||||||||
| Cash dividends, ($ per share) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Net income | |||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | |||||||||||||||||||||||
| Common stock issuance under employee stock purchase plans | |||||||||||||||||||||||||||
| Recognition of employee stock purchase plan expense | |||||||||||||||||||||||||||
| Cash dividends, ($ per share) | ( | ) | ( | ) | |||||||||||||||||||||||
| Cumulative effect of adoption of ASU 2016-13 | |||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Net income | |||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | |||||||||||||||||||||||
| Common stock issuance under employee stock purchase plans | |||||||||||||||||||||||||||
| Recognition of employee stock purchase plan expense | |||||||||||||||||||||||||||
| Purchase of treasury stock ( shares) | |||||||||||||||||||||||||||
| Cash dividends, ($ per share) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Net income | |||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | |||||||||||||||||||||||
| Common stock issuance under employee stock purchase plans | |||||||||||||||||||||||||||
| Recognition of employee stock purchase plan expense | |||||||||||||||||||||||||||
| Purchase of treasury stock ( shares) | ( | ) | ( | ) | |||||||||||||||||||||||
| Cash dividends, ($ per share) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
6
CCFNB Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| For The Nine Months Ended September 30, | ||||||||
| (In Thousands) | 2023 | 2022 | ||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Credit for credit losses | ( | ) | ( | ) | ||||
| Depreciation and amortization of premises and equipment | ||||||||
| Loss on equity securities | ||||||||
| Investment security losses, net | ||||||||
| Amortization and accretion on investment securities | ||||||||
| Deferred income tax expense | ||||||||
| Gain on sale of loans | ( | ) | ( | ) | ||||
| Proceeds from sale of mortgage loans | ||||||||
| Originations of mortgage loans held for resale | ( | ) | ( | ) | ||||
| Amortization of invesment in limited partnerships | ||||||||
| Increase in accrued interest receivable | ( | ) | ( | ) | ||||
| Earnings on bank-owned life insurance | ( | ) | ( | ) | ||||
| Increase (decrease) in accrued interest payable | ( | ) | ||||||
| Other, net | ||||||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Investment securities available-for-sale: | ||||||||
| Purchases | ( | ) | ( | ) | ||||
| Proceeds from sales | ||||||||
| Proceeds from maturities and calls | ||||||||
| Purchase of bank-owned life insurance | ( | ) | ( | ) | ||||
| Proceeds from redemption of restricted securities | ||||||||
| Purchase of restricted securities | ( | ) | ( | ) | ||||
| Net increase in loans | ( | ) | ( | ) | ||||
| Purchase of investment in limited partnership | ( | ) | ( | ) | ||||
| Acquisition of premises and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Net decrease in deposits | ( | ) | ( | ) | ||||
| Net increase in short-term borrowings | ||||||||
| Proceeds from long-term borrowings | ||||||||
| Repayment of long-term borrowings | ( | ) | ( | ) | ||||
| Acquisition of treasury stock | ( | ) | ||||||
| Proceeds from issuance of common stock | ||||||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Loans transferred to other real estate owned | $ | $ | ||||||
| Loans held for sale transferred to loans | $ | $ | ||||||
See accompanying notes to the unaudited consolidated financial statements.
7
CCFNB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CCFNB Bancorp, Inc. (the “Corporation”) are in accordance with the accounting principles generally accepted in the United States of America and conform to common practices within the banking industry. The more significant policies follow:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CCFNB Bancorp, Inc. and its wholly-owned subsidiary, First Columbia Bank & Trust Co. (the “Bank”). All significant inter-company balances and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, all adjustments consisting of normal recurring entries considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full-year.
For further information, refer to the Corporation’s Notes to the Consolidated Financial Statements included in the audited financial statements for the years ended December 31, 2022 and 2021.
INVESTMENTS
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
Investment securities classified as available for sale are those securities that the Bank intends to hold for an indefinite period of time but not necessarily to maturity. Securities available for sale are carried at fair value. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Bank’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Unrealized gains or losses are reported as increases or decreases in other comprehensive income (loss), net of the deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Investments securities classified as held to maturity are those securities the Bank has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. These securities are carried at cost, adjusted for the amortization of premium and accretion of discount, and computed by a method that approximates the interest method over the terms of the securities.
Equity securities are measured at fair value with changes in fair value recognized in net income.
Allowance for Credit Losses – Available for Sale Securities
The Bank measures expected credit losses on available-for-sale debt securities when the Bank does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Bank considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Economic forecast data is utilized to calculate the present value of expected cash flows. The Bank obtains its forecast data through a subscription to a widely recognized and relied up company who publishes various forecast scenarios. Management evaluates the various scenarios to determine a reasonable and supportable scenario, and utilizes a single scenario in the model. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
The allowance for credit losses on available-for-sale debt securities is included within investment securities available-for-sale on the consolidated balance sheet. Changes in the allowance for credit losses are recorded within provision for credit losses on the consolidated statement of income. Losses are charged against the allowance for credit losses when the Bank believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.
Accrued
interest receivable on available-for-sale debt securities totaled $
8
Credit Losses on Investment Securities-Prior to Adopting ASU 2016-13
The Bank adopted ASU No. 2016-13 effective January 1, 2023. Financial statement amounts related to Investment Securities recorded as of December 31, 2022 and for the periods ending December 31, 2022 are presented in accordance with the accounting polices described in the following sections. The following sections were carried forward from the Annual Report for the year ended December 31, 2022.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When other-than-temporary-impairment occurs, the amount of the other-than-temporary-impairment recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investments amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the other-than-temporary impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total other-than-temporary impairment related to the other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary-impairment recognized in earnings shall become the new amortized cost basis of the investment.
The Corporation invests in various forms of agency debt including mortgage-backed securities and callable agency debt. The fair value of these securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid to offer spreads in the market place and credit premiums for various types of agency debt. These factors change continuously and therefore the fair market value of these securities may be higher or lower than the Corporation’s carrying value at any measurement date. The Corporation does not consider the debt securities contained in the previous table to be other-than-temporarily impaired since it has both the intent and ability to hold the securities until a recovery of fair value, which may be maturity.
LOANS RECEIVABLE
Loans
receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated
at their outstanding unpaid principal balances, net of an allowance for credit losses and any deferred fees or costs. Accrued
interest receivable totaled $
The loans receivable portfolio is segmented into commercial real estate, residential real estate, commercial and industrial, and consumer loans. Commercial real estate loans consist of the following classes: commercial real estate loans and student housing. Residential real estate consist of the following classes: residential rentals 1-4 family, 1-4 family residential loans, and construction. Commercial and industrial consist of the following classes: commercial, financial, agricultural, and tax-exempt loans. Consumer and other loans consist of installment loans to individuals.
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for credit losses. Interest received on non-accrual loans, including impaired loans, generally is either applied against principal or reported as interest income on a cash basis, according to management’s judgment as to the collectability of principal. Generally loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months), and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past-due status of all classes of loans receivable is determined based on contractual due dates for loan payments.
9
Allowance for Credit Losses – Loans
The allowance for credit losses (“ACL”) is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of the amounts previously charged-off and expected to be charged-off.
The ACL is an estimate of expected credit losses, measured over the contractual life of a loan that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriated ACL inherently subjective and may have significant changes from period to period.
The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Bank has identified the following portfolio segments and measures the allowance for credit losses using the following methods:
| ● | Residential real estate |
| ● | Commercial real estate |
| ● | Commercial and industrial |
| ● | Consumer and other |
Historical credit loss experience is the basis for the estimation of expected credit losses. We apply historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on various economic forecasts, unemployment forecast and management judgment. For periods beyond our reasonable and supportable forecast, we revert to historical loss rates utilizing a straight-line method over a one year reversion period. The qualitative adjustments for current conditions are based upon changes in lending policies and practices, experience and ability of lending staff, quality of the Bank’s loan review system, value of underlying collateral, the existence of and changes in concentrations and other external factors. These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve.
The Bank has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.
The ACL for individual loans begins with the use or normal credit review procedure to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore, should be individually assessed. We evaluate all commercial loans that meet the following criteria: (1) when it is determined that foreclosure is probable; or (2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral; or (3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: (1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider dispositions costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance.
Allowance for Loan Losses – Prior to Adopting ASU 2016-13
Prior to the adoption of ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Bank calculated our ALL using an incurred loan loss methodology. The following policy related to the ALL in prior periods. The allowance for loan losses is established through provisions for loan losses charged against income. Loan amounts deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level established by management to be adequate to absorb estimated potential loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires significant estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
In addition, the Bank is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.
In addition, an allowance is provided for possible credit losses on off-balance sheet credit exposures. The allowance is estimated by management and is classified in other liabilities.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. At the present time, select loans are not aggregated for collective impairment evaluation, as such, all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the liquidation of the collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Bank determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
10
The general component covers all other loans not identified as impaired and is based on historical losses adjusted for current factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding five years. In calculating the historical component of our allowance, we aggregate our loans into one of five portfolio segments: Commercial, Financial & Agriculture, Tax-exempt, Commercial Real Estate, Consumer Real Estate, and Installment Loans to Individuals. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and business spending as a result of continued high unemployment and reduced credit availability and lack of confidence in a sustainable recovery. Actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: the concentration of watch and substandard loans as a percentage of total loans, levels of loan concentration within the portfolio segment or division of a portfolio segment and broad economic conditions.
A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Bank grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, extending repayment terms, creating balloon options or other modifications that would not be typically offered to new borrowers with acceptable credit risk.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
ACCOUNTING PRONOUNCEMENTS ADOPTED IN 2023
In June 2016, the FASB issued , “Financial Instruments – Credit Losses (Topics 326): Measurement of Credit Losses on Financial Instruments” and subsequent related updates. This ASU replaces the incurred loss methodology for recognizing credit losses and requires businesses and other organizations to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans and held-to-maturity securities, net investment in leases, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASC 326 requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell. This guidance became effective on January 1, 2023 for the Bank. The results reported for periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable accounting standards.
The
Bank adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets
measured at amortized cost, including loans, available-for-sale debt securities and unfunded commitments. On January 1, 2023,
the Bank recorded a cumulative effect increase to retained earnings of $
The Bank adopted the provisions of ACS 326 related to presenting other-than-temporary impairment on available-for-sale debt securities prior to January 1, 2023 using the prospective transition approach, though no such changes had been recorded on the securities held by the Bank as of the date of adoption.
11
The Bank expanded the pooling utilized under the legacy incurred loss method to include additional segmentation based on risk. The impact of the change from the incurred loss model to the current expected credit loss model is detailed below.
| January 1, 2023 | ||||||||||||
| Impact of | As Reported | |||||||||||
| Pre-ASC 326 | ASC 326 | Under | ||||||||||
| (In Thousands) | Adoption | Adoption | ASC 326 | |||||||||
| Assets: | ||||||||||||
| Allowance for Credit Losses - Loans | ||||||||||||
| Residential Real Estate | $ | $ | ( | ) | $ | |||||||
| Commercial Real Estate | ||||||||||||
| Commercial and Industrial | ( | ) | ||||||||||
| Consumer and other | ( | ) | ||||||||||
| Unallocated | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
| Liabilities: | ||||||||||||
| Allowance for Credit Losses on | ||||||||||||
| Off-Balance Sheet Credit Exposure | $ | $ | ( | ) | $ | |||||||
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted CECL and enhance the disclosure requirements for modifications of receivables made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investments in leases in the existing vintage disclosures. This ASU became effective on January 1, 2023 for the Corporation. The adoption of this ASU resulted in updated disclosures within our financial statements but otherwise did not have a material impact on the Corporation’s consolidated financial statements.
2. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
DEBT SECURITIES – AVAILABLE FOR SALE
The amortized cost, related fair value, allowance for credit losses, and unrealized gains and losses for available for sale investment debt securities were as follows at September 30, 2023:
| (In Thousands) | 2023 | |||||||||||||||||||
| Gross | Gross | Allowance | ||||||||||||||||||
| Amortized | Unrealized | Unrealized | for Credit | Fair | ||||||||||||||||
| Cost | Gains | Losses | Losses | Value | ||||||||||||||||
| Obligation of U.S.Government Corporations and Agencies: | ||||||||||||||||||||
| Mortgage-backed | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Other | ( | ) | ||||||||||||||||||
| Obligations of state and political subdivisions | ( | ) | ||||||||||||||||||
| Total debt securities, available for sale | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
The amortized cost, related fair value, and unrealized gains and losses for available for sale investment debt securities were as follows at December 31, 2022:
| 2022 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| (In Thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Obligation of U.S.Government Corporations and Agencies: | ||||||||||||||||
| Mortgage-backed | $ | $ | $ | ( | ) | $ | ||||||||||
| Other | ( | ) | ||||||||||||||
| Obligations of state and political subdivisions | ( | ) | ||||||||||||||
| Total debt securities, available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
12
Securities
available for sale with an aggregate fair value of $
The amortized cost and fair value of investment debt securities, by expected maturity, are shown below at September 30, 2023. Expected maturities on debt securities will differ from contractual maturities, because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties:
| Available for Sale | Weighted | |||||||||||
| (In Thousands) | Amortized | Estimated | Average | |||||||||
| Cost | Fair Value | Yield | ||||||||||
| Due in one year or less | $ | $ | % | |||||||||
| Due after one year to five years | % | |||||||||||
| Due after five years to ten years | % | |||||||||||
| Due after ten years | % | |||||||||||
| Total | $ | $ | ||||||||||
There
were
The following tables summarizes debt securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 2023 and December 31, 2022, aggregated by security type and length of time in a continuous loss position:
| September 30, 2023 | ||||||||||||||||||||||||
| (In Thousands) | Less than Twelve Months | Twelve Months or Greater | Total | |||||||||||||||||||||
| Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | |||||||||||||||||||
| Obligations of U.S.
Government Corporations and Agencies: | ||||||||||||||||||||||||
| Mortgage-backed | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||||||||||
| Obligations of state and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| (In Thousands) | Less than Twelve Months | Twelve Months or Greater | Total | |||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Obligations of U.S. Government Corporations and Agencies: | ||||||||||||||||||||||||
| Mortgage-backed | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Other | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Obligations of state and political subdivisions | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
At
September 30, 2023, the Corporation had a total of
At
September 30, 2023, the Corporation had a total of
Unrealized losses on debt securities have not been recognized into income because the issuers bonds are of high credit quality (rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
13
As of September 30, 2023, no ACL was required for debt securities. The Bank does not have the intent to sell and does not believe it will be more likely than not to be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.
As of September 30, 2023, all debt securities were rated above investment grade. Based on the payment status, rating and management’s evaluation of these securities, no ACL was required for the debt securities as of September 30, 2023. As of September 30, 2023, the underlying issuers continue to make timely principal and interest payments on the securities.
EQUITY SECURITIES
At
September 30, 2023 and December 31, 2022, the Corporation had $
| For the Three Months | For the Nine Months | |||||||||||||||
| Ending September 30, | Ending September 30, | |||||||||||||||
| (In Thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net losses recognized in equity securities during the quarter | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: Net gains (losses) realized on the sale of equity securities during the quarter | ||||||||||||||||
| Unrealized losses recognized in equity securities held at reporting date | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
3. LOANS
Loans
that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their
outstanding unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized
as an adjustment to yield (interest income) over the life of the loan. Deferred fees and costs amounted to $
The segments of the Corporation’s loan portfolio are disaggregated into classes that allows management to monitor risk and performance. The loan classes used are consistent with the internal reports evaluated by the Corporation’s management and Board of Directors to monitor risk and performance within the various segments of its loan portfolio.
Major classifications of loans at September 30, 2023 and December 31, 2022 consisted of:
| (In Thousands) | September 30, 2023 | |||||||
| Amount | % | |||||||
| Commercial and industrial | $ | % | ||||||
| Commercial real estate: | ||||||||
| Commercial mortgages | % | |||||||
| Student housing | % | |||||||
| Residential real estate: | ||||||||
| Rental 1-4 family | % | |||||||
| 1-4 family residential mortgages | % | |||||||
| Consumer and other | % | |||||||
| Gross loans | $ | % | ||||||
| (In Thousands) | ||||
| December 31, 2022 | ||||
| Commercial, financial and agricultural | $ | |||
| Tax-exempt | ||||
| Commercial real estate: | ||||
| Commercial mortgages | ||||
| Other construction and land development loans | ||||
| Secured by farmland | ||||
| Consumer real estate: | ||||
| Home equity loans | ||||
| Home equity lines of credit | ||||
| 1-4 family residential mortgages | ||||
| Construction | ||||
| Installment loans to individuals | ||||
| Gross loans | $ | |||
14
Allowance for Loan Losses and Recorded Investment in Financial Receivables
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Corporation has aligned our segmentation to internal loan reports. The Corporation has identified the following portfolio segments:
| ● | Residential Real Estate |
| ● | Commercial Real Estate |
| ● | Commercial and Industrial |
| ● | Consumer and other |
The following table presents the activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2023 and September 30, 2022:
| (In Thousands) | For the Three Months Ending September 30, 2023 | |||||||||||||||||||||||
| Commercial and
Industrial | Commercial
Real Estate | Residential
Real Estate | Consumer and Other | Unallocated | Total | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Impact of adopting ASC 326 | ||||||||||||||||||||||||
| (Credit) provision charged to operations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (In Thousands) | For the Nine Months Ending September 30, 2023 | |||||||||||||||||||||||
| Commercial | Residential | |||||||||||||||||||||||
| Commercial and | Real | Real | Consumer | |||||||||||||||||||||
| Industrial | Estate | Estate | and Other | Unallocated | Total | |||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Impact of adopting ASC 326 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| (Credit) provision charged to operations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (In Thousands) | For the Three Months Ending September 30, 2022 | |||||||||||||||||||||||
| Commercial, Financial | Commercial | Consumer | Installment | |||||||||||||||||||||
| & Agricultural, | Real | Real | Loans | |||||||||||||||||||||
| Tax-exempt | Estate | Estate | Individuals | Unallocated | Total | |||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Credit) provision charged to operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (In Thousands) | For the Nine Months Ending September 30, 2022 | |||||||||||||||||||||||
| Commercial, Financial | Commercial | Consumer | Installment | |||||||||||||||||||||
| & Agricultural, | Real | Real | Loans | |||||||||||||||||||||
| Tax-exempt | Estate | Estate | Individuals | Unallocated | Total | |||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Credit) provision charged to operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Loans charged off | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Corporation’s historical loss experience. As of September 30, 2023, the Corporation expects that the market in which it operates will experience a slight improvement in economic conditions based primarily on housing indexes, interest rate stabilization, and a steady unemployment rate causing the trend in delinquencies over the next year to follow historical levels. Management adjusted the historical loss experience for these expectations. No reversion adjustments were necessary, as the starting point for the Corporation’s estimate was a cumulative loss rate covering the expected contractual term of the loan portfolio.
15
The
Corporation recorded a $
Historical credit loss experience is the basis for the estimation of excepted credit losses. The Corporation applies historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management can apply qualitative adjustments to reflect the current conditions and reasonable and supportive forecasts not already captured in the historical loss information at the balance sheet date.
In accordance with ASC 2016-13, the Corporation will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. In contrast to legacy accounting standards, this criterion is broader than the impairment concept and management may evaluate loans individually when no specific expectation of collectability is in place. Loans will not be included in both collective and individual analysis. The individual analysis will establish a specific reserve for loans in scope.
Specific reserves are established based on the following three acceptable methods for measuring the ACL:1) the present value of expected future cash flows discounted at the loan’s original interest rate; 2) the loan’s observable market price; 3) the fair value of the collateral when the loan is collateral dependent. The method is selected on a loan-by-loan basis with the evaluation of the need and amount of a specific allocation of the allowance being made on a quarterly basis.
The need for an updated appraisal on collateral dependent loans is determined on a case-by-case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for credit losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s Chief Lending Officer to support the value of the property.
When receiving an appraisal associated with an existing real estate collateral dependent transaction, the Bank’s Chief Lending Officer must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:
| ● | the passage of time; |
| ● | the volatility of the local market; |
| ● | the availability of financing; |
| ● | natural disasters; |
| ● | the inventory of competing properties; |
| ● | new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank; |
| ● | changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or |
| ● | environmental contamination. |
The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Chief Lending Officer determines that a reasonable value cannot be derived based on the available information, a new appraisal is ordered. The determination of the need for a new appraisal rests with the Chief Lending Officer and not the originating account officer.
16
The following tables summarize the loan portfolio and allowance for credit losses as of September 30, 2023 and December 31, 2022:
| (In Thousands) | September 30, 2023 | |||||||||||||||||||
| Commercial and Industrial | Commercial Real Estate | Residential Real Estate | Consumer and Other | Total | ||||||||||||||||
| Loans: | ||||||||||||||||||||
| Individually evaluated | $ | $ | $ | $ | $ | |||||||||||||||
| Collectively evaluated | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | |||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||
| Individually evaluated | $ | $ | $ | $ | $ | |||||||||||||||
| Collectively evaluated | ||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | $ | |||||||||||||||
| (In Thousands) | December 31, 2022 | |||||||||||||||||||||||
| Commercial, Financial & Agricultural, Tax-exempt | Commercial Real Estate | Consumer Real Estate | Installment Loans Individuals | Total | ||||||||||||||||||||
| Ending balance individually evaluated for impairment | $ | $ | $ | $ | $ | |||||||||||||||||||
| Ending balance collectively evaluated for impairment | ||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | |||||||||||||||||||
| Ending balance individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending balance collectively evaluated for impairment | $ | $ | $ | $ | $ | $ |
The following table presents the amortized cost basis of collateral-dependent loans by class of loans:
| Collateral Type | ||||
| September 30, 2023 | Real Estate | |||
| Commercial real estate (non-owner occupied): | ||||
| Student Housing | $ | |||
| Total | $ | |||
Age Analysis of Past-Due Loans Receivable
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past-due status as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | ||||||||||||||||||||||||
| 31-60 | 61-90 | Greater Than | ||||||||||||||||||||||
| Days | Days | 90 Days | Total | Total | ||||||||||||||||||||
| (In Thousands) | Current | Past Due | Past Due | Past Due | Past Due | Loans | ||||||||||||||||||
| Residential Real Estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Commercial and Industrial | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
17
| December 31, 2022 | ||||||||||||||||||||||||
| Loans | Loans 90 or | Accruing Loans 90 | ||||||||||||||||||||||
| (In Thousands) | 30-89 Days | more days | Total Past | Current | Total | or more | ||||||||||||||||||
| Past Due | Past Due | Due Loans | Loans | Loans | Days Past Due | |||||||||||||||||||
| Commercial, financial and agricultural | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Tax-exempt | ||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||
| Commercial mortgages | ||||||||||||||||||||||||
| Other construction and land development loans | ||||||||||||||||||||||||
| Secured by farmland | ||||||||||||||||||||||||
| Consumer real estate: | ||||||||||||||||||||||||
| Home equity loans | ||||||||||||||||||||||||
| Home equity lines of credit | ||||||||||||||||||||||||
| 1-4 family residential mortgages | ||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||
| Installment loans to individuals | ||||||||||||||||||||||||
| Gross loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Nonperforming Loans
The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing interest as of September 30, 2023 and nonaccrual status as of December 31, 2022:
| September 30, 2023 | ||||||||||||||||||||
| Nonaccrual | Nonaccrual | Loans Past | ||||||||||||||||||
| with no | with | Total | Due over 90 Days | Total | ||||||||||||||||
| (In Thousands) | ACL | ACL | Nonaccrual | Still Accruing | Nonperforming | |||||||||||||||
| Residential Real Estate | $ | $ | $ | $ | $ | |||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||
| Commercial and Industrial | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| (In Thousands) | December 31, 2022 | |||
| Commercial, financial and agricultural | $ | — | ||
| Tax-exempt | — | |||
| Commercial real estate: | ||||
| Commercial mortgages | ||||
| Other construction and land development loans | — | |||
| Secured by farmland | — | |||
| Consumer real estate: | ||||
| Home equity loans | ||||
| Home equity lines of credit | ||||
| 1-4 family residential mortgages | ||||
| Construction | — | |||
| Installment loans to individuals | ||||
| Total | $ | |||
Credit Quality Indicators
The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually to classify the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial real estate, commercial construction, and commercial and industrial loans. This analysis is performed on a quarterly basis. The Bank uses the following definitions for risk ratings:
Pass. Loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.
18
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Based on the most recent analysis performed, the following table presents the recorded investment in non-homogenous loans by internal risk rating system as of September 30, 2023 and December 31, 2022:
| Revolving | Revolving | |||||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Period | Loans | Loans | ||||||||||||||||||||||||||||||||||
| Amortized | Converted | |||||||||||||||||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | To Term | Total | |||||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | $ | 19,941 | $ | 36,903 | $ | 26,817 | $ | 12,887 | $ | 14,114 | $ | 78,216 | $ | — | $ | — | $ | 188,878 | ||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial and Industrial | ||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Risk Rating | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Current period gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||
| Commercial, | ||||||||||||||||
| Financial & | Commercial | |||||||||||||||
| (In Thousands) | Agricultural | Tax-exempt | Real Estate | Total | ||||||||||||
| Pass | $ | $ | $ | $ | ||||||||||||
| Special Mention | ||||||||||||||||
| Substandard | ||||||||||||||||
| Doubtful | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
19
The Bank monitors the credit risk profile by payment activity for residential real estate, consumer, and other loan classes. Loans past due 90 days or more and loans on nonaccrual status are considered nonperforming. Nonperforming loans are reviewed quarterly. The following table presents the amortized cost in residential, consumer, and other loans based on payment activity for the quarters ended September 30, 2023 and December 31, 2022:
| Revolving | Revolving | |||||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Period | Loans | Loans | ||||||||||||||||||||||||||||||||||
| Amortized | Converted | |||||||||||||||||||||||||||||||||||
| (In Thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Cost Basis | To Term | Total | |||||||||||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer and Other | ||||||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Payment Performance | ||||||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||
| (In Thousands) | Performing | Nonperforming | Total | |||||||||
| Consumer real estate: | ||||||||||||
| Home equity loans | $ | $ | $ | |||||||||
| Home equity lines of credit | ||||||||||||
| 1-4 family residential mortgages | ||||||||||||
| Construction | ||||||||||||
| Installment loans to individuals | ||||||||||||
| $ | $ | $ | ||||||||||
Modifications to Borrowers Experiencing Financial Difficulty
Occasionally, the Bank modifies loans to borrowers in financial distress by providing term extension, other-than-significant payment delay or interest rate reduction. In some cases, the Bank provides multiple types of concessions on one loan. Typically, one type of concession, such as an interest rate reduction, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as term extension, may be granted.
For the three and nine months ended September 30, 2023, the Bank did not grant a loan modification. Loan modifications considered troubled debt restructurings completed during the nine months ended September 30, 2022 were as follows:
| (In Thousands) | For the Nine Months Ending September 30, 2022 | |||||||||||||||||||
| Commercial, Financial | Commercial | Consumer | Installment | |||||||||||||||||
| & Agricultural, | Real | Real | Loans | |||||||||||||||||
| Tax-exempt | Estate | Estate | Individuals | Total | ||||||||||||||||
| Number of contracts: | ||||||||||||||||||||
| Interest modification | ||||||||||||||||||||
| Term modification | ||||||||||||||||||||
| Pre-modification outstanding recorded investment | $ | $ | $ | $ | $ | |||||||||||||||
| Post-modification outstanding recorded investment | $ | $ | $ | $ | $ | |||||||||||||||
20
During 2023 and 2022, no borrowers defaulted on their obligations pursuant to the modified loans.
As of September 30, 2023 and December 31, 2022, the Bank has not initiated formal proceedings on any loans that have not been transferred into foreclosed assets.
Concentrations of Credit Risk
Most of the Corporation’s lending activity occurs within the Bank’s primary market area which encompasses Columbia, Montour and Eastern Northumberland counties in Northcentral Pennsylvania. The majority of the Corporation’s loan portfolio consists of commercial and consumer real estate loans. As of September 30, 2023 and December 31, 2022, there were no concentrations of loans related to any single industry in excess of 10% of total loans.
4. DEPOSITS
Major classifications of deposits at September 30, 2023 and December 31, 2022 consisted of:
| (In Thousands) | 2023 | 2022 | ||||||
| Demand deposits | $ | $ | ||||||
| Interest-bearing demand deposits | ||||||||
| Savings | ||||||||
| Time deposits | ||||||||
| Total deposits | $ | $ | ||||||
Time
deposits of $250,000 or more amounted to $
5. SHORT-TERM BORROWINGS
Securities
sold under agreements to repurchase and Federal Home Loan Bank (“FHLB”) advances generally represented overnight or
less than 30-day borrowings. Under terms of a blanket FHLB agreement, the loans were secured by certain qualifying assets of the
Bank which consisted principally of first mortgage loans. The Bank has lines of credit with the Federal Reserve Bank Discount
Window, FHLB – Pittsburgh, and Atlantic Community Bankers Bank in the aggregate amount of $
| September 30, 2023 | ||||||||||||||||
| Weighted | Maximum | |||||||||||||||
| (In Thousands) | Ending | Average | Month End | Average | ||||||||||||
| Balance | Balance | Balance | Rate | |||||||||||||
| Securities sold under agreements to repurchase | $ | $ | $ | % | ||||||||||||
| Other short-term borrowings | % | |||||||||||||||
| Total | $ | $ | $ | % | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Weighted | Maximum | |||||||||||||||
| (In Thousands) | Ending | Average | Month End | Average | ||||||||||||
| Balance | Balance | Balance | Rate | |||||||||||||
| Securities sold under agreements to repurchase | $ | $ | $ | % | ||||||||||||
| Other short-term borrowings | % | |||||||||||||||
| Total | $ | $ | $ | % | ||||||||||||
Securities sold under agreements to repurchase. We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.
21
The remaining contractual maturity of repurchase agreements in the consolidated balance sheet as of September 30, 2023 and December 31, 2022 is presented in the following tables:
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and | Greater than 90 | |||||||||||||||||||
| (In Thousands) | Continuous | Up to 30 Days | 30-90 Days | Days | Total | |||||||||||||||
| September 30, 2023 | ||||||||||||||||||||
| Securities sold under agreements to repurchase: | ||||||||||||||||||||
| Obligation of U.S. Government Corporations and Agencies: | ||||||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | $ | |||||||||||||||
| Other | ||||||||||||||||||||
| Total borrowings | $ | $ | $ | $ | $ | |||||||||||||||
| Gross amount of recognized liabilities for repurchase agreements | $ | |||||||||||||||||||
| Amounts related to agreements not included in offsetting disclosure above | $ | |||||||||||||||||||
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and | Greater than 90 | |||||||||||||||||||
| (In Thousands) | Continuous | Up to 30 Days | 30-90 Days | Days | Total | |||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Securities sold under agreements to repurchase: | ||||||||||||||||||||
| Obligation of U.S. Government Corporations and Agencies: | ||||||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | $ | |||||||||||||||
| Other | ||||||||||||||||||||
| Total borrowings | $ | $ | $ | $ | $ | |||||||||||||||
| Gross amount of recognized liabilities for repurchase agreements | $ | |||||||||||||||||||
| Amounts related to agreements not included in offsetting disclosure above | $ | |||||||||||||||||||
6. LONG-TERM BORROWINGS
Long-term
borrowings consist of advances due to the FHLB - Pittsburgh. Under terms of a blanket agreement, the loans were secured by certain
qualifying assets of the Bank which consisted principally of first mortgage loans. The carrying value of these collateralized
items was $
| (In Thousands) | 2023 | 2022 | ||||||
| Loan dated
| $ | $ | ||||||
| Loan dated | ||||||||
| Loan dated | ||||||||
| Loan dated | ||||||||
| Loan dated | ||||||||
| Loan dated | ||||||||
| Total | $ | $ | ||||||
22
The following is a schedule reflecting remaining maturities of long-term debt at September 30, 2023:
| Weighted | |||||||||
| (In Thousands) | Average Rate | ||||||||
| 2023 | $ | % | |||||||
| 2024 | % | ||||||||
| 2025 | % | ||||||||
| 2026 | % | ||||||||
| 2027 | % | ||||||||
| Thereafter | % | ||||||||
| Total | $ | % | |||||||
7. FAIR VALUE MEASUREMENTS
The Corporation establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The standard describes three levels of inputs that may be used to measure fair values:
| Level I: | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
| Level II: | Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments of which can be directly observed. |
| Level III: | Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgement or estimation. |
This hierarchy requires the use of observable market data available.
The following table presents the assets reported on the consolidated balance sheet at their fair value on a recurring basis as of September 30, 2023 and December 31, 2022, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| September 30, 2023 | ||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||
| Obligation of US Government
Corporations and Agencies | ||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | ||||||||||||
| Other | ||||||||||||||||
| Obligations of state and political subdivisions | ||||||||||||||||
| Investment equity securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||
| Obligation
of US Government Corporations and Agencies | ||||||||||||||||
| Mortgage-backed | $ | $ | $ | $ | ||||||||||||
| Other | ||||||||||||||||
| Obligations of state and political subdivisions | ||||||||||||||||
| Investment equity securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The fair values of equity securities classified as Level I are derived from quoted market prices in active markets; these assets consist entirely of stocks held in other banks. The fair values of all debt securities classified as Level II are obtained from nationally-recognized third-party pricing agencies. The fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Corporation (observable inputs), and are therefore classified as Level II within the fair value hierarchy.
23
The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of September 30, 2023, by level within the fair value hierarchy. There were no assets measured on a non-recurring basis as of December 31, 2022. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| September 30, 2023 | ||||||||||||||||
| (In Thousands) | Level I | Level II | Level III | Total | ||||||||||||
| Assets Measured on a Non-recurring Basis: | ||||||||||||||||
| Collateral dependent loans | $ | $ | $ | $ | ||||||||||||
All collateral dependent loans have a fair value based upon the fair value of the underlying collateral.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
At September 30, 2023 and December 31, 2022, the carrying values and fair values of financial instruments that are not required to be measured at fair value are presented in the table below:
| 2023 | ||||||||||||||||||||
| (In Thousands) | Carrying | |||||||||||||||||||
| Amount | Fair Value | Level I | Level II | Level III | ||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Loans held for sale | $ | $ | $ | $ | $ | |||||||||||||||
| Loans, net | ||||||||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Interest-bearing deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
| 2022 | ||||||||||||||||||||
| (In Thousands) | Carrying | |||||||||||||||||||
| Amount | Fair Value | Level I | Level II | Level III | ||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Loans held for sale | $ | $ | $ | $ | $ | |||||||||||||||
| Loans, net | ||||||||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Interest- bearing deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Long-term borrowings | ||||||||||||||||||||
Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract that creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms. The carrying value is a reasonable estimate of the true fair value for cash and cash equivalents, restricted securities, cash surrender value of bank owned life insurance, accrued interest receivable, noninterest bearing deposits, short-term borrowings, and accrued interest payable.
Fair value is defined as a financial instrument which could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument, but focuses on the exit price of the asset and liability.
If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimate losses, and other factors as determined through various option pricing formulas. As many of these assumptions result from judgments made by management based upon estimates that are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimate fair values are based may have a significant impact on the resulting estimated fair values.
As certain assets, such as deferred tax assets and premises and equipment, are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Corporation.
9. REVENUE RECOGNITION
Management determined that the primary sources of revenue associated with financial instruments, including interest income on loans and investments, along with certain noninterest revenue sources including investment security gains, loan servicing charges, gains on the sale of loans, and earnings on bank owned life insurance are not within the scope of Topic 606. As a result, no changes were made during the period related to these sources of revenue, which cumulatively comprise 85.2% of the total revenue of the Corporation for the nine months ended September 30, 2023.
24
Noninterest income within the scope of Topic 606 are as follows:
| ● | Trust and Brokerage fees – Trust and investment advisory income is primarily comprised of fees earned from the management and administration of trusts and customer investment portfolios. The Corporation’s performance obligation is generally satisfied over a period of time and the resulting fees are billed monthly or quarterly, based upon the month end market value of the assets under management. Payment is generally received after month end through a direct charge to customers’ accounts. Other performance obligations (such as delivery of account statements to customers) are generally considered immaterial to the overall transactions price. Commissions on transactions are recognized on a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed. |
| ● | Service charges and fees – The Corporation has contracts with its deposit account customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Corporation or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Corporation has an unconditional right to the fee consideration. The Corporation also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All these fees are attributed to specific performance obligations of the Corporation where revenue is recognized at a defined point in time upon the completion of the requested service/transaction. |
| ● | Interchange fees – The Corporation issues debit cards to consumer and business customers with checking deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements of income. |
| ● | Other noninterest income – Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, gain (loss) on sale of other real estate owned and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized when billed. However, if the safe deposit box rental fee is prepaid (i.e. paid prior to issuance of annual bill), the revenue is recognized upon receipt of payment. The Corporation has determined that since rentals and renewals occur consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Gains and losses on the sale of other real estate owned are recognized at the completion of the property sale when the buyer obtains control of the real estate and all the performance obligations of the Corporation have been satisfied. |
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the nine months ended September 30, 2023 and 2022:
| (In Thousands) | For the Nine Months Ended September 30, | |||||||
| Non-interest Income | 2023 | 2022 | ||||||
| In-Scope of Topic 606: | ||||||||
| Trust and Brokerage Services | $ | $ | ||||||
| Service Charges and Fees | ||||||||
| Interchange Fees | ||||||||
| Other | ||||||||
| Non-interest Income (in-scope of Topic 606) | ||||||||
| Non-interest Income (out-of-scope of Topic 606) | ( | ) | ||||||
| Total Non-interest Income | $ | $ | ||||||
10. PROPOSED ACQUISITION OF MUNCY BANK FINANCIAL INC.
On April 18, 2023, CCFNB Bancorp, Inc. and Muncy Bank Financial, Inc. (“Muncy”) jointly announced the signing of Agreement and Plan of Merger (the “Merger Agreement”) to combine the two companies in a strategic merger of equals. The Merger Agreement has been unanimously approved by the board of directors of both parties and provides that, upon the terms and subject to the conditions set forth therein, Muncy will merge with and into CCFNB Bancorp, Inc. (the “Merger”), with CCFNB Bancorp, Inc. as the surviving corporation. Following the consummation of the Merger, The Muncy Bank and Trust Company, a Pennsylvania bank and trust company and a wholly owned subsidiary of Muncy (“Muncy Bank”), will merge with and into First Columbia Bank & Trust Co., a Pennsylvania bank and trust company and a wholly owned subsidiary of CCFNB Bancorp, Inc. (“First Columbia Bank”), with First Columbia Bank as the surviving bank (the “Bank Merger”).
25
Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, Muncy shareholders will be entitled to receive shares of CCFNB Bancorp, Inc. common stock for each share of Muncy common stock owned. Fractional shares will be exchanged for cash.
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
Certain statements in this section and elsewhere in this Quarterly Report on Form 10-Q, other periodic reports filed by us under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of us may include “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect our current views with respect to future events and financial performance. Such forward looking statements are based on general assumptions and are subject to various risks, uncertainties, and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to:
| ● | Our business and financial results are affected by business and economic conditions, both generally and specifically in the mostly North Central Pennsylvania market in which we operate. |
| ● | Changes in interest rates and valuations in the debt, equity and other financial markets. |
| ● | Disruptions in the liquidity and other functioning of financial markets, including such disruptions in the market for real estate and other assets commonly securing financial products. |
| ● | Actions by the Federal Reserve Board and other government agencies, including those that impact money supply and market interest rates. |
| ● | Changes in our customers’ and suppliers’ performance in general and their creditworthiness in particular. |
| ● | Changes in customer preferences and behavior, whether as a result of changing business and economic conditions or other factors. |
| ● | Changes resulting from the enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. |
| ● | A continuation of recent turbulence in significant segments of the United States and global financial markets, particularly if it worsens, could impact our performance, both directly by affecting our revenues and the value of our assets and liabilities and indirectly by affecting our customers and suppliers and the economy generally. |
| ● | Our business and financial performance could be impacted as the financial industry restructures in the current environment by changes in the competitive landscape. |
| ● | Given current economic and financial market conditions, our forward-looking statements are subject to the risk that these conditions will be substantially different than we are currently expecting. These statements are based on our current expectations that interest rates will remain high throughout the remainder of 2023 and into 2024. |
| ● | Legal and regulatory developments could have an impact on our ability to operate our businesses or our financial condition or results of operations or our competitive position or reputation. Reputational impacts, in turn, could affect matters such as business generation and retention, our ability to attract and retain management, liquidity and funding. These legal and regulatory developments could include: (a) the unfavorable resolution of legal proceedings or regulatory and other governmental inquiries; (b) increased litigation risk from recent regulatory and other governmental developments; (c) the results of the regulatory examination process, and regulators’ future use of supervisory and enforcement tools; (d) legislative and regulatory reforms, including changes to laws and regulations involving tax, pension, education and mortgage lending, the protection of confidential customer information, and other aspects of the financial institution industry; and (e) changes in accounting policies and principles. |
| ● | Our business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through the effective use of third-party insurance and capital management techniques. |
| ● | Our ability to anticipate and respond to technological changes can have an impact on our ability to respond to customer needs and to meet competitive demands. |
| ● | Our ability to implement our business initiatives and strategies could affect our financial performance over the next several years. |
26
| ● | Competition can have an impact on customer acquisition, growth and retention, as well as on our credit spreads and product pricing, which can affect market share, deposits and revenues. |
| ● | Our business and operating results can also be affected by widespread natural disasters, terrorist activities or international hostilities, either as a result of the impact on the economy and capital and other financial markets generally or on us or on our customers and suppliers. |
| ● | Exploration and drilling of the Marcellus Shale natural gas reserves in our market area may be affected by federal, state and local laws and regulations such as restrictions on production, permitting, changes in taxes and environmental protection, which could negatively impact our customers and, as a result, negatively impact our deposit volume and loan quality. |
The words “believe,” “expect,” “anticipate,” “project” and similar expressions signify forward looking statements. Readers are cautioned not to place undue reliance on any forward looking statements made by or on behalf of us. Any such statement speaks only as of the date the statement was made. We undertake no obligation to update or revise any forward looking statements.
The following discussion and analysis should be read in conjunction with the detailed information and consolidated financial statements, including notes thereto, included elsewhere in this report. Our consolidated financial condition and results of operations are essentially those of our subsidiary, the Bank. Therefore, the analysis that follows is directed to the performance of the Bank.
FINANCIAL CONDITION
Total assets at September 30, 2023, were $957.6 million, an increase of $13.6 million, or 1.4 percent from $944.0 million at December 31, 2022. The increase in total assets was primarily due to the net increase in gross loans receivable of $24.6 million netted against a decrease of $19.5 million in debt securities available for sale. Investments in limited partnerships increased $2.2 million as CCFNB continued funding a new project. On the liability side, deposit balances decreased by $41.8 million. Other short term borrowings increased $27.3 million since December 31, 2022. Long term borrowings increased $25.0 million since December 31, 2022 to fund the loan growth and offset deposit losses.
Total average assets increased 0.85 percent from $950.4 million at September 30, 2022 to $958.4 million at September 30, 2023. Average earning assets were $893.5 million in 2023 and $886.8 million in 2022. Average interest-bearing liabilities were $688.8 million in 2023 and $665.4 million in 2022.
Cash and cash equivalents increased $4.4 million or 33.3 percent from $13.1 million at December 31, 2022 to $17.4 million at September 30, 2023. The increase is primarily from increased short-term borrowings.
Gross loans not held for sale increased 5.4 percent to $556.3 million at September 30, 2023 from $527.7 million at December 31, 2022.
Interest bearing deposits decreased 5.2 percent to $474.7 million at September 30, 2023 from $500.5 million at December 31, 2022. Noninterest-bearing deposits decreased 8.8 percent from $181.8 million in 2022 to $165.9 million in 2023.
Total stockholder’s equity increased by $2.5 million, or 2.89 percent, from $85.9 million at December 31, 2022, to $88.4 million at September 30, 2023. The increase is primarily attributable to the decrease in accumulated other comprehensive loss due to increased fair values in the available for sale investment securities. Accumulated other comprehensive loss amounted to $27.4 million as of September 30, 2023 and December 31, 2022.
The loan-to-deposit ratio is a key measurement of liquidity. Our average loan-to-deposit ratio increased from 70.3 percent as of December 31, 2022 to 82.3 percent at September 30, 2023.
It is our opinion that the asset/liability mix and the interest rate risk associated with the balance sheet are within manageable parameters. Constant monitoring using asset/liability reports and interest rate risk scenarios are in place along with quarterly asset/liability management meetings on the committee level by the Bank’s Board of Directors. Additionally, the Bank’s Asset/Liability Committee meets quarterly with an investment consultant and works with independent third parties regularly to review key assumptions and other metrics used in the modeling software.
Investment Securities
Debt Securities – Available-for-Sale
Debt securities available-for-sale decreased by $19.5 million or 5.7 percent to $321.6 million at September 30, 2023 from $341.1 million at December 31, 2022. The decrease is due MBS principal payments and scheduled maturities.
27
Equity Securities
At September 30, 2023 and December 31, 2022, the Corporation had $812 thousand and $1.1 million in equity securities recorded at fair value, respectively. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2023 and 2022:
| For the Three Months | For the Nine Months | |||||||||||||||
| Ending September 30, | Ending September 30, | |||||||||||||||
| (In Thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net losses recognized in equity securities during the quarter | $ | (118 | ) | $ | (17 | ) | $ | (265 | ) | $ | (60 | ) | ||||
| Less: Net gains (losses) realized on the sale of equity securities during the quarter | — | — | — | — | ||||||||||||
| Unrealized losses recognized in equity securities held at reporting date | $ | (118 | ) | $ | (17 | ) | $ | (265 | ) | $ | (60 | ) | ||||
See Note 2 within CCFNB’s Notes to the Consolidated Financial Statements (Unaudited) which are included in this Quarterly Report on Form 10Q for more information regarding Corporation’s investment portfolio as of September 30, 2023.
Loans
Gross loans receivable increased 5.4 percent from $527.7 million at December 31, 2022 to $556.3 million at September 30, 2023. The percentage distribution in the loan portfolio as shown in the tables below:
| (In Thousands) | September 30, 2023 | |||||||
| Amount | % | |||||||
| Commercial and industrial | $ | 66,845 | 12.0 | % | ||||
| Commercial real estate: | ||||||||
| Commercial mortgages | 156,943 | 28.2 | % | |||||
| Student housing | 31,935 | 5.7 | % | |||||
| Residential real estate: | ||||||||
| Rental 1-4 family | 54,888 | 9.9 | % | |||||
| 1-4 family residential mortgages | 239,761 | 43.1 | % | |||||
| Consumer and other | 5,883 | 1.1 | % | |||||
| Gross loans | $ | 556,255 | 100 | % | ||||
| (In Thousands) | December 31, 2022 | |||||||
| Amount | % | |||||||
| Commercial, financial and agricultural | $ | 39,573 | 7.5 | % | ||||
| Tax-exempt | 30,679 | 5.8 | % | |||||
| Commercial real estate: | ||||||||
| Commercial mortgages | 145,622 | 27.6 | % | |||||
| Other construction and land development loans | 18,649 | 3.5 | % | |||||
| Secured by farmland | 13,120 | 2.5 | % | |||||
| Consumer real estate: | ||||||||
| Home equity loans | 13,391 | 2.5 | % | |||||
| Home equity lines of credit | 12,262 | 2.3 | % | |||||
| 1-4 family residential mortgages | 241,179 | 45.7 | % | |||||
| Construction | 7,430 | 1.4 | % | |||||
| Installment loans to individuals | 5,824 | 1.1 | % | |||||
| Gross loans | $ | 527,729 | 100.0 | % | ||||
See Note 3 within the Corporation’s Notes to the Consolidated Financial Statements (Unaudited) which are included in this Quarterly Report on Form 10Q for more information regarding the Corporation’s loan portfolio as of September 30, 2023.
Allowance for Credit Losses
The allowance for credit losses was $6.1 million at September 30, 2023, compared to $7.3 million at December 31, 2022. This allowance equaled 1.10 percent and 1.37 percent of total loans, net of unearned income, at the period end September 30, 2023 and December 31, 2022, respectively. The allowance for credit losses was analyzed quarterly and reviewed by the CCFNB’s Board of Directors. No concentration or apparent deterioration in classes of loans or pledged collateral was evident. Regular loan meetings with the CCFNB’s Board of Directors reviewed new loans. Delinquent loans, loan exceptions and certain large loans are addressed by the full Board no less than monthly to determine compliance with policies.
See Note 1 and 3 within the Corporation’s Notes to the Consolidated Financial Statements (Unaudited) which are included in this Quarterly Report on Form 10Q for more information regarding the Corporation’s allowance for credit losses as of September 30, 2023.
28
Deposits
Total average deposits decreased by 6.3 percent from $708.1 million at September 30, 2022 to $663.7 million at September 30, 2023. Average savings deposits decreased 5.7 percent to $162.2 million in 2023 from $172.0 million in 2022. Average time deposits decreased 6.7 percent from $137.0 million in 2022 to $127.9 million in 2023. Average non-interest bearing demand deposits decreased 5.2 percent to $175.2 million in 2023 from $184.8 million in 2022. Average interest bearing NOW accounts decreased 5.4 percent from $160.8 million in 2022 to $152.1 million in 2023.
The average balance and average rate paid on deposits are summarized as follows:
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| Average | Average | Average | Average | Change | ||||||||||||||||||||
| (In Thousands) | Balance | Rate | Balance | Rate | Amount | % | ||||||||||||||||||
| Non-interest bearing | $ | 175,167 | — | % | $ | 184,815 | — | % | $ | (9,648 | ) | (5.2 | )% | |||||||||||
| Savings | 162,218 | 0.03 | 172,010 | 0.03 | (9,792 | ) | (5.7 | ) | ||||||||||||||||
| Now deposits | 152,140 | 0.07 | 160,778 | 0.04 | (8,638 | ) | (5.4 | ) | ||||||||||||||||
| Money market deposits | 46,286 | 1.35 | 53,444 | 0.39 | (7,158 | ) | (13.4 | ) | ||||||||||||||||
| Time deposits | 127,881 | 1.79 | 137,039 | 1.02 | (9,158 | ) | (6.7 | ) | ||||||||||||||||
| Total deposits | $ | 663,692 | 0.46 | % | $ | 708,086 | 0.24 | % | $ | (44,394 | ) | (6.3 | )% | |||||||||||
See Note 4 within the Corporation’s Notes to the Consolidated Financial Statements (Unaudited) which are included in this Quarterly Report on Form 10Q for more information regarding the Corporation’s deposits as of September 30, 2023.
Short-Term Borrowings
The average balance of short-term borrowings, including securities sold under agreements to repurchase and day-to-day FHLB - Pittsburgh borrowings increased $45.1 million or 33.8 percent from $142.1 million in 2022 to $187.3 million in 2023. Average short-term borrowings amounted to 27.2 percent of total interest-bearing liabilities as of September 30, 2023 as compared to 21.4 percent in 2022. Short-term borrowings consist primarily of securities sold under agreements to repurchase and periodic overnight or less than 30-day Federal Home Loan Bank advances.
See Note 5 within the Corporation’s Notes to the Consolidated Financial Statements (Unaudited) which are included in this Quarterly Report on Form 10Q for more information regarding the Corporation’s short-term borrowings as of September 30, 2023.
Long-Term Borrowings
Long-term borrowings consist of advances due to the FHLB - Pittsburgh. Under terms of a blanket agreement, the loans were secured by certain qualifying assets of the Bank which consisted principally of first mortgage loans. The carrying value of these collateralized items was $269,690,000 at September 30, 2023. The Bank has lines of credit with the Federal Reserve Bank Discount Window, FHLB – Pittsburgh, and Atlantic Community Bankers Bank in the aggregate amount of $279,689,000 at September 30, 2023. The unused portion of these lines of credit was $238,603,000 at September 30, 2023.
See Note 6 within the Corporation’s Notes to the Consolidated Financial Statements (Unaudited) which are included in this Quarterly Report on Form 10Q for more information regarding the Corporation’s long-term borrowings as of September 30, 2023.
Capital Resources
Capital continues to be a strength for the Corporation and the Bank. Capital is critical as it must provide growth, payment to shareholders, and absorption of unforeseen losses. The federal regulators provide standards that must be met. As of September 30, 2023, the Corporation was categorized as well-capitalized under the regulatory framework for prompt corrective action. Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), Common Equity Tier I Capital (as defined) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). Management believes, as of September 30, 2023 and December 31, 2022, that the Corporation and the Bank met all capital adequacy requirements to which they are subject.
29
The following table reflects CCFNB’s actual consolidated capital amounts and ratios at September 30, 2023 and December 31, 2022:
| (In Thousands) | September 30, 2023 | December 31, 2022 | ||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
| Total Capital | ||||||||||||||||
| (to Risk-weighted Assets) | ||||||||||||||||
| Actual | $ | 114,864 | 20.9 | % | $ | 112,969 | 21.0 | % | ||||||||
| For Capital Adequacy Purposes | 44,039 | 8.0 | 42,956 | 8.0 | ||||||||||||
| To Be Well-Capitalized | 55,049 | 10.0 | 53,695 | 10.0 | ||||||||||||
| Tier I Capital | ||||||||||||||||
| (to Risk-weighted Assets) | ||||||||||||||||
| Actual | $ | 108,751 | 19.8 | % | $ | 106,249 | 19.8 | % | ||||||||
| For Capital Adequacy Purposes | 33,030 | 6.0 | 32,217 | 6.0 | ||||||||||||
| To Be Well-Capitalized | 44,040 | 8.0 | 42,956 | 8.0 | ||||||||||||
| Tier I Capital | ||||||||||||||||
| (to Average Assets) | ||||||||||||||||
| Actual | $ | 108,751 | 11.1 | % | $ | 106,249 | 11.0 | % | ||||||||
| For Capital Adequacy Purposes | 39,353 | 4.0 | 38,576 | 4.0 | ||||||||||||
| To Be Well-Capitalized | 49,191 | 5.0 | 48,220 | 5.0 | ||||||||||||
| Common Equity Tier I Capital | ||||||||||||||||
| (to Risk-weighted Assets) | ||||||||||||||||
| Actual | $ | 108,751 | 19.8 | % | $ | 106,249 | 19.8 | % | ||||||||
| For Capital Adequacy Purposes | 24,772 | 4.5 | 24,163 | 4.5 | ||||||||||||
| To Be Well-Capitalized | 35,782 | 6.5 | 34,902 | 6.5 | ||||||||||||
The Corporation’s capital ratios are not materially different from those of the Bank.
RESULTS OF OPERATIONS
Net Interest Income
Comparison of Three Months Ended September 30, 2023 and 2022
Tax-equivalent net interest income, as reflected in the following tables, decreased $1.0 million to $5.0 million at September 30, 2023 when compared to the same 2022 time period. Reported tax-equivalent interest income increased $1.4 million to $8.5 million for the three months-ended September 30, 2023 when compared to the same 2022 time period. The increase to interest income was rate and volume driven as maturing investment securities repriced to market rates, as well as, adjusting rates on existing loans and new growth throughout the past year. Investment security tax-equivalent interest income for the three months-ended September 30, 2023 increased $140 thousand when compared to 2022 results. Average balances of investment securities decreased $18.7 million as the portfolio was marked to fair value and offset new purchases. In addition, the average rate earned on investment securities increased 25 basis points to 1.74% as of September 30, 2023. Loan interest income for the three months-ended September 30, 2023 increased $1.3 million when compared to 2022 results. The average balance of loans increased $47.9 million, or 9.5%, when compared to 2022 balances. In addition, the average loan rate for the three months-ended September 30, 2023 increased 57 bps when compared to 2022. Reported interest expense increased $2.4 million to $3.5 million for the three months-ended September 30, 2023 when compared to the same 2022 time period. The increase was primarily rate driven as maturing time deposits re-priced during the year increasing the average rate paid on interest-bearing deposits to 0.74 percent for the three months-ended September 30, 2023 from 0.34 percent at September 30, 2022. In addition, the average rate paid on borrowings increased to 4.74 percent for the three months-ended September 30, 2023 from 1.71 percent at September 30, 2022. Over the same time period, the average balance of borrowings increased $62.4 million to $218.1 million at September 30, 2023 from $155.7 million at September 30, 2022. Net interest margin decreased to 2.21 percent at September 30, 2023 from 2.67 percent at September 30, 2022 as the average rate on interest-bearing liabilities increased from 0.66% as of September 30, 2022 to 1.99% as of September 30, 2023.
The following Average Balance Sheet and Rate Analysis tables presents the average assets, actual income or expense and the average yield on assets, liabilities and stockholders’ equity for the three months ended September 30, 2023 and 2022.
30
AVERAGE BALANCE SHEET AND RATE ANALYSIS
THREE MONTHS ENDED SEPTEMBER 30,
| 2023 | 2022 | |||||||||||||||||||||||
| (In Thousands) | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||
| ASSETS: | (1) | (1) | ||||||||||||||||||||||
| Tax-exempt loans | $ | 30,105 | $ | 307 | 4.05 | % | $ | 23,899 | $ | 199 | 3.30 | % | ||||||||||||
| All other loans | 523,896 | 6,629 | 5.02 | % | 482,179 | 5,418 | 4.46 | % | ||||||||||||||||
| Total loans (2)(3)(4) | 554,001 | 6,936 | 4.97 | % | 506,078 | 5,617 | 4.40 | % | ||||||||||||||||
| Taxable securities | 323,105 | 1,333 | 1.65 | % | 352,269 | 1,302 | 1.48 | % | ||||||||||||||||
| Tax-exempt securitites (3) | 14,893 | 135 | 3.63 | % | 4,380 | 26 | 2.37 | % | ||||||||||||||||
| Total securities | 337,998 | 1,468 | 1.74 | % | 356,649 | 1,328 | 1.49 | % | ||||||||||||||||
| Federal funds sold | 2 | — | 0.00 | % | 1,765 | 9 | 2.02 | % | ||||||||||||||||
| Interest-bearing deposits | 6,163 | 84 | 5.41 | % | 29,763 | 174 | 2.32 | % | ||||||||||||||||
| Total interest-earning assets | 898,164 | 8,488 | 3.75 | % | 894,255 | 7,128 | 3.17 | % | ||||||||||||||||
| Other assets | 67,141 | 64,918 | ||||||||||||||||||||||
| TOTAL ASSETS | $ | 965,305 | $ | 959,173 | ||||||||||||||||||||
| LIABILITIES: | ||||||||||||||||||||||||
| Savings | $ | 156,701 | 12 | 0.03 | % | $ | 174,700 | 14 | 0.03 | % | ||||||||||||||
| Now deposits | 151,345 | 51 | 0.13 | % | 160,603 | 16 | 0.04 | % | ||||||||||||||||
| Money market deposits | 42,337 | 158 | 1.48 | % | 53,479 | 89 | 0.66 | % | ||||||||||||||||
| Time deposits | 129,046 | 671 | 2.06 | % | 132,900 | 334 | 1.00 | % | ||||||||||||||||
| Total deposits | 479,429 | 892 | 0.74 | % | 521,682 | 453 | 0.34 | % | ||||||||||||||||
| Short-term borrowings | 193,126 | 2,337 | 4.80 | % | 155,681 | 673 | 1.72 | % | ||||||||||||||||
| Long-term borrowings | 25,022 | 268 | 4.25 | % | 25 | — | 0.00 | % | ||||||||||||||||
| Total borrowings | 218,148 | 2,605 | 4.74 | % | 155,706 | 673 | 1.71 | % | ||||||||||||||||
| Total interest-bearing liabilities | 697,577 | 3,497 | 1.99 | % | 677,388 | 1,126 | 0.66 | % | ||||||||||||||||
| Demand deposits | 172,841 | 186,508 | ||||||||||||||||||||||
| Other liabilities | 5,028 | 5,750 | ||||||||||||||||||||||
| Stockholders’ equity | 89,859 | 89,527 | ||||||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 965,305 | $ | 959,173 | ||||||||||||||||||||
| Interest rate spread (6) | 1.77 | % | 2.51 | % | ||||||||||||||||||||
| Net interest income/margin (5) | $ | 4,991 | 2.21 | % | $ | 6,002 | 2.67 | % | ||||||||||||||||
| (1) | Average volume information was compared using daily (or monthly) averages for interest-earning and bearing accounts. Certain balance sheet items utilized quarter-end balances for averages. |
| (2) | Interest on loans includes fee income. |
| (3) | Tax exempt interest revenue is shown on a tax-equivalent basis using a statutory federal income tax rate of 21 percent for 2023 and 2022. |
| (4) | Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. |
| (5) | Net interest margin is computed by dividing annualized net interest income by total interest earning assets. |
| (6) | Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. |
31
Comparison of Nine Months Ended September 30, 2023 and 2022
Tax-equivalent net interest income, as reflected in the following tables, decreased $1.7 million to $15.3 million at September 30, 2023 when compared to the same 2022 time period. Reported tax-equivalent interest income increased $5.0 million to $24.3 million for the nine months-ended September 30, 2023 when compared to the same 2022 time period. The increase to interest income was rate and volume driven as maturing and called investment securities repriced to market rates, as well as, new loan growth and adjusting rates on existing loans throughout the past year. Investment security tax-equivalent interest income for the nine months-ended September 30, 2023 increased $1.0 million when compared to 2022 results. Loan interest income for the nine months-ended September 30, 2023 increased $4.1 million when compared to 2022 results. The average balance of loans increased $62.8 million, or 13.0%, when compared to 2022 balances. In addition, the average loan rate for the nine months-ended September 30, 2023 increased 51 bps when compared to 2022. Reported interest expense increased $6.7 million to $9.0 million for the nine months-ended September 30, 2023 when compared to the same 2022 time period. The increase was primarily rate driven as maturing time deposits re-priced during the year increasing the average rate paid on interest-bearing deposits to 0.63 percent for the nine months-ended September 30, 2023 from 0.33 percent at September 30, 2022. In addition, the average rate paid on borrowings increased to 4.45 percent for the nine months-ended September 30, 2023 from 0.88 percent at September 30, 2022. Over the same time period, the average balance of borrowings increased $58.1 million to $200.3 million at September 30, 2023 from $142.2 million at September 30, 2022. Net interest margin decreased to 2.29 percent at September 30, 2023 from 2.56 percent at September 30, 2022 as the average rate on interest-bearing liabilities increased from 0.45% as of September 30, 2022 to 1.74% as of September 30, 2023.
The following Average Balance Sheet and Rate Analysis tables presents the average assets, actual income or expense and the average yield on assets, liabilities and stockholders’ equity for the nine months ended September 30, 2023 and 2022.
32
AVERAGE BALANCE SHEET AND RATE ANALYSIS
NINE MONTHS ENDED SEPTEMBER 30,
| (In Thousands) | 2023 | 2022 | ||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |||||||||||||||||||
| ASSETS: | (1) | (1) | ||||||||||||||||||||||
| Tax-exempt loans | $ | 30,423 | $ | 853 | 3.75 | % | $ | 24,032 | $ | 582 | 3.24 | % | ||||||||||||
| All other loans | 515,801 | 18,862 | 4.89 | % | 459,433 | 15,033 | 4.37 | % | ||||||||||||||||
| Total loans (2)(3)(4) | 546,224 | 19,715 | 4.83 | % | 483,465 | 15,615 | 4.32 | % | ||||||||||||||||
| Taxable securities | 328,166 | 3,863 | 1.57 | % | 349,597 | 3,232 | 1.23 | % | ||||||||||||||||
| Tax-exempt securitites (3) | 14,772 | 504 | 4.55 | % | 5,112 | 118 | 3.08 | % | ||||||||||||||||
| Total securities | 342,938 | 4,367 | 1.70 | % | 354,709 | 3,350 | 1.26 | % | ||||||||||||||||
| Federal funds sold | 5 | — | 0.00 | % | 3,814 | 15 | 0.53 | % | ||||||||||||||||
| Interest-bearing deposits | 4,353 | 169 | 5.19 | % | 44,856 | 261 | 0.78 | % | ||||||||||||||||
| Total interest-earning assets | 893,520 | 24,251 | 3.63 | % | 886,844 | 19,241 | 2.90 | % | ||||||||||||||||
| Other assets | 64,895 | 63,531 | ||||||||||||||||||||||
| TOTAL ASSETS | $ | 958,415 | $ | 950,375 | ||||||||||||||||||||
| LIABILITIES: | ||||||||||||||||||||||||
| Savings | $ | 162,218 | 36 | 0.03 | % | $ | 172,010 | 39 | 0.03 | % | ||||||||||||||
| Now deposits | 152,140 | 82 | 0.07 | % | 160,778 | 48 | 0.04 | % | ||||||||||||||||
| Money market deposits | 46,286 | 467 | 1.35 | % | 53,444 | 154 | 0.39 | % | ||||||||||||||||
| Time deposits | 127,881 | 1,714 | 1.79 | % | 137,039 | 1,048 | 1.02 | % | ||||||||||||||||
| Total deposits | 488,525 | 2,299 | 0.63 | % | 523,271 | 1,289 | 0.33 | % | ||||||||||||||||
| Short-term borrowings | 187,266 | 6,248 | 4.46 | % | 142,126 | 930 | 0.87 | % | ||||||||||||||||
| Long-term borrowings | 13,026 | 414 | 4.25 | % | 26 | 1 | 5.14 | % | ||||||||||||||||
| Total borrowings | 200,292 | 6,662 | 4.45 | % | 142,152 | 931 | 0.88 | % | ||||||||||||||||
| Total interest-bearing liabilities | 688,817 | 8,961 | 1.74 | % | 665,423 | 2,220 | 0.45 | % | ||||||||||||||||
| Demand deposits | 175,167 | 184,815 | ||||||||||||||||||||||
| Other liabilities | 4,618 | 6,170 | ||||||||||||||||||||||
| Stockholders’ equity | 89,813 | 93,967 | ||||||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 958,415 | $ | 950,375 | ||||||||||||||||||||
| Interest rate spread (6) | 1.89 | % | 2.45 | % | ||||||||||||||||||||
| Net interest income/margin (5) | $ | 15,290 | 2.29 | % | $ | 17,021 | 2.56 | % | ||||||||||||||||
| (1) | Average volume information was compared using daily (or monthly) averages for interest-earning and bearing accounts. Certain balance sheet items utilized quarter-end balances for averages. |
| (2) | Interest on loans includes fee income. |
| (3) | Tax exempt interest revenue is shown on a tax-equivalent basis using a statutory federal income tax rate of 21 percent for 2023 and 2022. |
| (4) | Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. |
| (5) | Net interest margin is computed by dividing annualized net interest income by total interest earning assets. |
| (6) | Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. |
33
| Reconcilement of Taxable Equivalent Net Interest Income | ||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (In Thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Total interest income | $ | 8,388 | $ | 7,079 | $ | 23,966 | $ | 19,094 | ||||||||
| Total interest expense | 3,497 | 1,126 | 8,961 | 2,220 | ||||||||||||
| Net interest income | 4,891 | 5,953 | 15,005 | 16,874 | ||||||||||||
| Tax equivalent adjustment | 100 | 49 | 285 | 147 | ||||||||||||
| Net interest income | ||||||||||||||||
| (fully taxable equivalent) | $ | 4,991 | $ | 6,002 | $ | 15,290 | $ | 17,021 | ||||||||
Rate/Volume Analysis
To enhance the understanding of the effects of volumes (the average balance of earning assets and costing liabilities) and average interest rate fluctuations on the consolidated balance sheet as it pertains to net interest income, the table below reflects these changes for 2023 versus 2022:
| (In Thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 vs 2022 | 2023 vs 2022 | |||||||||||||||||||||||
| Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| Due to | Due to | |||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Loans, tax-exempt | $ | 63 | $ | 45 | $ | 108 | $ | 179 | $ | 92 | $ | 271 | ||||||||||||
| Loans | 528 | 683 | 1,211 | 2,061 | 1,768 | 3,829 | ||||||||||||||||||
| Taxable investment securities | (120 | ) | 151 | 31 | (252 | ) | 883 | 631 | ||||||||||||||||
| Tax-exempt investment securities | 95 | 14 | 109 | 330 | 56 | 386 | ||||||||||||||||||
| Federal funds sold | (9 | ) | — | (9 | ) | — | (15 | ) | (15 | ) | ||||||||||||||
| Interest bearing deposits | (322 | ) | 232 | (90 | ) | (1,572 | ) | 1,480 | (92 | ) | ||||||||||||||
| Total interest-earning assets | 235 | 1,125 | 1,360 | 746 | 4,264 | 5,010 | ||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Savings | (1 | ) | (1 | ) | (2 | ) | (2 | ) | (1 | ) | (3 | ) | ||||||||||||
| NOW deposits | (3 | ) | 38 | 35 | (5 | ) | 39 | 34 | ||||||||||||||||
| Money market deposits | (42 | ) | 111 | 69 | (72 | ) | 385 | 313 | ||||||||||||||||
| Time deposits | (20 | ) | 357 | 337 | (123 | ) | 789 | 666 | ||||||||||||||||
| Short-term borrowings | 453 | 1,211 | 1,664 | 1,506 | 3,812 | 5,318 | ||||||||||||||||||
| Long-term borrowings, FHLB | 268 | — | 268 | 413 | — | 413 | ||||||||||||||||||
| Total interest-bearing liabilities | 655 | 1,716 | 2,371 | 1,717 | 5,024 | 6,741 | ||||||||||||||||||
| Change in net interest income | $ | (420 | ) | $ | (591 | ) | $ | (1,011 | ) | $ | (971 | ) | $ | (760 | ) | $ | (1,731 | ) | ||||||
(Credit) Provision for Credit Losses - Loans
For the nine months-ended September 30, 2023, the Corporation recorded a $594 thousand credit for credit losses given the clarity that exists with the COVID-19 pandemic and the related financial condition of municipalities and the local businesses. The September 30, 2023 credit, calculated under the new Current Expected Credit Losses “CECL”, reflected improvements in the projected economic forecasts and real estate valuations. CCFNB adopted the CECL accounting standard effective January 1, 2023. For the nine months-ended September 30, 2022, CCFNB recorded a credit for credit losses of $1.4 million.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topics 326): Measurement of Credit Losses on Financial Instruments” and subsequent related updates. This ASU replaces the incurred loss methodology for recognizing credit losses and requires businesses and other organizations to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans and held-to-maturity securities, net investment in leases, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASC 326 requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell. This guidance became effective on January 1, 2023 for the Bank. The results reported for period beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable accounting standards.
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The Bank adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans, available-for-sale debt securities and unfunded commitments. On January 1, 2023, the Bank recorded a cumulative effect increase to retained earnings of $528, net of tax, of which $490 thousand related to loans, $38 thousand related to unfunded commitments, and $0 related to available-for-sale securities.
The Bank adopted the provisions of ACS 326 related to presenting other-than-temporary impairment on available-for-sale debt securities prior to January 1, 2023 using the prospective transition approach, though no such changes had been recorded on the securities held by the Bank as of the date of adoption.
The Bank expanded the pooling utilized under the legacy incurred loss method to include additional segmentation based on risk. The impact of the change from the incurred loss model to the current expected credit loss model is detailed below.
| January 1, 2023 | ||||||||||||
| Impact of | As Reported | |||||||||||
| Pre-ASC 326 | ASC 326 | Under | ||||||||||
| (In Thousands) | Adoption | Adoption | ASC 326 | |||||||||
| Assets: | ||||||||||||
| Allowance for Credit Losses - Loans | ||||||||||||
| Residential Real Estate | $ | 3,077 | $ | (2,617 | ) | $ | 460 | |||||
| Commercial Real Estate | 2,897 | 3,198 | 6,095 | |||||||||
| Commercial and Industrial | 1,041 | (959 | ) | 82 | ||||||||
| Consumer and other | 60 | (39 | ) | 21 | ||||||||
| Unallocated | 204 | (204 | ) | — | ||||||||
| $ | 7,279 | $ | (621 | ) | $ | 6,658 | ||||||
| Liabilities: | ||||||||||||
| Allowance for Credit Losses on | ||||||||||||
| Off-Balance Sheet Credit Exposure | $ | 65 | $ | (48 | ) | $ | 17 | |||||
See Note 1 and 3 within the Corporation’s Notes to the Consolidated Financial Statements (Unaudited) which are included in this Quarterly Report on Form 10Q for more information regarding the Corporation’s allowance for credit losses as of September 30, 2023.
Non-interest Income
Comparison of Three Months Ended September 30, 2023 and 2022
Total non-interest income increased $1.0 million to $1.5 million for the three months-ended September 30, 2023. The service charges and fees decreased $95 thousand or 16.6 percent to $477 thousand for the three months-ended September 30, 2023. Gain on sale of loans decreased $7 thousand or 9.3 percent from $75 thousand in 2022 to $68 thousand in 2023. Trust income decreased $24 thousand or 11.0 percent from $219 thousand in 2022 to $195 thousand in 2023. The market value of equity securities decreased $118 thousand for the three months ended September 30, 2023. For the three months ended September 30, 2022, the Corporation realized gross losses of $1,236,000 from the sale of investment debt securities.
| For The Three Months Ended | ||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | Change | ||||||||||||||||||||||
| (In Thousands) | Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||
| Service charges and fees | $ | 477 | 31.4 | % | $ | 572 | 114.8 | % | $ | (95 | ) | (16.6 | )% | |||||||||||
| Gain on sale of loans | 68 | 4.5 | 75 | 15.1 | (7 | ) | (9.3 | ) | ||||||||||||||||
| Earnings on bank-owned life insurance | 113 | 7.4 | 109 | 21.9 | 4 | 3.7 | ||||||||||||||||||
| Brokerage | 146 | 9.6 | 125 | 25.1 | 21 | 16.8 | ||||||||||||||||||
| Trust | 195 | 12.8 | 219 | 44.0 | (24 | ) | (11.0 | ) | ||||||||||||||||
| Loss on equity securities | (118 | ) | (7.8 | ) | (17 | ) | (3.4 | ) | (101 | ) | — | |||||||||||||
| Investment security losses, net | — | — | (1,236 | ) | (248.2 | ) | 1,236 | — | ||||||||||||||||
| Interchange fees | 428 | 28.1 | 428 | 85.9 | — | — | ||||||||||||||||||
| Other | 213 | 14.0 | 223 | 44.8 | (10 | ) | (4.5 | ) | ||||||||||||||||
| Total non-interest income | $ | 1,522 | 100.0 | % | $ | 498 | 100.0 | % | $ | 1,024 | 205.6 | % | ||||||||||||
Comparison of Nine Months Ended September 30, 2023 and 2022
Total non-interest income increased $791 thousand or 6.5 percent to $4.9 million for the nine months-ended September 30, 2023. The service charges and fees decreased $60 thousand or 3.8 percent to $1.5 million for the nine months-ended September 30, 2023. Gain on sale of loans decreased $238 thousand or 55.2 percent from $431 thousand in 2022 to $193 thousand in 2023. Trust income increased $8 thousand or 1.3 percent from $605 thousand in 2022 to $613 thousand in 2023. The market value of equity securities decreased $205 thousand for the nine months ended September 30, 2023. . For the nine months ended September 30, 2022, the Corporation realized gross losses of $1,236,000 from the sale of investment debt securities.
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| (In Thousands) | For The Nine Months Ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | Change | ||||||||||||||||||||||
| Amount | % Total | Amount | % Total | Amount | % | |||||||||||||||||||
| Service charges and fees | $ | 1,516 | 31.2 | % | $ | 1,576 | 38.8 | % | $ | (60 | ) | (3.8 | )% | |||||||||||
| Gain on sale of loans | 193 | 4.0 | 431 | 10.6 | (238 | ) | (55.2 | ) | ||||||||||||||||
| Earnings on bank-owned life insurance | 335 | 6.9 | 320 | 7.9 | 15 | 4.7 | ||||||||||||||||||
| Brokerage | 425 | 8.8 | 448 | 11.0 | (23 | ) | (5.1 | ) | ||||||||||||||||
| Trust | 613 | 12.6 | 605 | 14.9 | 8 | 1.3 | ||||||||||||||||||
| Loss on equity securities | (265 | ) | (5.5 | ) | (60 | ) | (1.5 | ) | (205 | ) | — | |||||||||||||
| Investment security losses, net | — | — | (1,236 | ) | (30.4 | ) | 1,236 | — | ||||||||||||||||
| Interchange fees | 1,294 | 26.7 | 1,285 | 31.6 | 9 | 0.7 | ||||||||||||||||||
| Other | 743 | 15.3 | 694 | 17.1 | 49 | 7.1 | ||||||||||||||||||
| Total non-interest income | $ | 4,854 | 100.0 | % | $ | 4,063 | 100.0 | % | $ | 791 | 19.5 | % | ||||||||||||
Non-interest Expense
Comparison of Three Months Ended September 30, 2023 and 2022
Total non-interest expense increased $605 thousand or 13.0 percent from $4.7 million in 2022. Professional fees increased $89 thousand for the three months-ended September 30, 2023 primarily from additional services. Salaries decreased $63 thousand, employee benefits decreased $266 thousand, occupancy decreased $10 thousand, furniture and fixtures increased $118 thousand, and automated teller machine and interchange increased $10 thousand. Merger related expenses increased $ 757 thousand for the three months ended September 30, 2023. Other expenses increased $154 thousand for the three months ended September 30, 2023.
One standard to measure non -interest expense is to express annualized non-interest expense as a percentage of average total assets. As of September 30, 2023 this percentage was 2.19 percent compared to 1.95 percent in 2022.
| (In Thousands) | For The Three Months Ended | ||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | Change | |||||||||||||||||||||||
| Amount | % Total | Amount | % Total | Amount | % | ||||||||||||||||||||
| Salaries | $ | 1,788 | 33.8 | % | $ | 1,851 | 39.6 | % | $ | (63 | ) | (3.4 | )% | ||||||||||||
| Employee benefits | 487 | 9.2 | 753 | 16.1 | (266 | ) | (35.3 | ) | |||||||||||||||||
| Occupancy | 326 | 6.2 | 336 | 7.2 | (10 | ) | (3.0 | ) | |||||||||||||||||
| Furniture and equipment | 536 | 10.2 | 418 | 9.0 | 118 | 28.2 | |||||||||||||||||||
| State shares tax | (58 | ) | (1.1 | ) | 177 | 3.8 | (235 | ) | (132.8 | ) | |||||||||||||||
| Professional fees | 363 | 6.9 | 274 | 5.9 | 89 | 32.5 | |||||||||||||||||||
| Directors fees | 72 | 1.4 | 71 | 1.5 | 1 | 1.4 | |||||||||||||||||||
| FDIC assessments | 110 | 2.1 | 64 | 1.4 | 46 | 71.9 | |||||||||||||||||||
| Telecommunications | 83 | 1.6 | 79 | 1.7 | 4 | 5.1 | |||||||||||||||||||
| Automated teller machine and interchange | 111 | 2.1 | 101 | 2.2 | 10 | 9.9 | |||||||||||||||||||
| Merger related expenses | 757 | 14.4 | — | — | 757 | — | |||||||||||||||||||
| Other | 698 | 13.2 | 544 | 11.6 | 154 | 28.3 | |||||||||||||||||||
| Total non-interest expense | $ | 5,273 | 100.0 | % | $ | 4,668 | 100.0 | % | $ | 605 | 13.0 | % | |||||||||||||
Comparison of Nine Months Ended September 30, 2023 and 2022
Total non-interest expense increased $917 thousand or 6.5 percent from $14.9 million in 2022. Professional fees increased $71 thousand for the nine months-ended September 30, 2023 primarily from additional services. Salaries decreased $202 thousand, employee benefits decreased $370 thousand, occupancy decreased $38 thousand, furniture and fixtures increased $275 thousand, and automated teller machine and interchange increased $15 thousand. Merger related expenses increased $ 1.2 million for the nine months ended September 30, 2023. Other expenses increased $157 thousand for the nine months ended September 30, 2023.
One standard to measure non -interest expense is to express annualized non-interest expense as a percentage of average total assets. As of September 30, 2023 this percentage was 2.08 percent compared to 1.97 percent in 2022.
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| (In Thousands) | For The Nine Months Ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | Change | ||||||||||||||||||||||
| Amount | % Total | Amount | % Total | Amount | % | |||||||||||||||||||
| Salaries | $ | 5,420 | 36.3 | % | $ | 5,622 | 40.0 | % | $ | (202 | ) | (3.6 | )% | |||||||||||
| Employee benefits | 1,887 | 12.6 | 2,257 | 16.1 | (370 | ) | (16.4 | ) | ||||||||||||||||
| Occupancy | 969 | 6.5 | 1,007 | 7.2 | (38 | ) | (3.8 | ) | ||||||||||||||||
| Furniture and equipment | 1,546 | 10.3 | 1,271 | 9.1 | 275 | 21.6 | ||||||||||||||||||
| State shares tax | 234 | 1.6 | 521 | 3.7 | (287 | ) | (55.1 | ) | ||||||||||||||||
| Professional fees | 985 | 6.6 | 914 | 6.5 | 71 | 7.8 | ||||||||||||||||||
| Directors fees | 227 | 1.5 | 238 | 1.7 | (11 | ) | (4.6 | ) | ||||||||||||||||
| FDIC assessments | 327 | 2.2 | 195 | 1.4 | 132 | 67.7 | ||||||||||||||||||
| Telecommunications | 243 | 1.6 | 274 | 2.0 | (31 | ) | (11.3 | ) | ||||||||||||||||
| Automated teller machine and interchange | 221 | 1.5 | 206 | 1.5 | 15 | 7.3 | ||||||||||||||||||
| Merger related expenses | 1,206 | 8.1 | - | — | 1,206 | — | ||||||||||||||||||
| Other | 1,682 | 11.2 | 1,525 | 10.8 | 157 | 10.3 | ||||||||||||||||||
| Total non-interest expense | $ | 14,947 | 100.0 | % | $ | 14,030 | 100.0 | % | $ | 917 | 6.5 | % | ||||||||||||
LIQUIDITY
The Bank’s liquidity, represented by cash and due from banks, is a product of its operating, investing and financing activities. The Bank’s primary sources of funds are deposits, securities sold under agreements to repurchase, principal repayments of securities and outstanding loans, funds provided from operations, and day-to-day FHLB – Pittsburgh borrowings. In addition, the Corporation invests excess funds in short-term interest-earning assets such as overnight deposits or U.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the amortization of loans and securities and short-term investments are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and repayments on loans and mortgage-backed securities.
The Bank strives to maintain sufficient liquidity to fund operations, loan demand and to satisfy fluctuations in deposit levels. The Bank is required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound banking operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The Bank attempts to maintain adequate but not excessive liquidity, and liquidity management is both a daily and long-term function of its business management. The Bank manages its liquidity in accordance with a board of directors-approved asset liability policy, which is administered by its asset-liability committee (“ALCO”). ALCO reports interest rate sensitivity, liquidity, capital and investment-related matters on a quarterly basis to the Corporation’s board of directors.
The Bank reviews cash flow projections regularly and updates them in order to maintain liquid assets at levels believed to meet the requirements of normal operations, including loan commitments and potential deposit outflows from maturing certificates of deposit and savings withdrawals. While deposits and securities sold under agreements to repurchase are its primary source of funds, when needed it is also able to generate cash through borrowings from the Federal Home Loan Bank of Pittsburgh (“FHLB”). At September 30, 2023, the Bank had remaining available capacity with FHLB, subject to certain collateral restrictions, of $238.6 million.
Liquidity management is required to ensure that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt service payments, investment commitments, commercial and consumer loan demand, and ongoing operating expenses. Funding sources include principal repayments on loans, sale of assets, growth in time and core deposits, short and long-term borrowings, investment securities coming due, loan prepayments and repurchase agreements. Regular loan payments are a dependable source of funds, while the sale of investment securities, deposit growth and loan prepayments are significantly influenced by general economic conditions and the level of interest rates.
We manage liquidity on a daily basis. We believe that our liquidity is sufficient to meet present and future financial obligations and commitments on a timely basis. However, see potential liquidity risk factors at Item 1A – Risk Factors and refer to Consolidated Statements of Cash Flows in this Form 10-Q.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management involves managing the extent to which interest-sensitive assets and interest- sensitive liabilities are matched. Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities. The Bank’s net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Bank seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities.
One major objective of the Bank when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Bank’s Asset/Liability Committee (“ALCO”), which is comprised of senior management and Board members. ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk management is a regular part of management of the Bank. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of noncontractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings from shifts in interest rates.
37
The ratio between assets and liabilities repricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.
To manage the interest sensitivity position, an asset/liability model called “gap analysis” is used to monitor the difference in the volume of the Bank’s interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect. The Bank employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest sensitive assets and liabilities in order to determine what impact these rate changes will have upon our net interest spread.
At September 30, 2023, our cumulative gap positions and the potential earnings change resulting from various change in rates were both within the internal risk management guidelines.
In addition to gap analysis, the Bank uses earnings simulation to assist in measuring and controlling interest rate risk. The Bank also simulates the impact on net interest income of plus and minus 100, 200, 300 and 400 basis point rate shocks. The results of these theoretical rate shocks provide an additional tool to help manage the Bank’s interest rate risk.
It is our opinion that the asset/liability mix and the interest rate risk associated with the balance sheet is within manageable parameters. Additionally, the Bank’s Asset/Liability Committee meets quarterly with an investment consultant.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that our disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this Report, were effective as of such date at the reasonable assurance level as discussed below to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including the CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.
The CEO and CFO have evaluated the changes to our internal controls over financial reporting that occurred during our fiscal Quarter Ended September 30, 2023, as required by paragraph (d) Rules 13a – 15 and 15d – 15 under the Securities Exchange Act of 1934, as amended, and have concluded that there were no changes that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II Other Information
Item 1. Legal Proceedings
At September 30, 2023, the Corporation was not involved in any legal proceedings other than routine legal proceedings in the ordinary course of business, which involve amounts which, in the aggregate, are believed by management to be immaterial to the financial condition of the Corporation. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation by government authorities.
Item 1A. Risk Factors
Not required for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (a) | The Corporation did not sell any securities during the third quarter of 2023 that were not registered. |
| (b) | Not applicable. |
(c) Not applicable. The Corporation does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
38
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
| (a) | None |
| (b) | None |
| (c) | Not Applicable |
Item 6. Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
101 The following materials from the Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2023, formatted in XBRL (Extensible Business Reporting Language); (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statement of Comprehensive Income (unaudited), (iv) the Consolidated Statement of Changes in Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited), and (vi) the Notes to Consolidated Financial Statements (unaudited).
104 Cover Page for Interactive Data File (embedded with the Inline XBRL document)
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CCFNB BANCORP, INC. | ||
| (Registrant) |
| By | /s/ Lance O. Diehl | ||
| Lance O. Diehl | |||
| President and CEO | |||
| (Principal Executive Officer) | |||
| Date: | November 9, 2023 | ||
| By | /s/ Jeffrey T. Arnold | ||
| Jeffrey T. Arnold, CPA, CIA | |||
| Chief Financial Officer and Treasurer | |||
| (Principal Financial Officer) | |||
| (Principal Accounting Officer) | |||
| Date: | November 9, 2023 | ||
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