PENNS WOODS BANCORP INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
WINNING SUMMARY
Comparison of three and three month periods ended
Summary of results
Net income for the three months endedMarch 31, 2022 was$3,432,000 compared to$3,441,000 for the same periods of 2021. Results for the three months endedMarch 31, 2022 compared to 2021 were impacted by an increase in after-tax securities losses of$142,000 (from a gain of$94,000 to a loss of$48,000 ) for the three month period. In addition, an after-tax loss of$201,000 related to a branch closure negatively impacted the three months endedMarch 31, 2022 . Basic and diluted earnings per share for the three months endedMarch 31, 2022 were$0.49 compared to basic and diluted earnings per share of$0.49 for the corresponding period of 2021. Return on average assets and return on average equity were 0.72% and 8.17% for the three months endedMarch 31, 2022 compared to 0.75% and 8.59% for the corresponding period of 2021. Net income from core operations ("core earnings") was$3,480,000 for the three months endedMarch 31, 2022 compared to$3,347,000 for the corresponding period of 2021. Core basic and diluted earnings per share for the three months endedMarch 31, 2022 was$0.50 compared to$0.47 basic and diluted for the corresponding periods of 2021. Management uses the non-GAAP measure of net income from core operations in its analysis of the Company's performance. This measure, as used by the Company, adjusts net income by excluding significant gains or losses that are unusual in nature. Because certain of these items and their impact on the Company's performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company's core businesses. For purposes of this Quarterly Report on Form 10-Q, net income from core operations means net income adjusted to exclude after-tax net securities gains or losses. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliation of GAAP and Non-GAAP Financial Measures (Dollars in Thousands, Except Per Share Data) Three Months Ended March 31, 2022 2021 GAAP net income$ 3,432 $ 3,441 Less: net securities (losses) gains, net of tax (48) 94 Non-GAAP core earnings$ 3,480 $ 3,347 Three Months Ended March 31, 2022 2021 Return on average assets (ROA) 0.72 % 0.75 % Less: net securities (losses) gains, net of tax (0.01) % 0.02 % Non-GAAP core ROA 0.73 % 0.73 % Three Months Ended March 31, 2022 2021 Return on average equity (ROE) 8.17 % 8.59 % Less: net securities (losses) gains, net of tax (0.11) % 0.24 % Non-GAAP core ROE . 8.28 % 8.35 % Three Months Ended March 31, 2022 2021 Basic earnings per share (EPS)$ 0.49 $ 0.49 Less: net securities (losses) gains, net of tax (0.01) 0.02 Non-GAAP core operating EPS
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Table of Contents Three Months Ended March 31, 2022 2021 Diluted EPS$ 0.49 $ 0.49 Less: net securities (losses) gains, net of tax (0.01) 0.02 Non-GAAP diluted core EPS
Interest and dividend income
Interest and dividend income for the three months endedMarch 31, 2022 decreased to$14,275,000 compared to$14,595,000 for the same period of 2021. The decrease in loan portfolio income was due to a decrease in average rate paid on loans that was offset partially by an increase in the average loan portfolio balance. Investment securities income decreased as the increase in the average portfolio balance was more than offset by a decrease in the average rate earned on the portfolio as higher yielding legacy investments matured. The increase in dividend and other interest income is due to the increase in interest earned on federal funds sold.
Composition of interest and dividend income for the three months ended
Three Months Ended March 31, 2022 March 31, 2021 Change (In Thousands) Amount % Total Amount % Total Amount % Loans including fees$ 13,038 91.34 %$ 13,345 91.44 %$ (307) (2.30) % Investment securities: Taxable 737 5.16 819 5.61 (82) (10.01) Tax-exempt 164 1.15 171 1.17 (7) (4.09) Dividend and other interest income 336 2.35 260 1.78 76
29.23
Total interest and dividend income$ 14,275 100.00 %$ 14,595 100.00 %$ (320) (2.19) % Interest Expense Interest expense for the three months endedMarch 31, 2022 decreased$1,103,000 compared to the same period of 2021. Interest-bearing deposit rates continue to reduce due to the economic impact of COVID-19 and an increased level of excess balance sheet liquidity. The decrease in deposit rates was offset in part by an increase in average interest-bearing demand deposits. Growth in the deposit portfolio has allowed for a decrease in average long-term borrowings resulting in a decrease of$206,000 in long-term borrowing interest expense. Interest expense composition for the three months endedMarch 31, 2022 and 2021 was as follows: Three Months Ended March 31, 2022 March 31, 2021 Change (In Thousands) Amount % Total Amount % Total Amount % Deposits$ 788 55.42 %$ 1,684 66.69 %$ (896) (53.21) % Short-term borrowings 1 0.07 2 0.08 (1) (50.00) Long-term borrowings 633 44.51 839 33.23 (206) (24.55) Total interest expense$ 1,422 100.00 %$ 2,525 100.00 %$ (1,103) (43.68) % Net Interest Margin The net interest margin for the three months endedMarch 31, 2022 was 2.93% compared to 2.88% for the corresponding period of 2021. The increase in the net interest margin for the three month period was driven by a decline in the rate paid on interest-bearing deposits of 35 basis points ("bps") as rates paid decreased throughout 2021 and through the first three months of 2022. Leading the decline in the rate paid on interest-bearing deposits was a 94 bps decline in the rate paid on time deposits as time deposits issued prior to the start of the COVID-19 pandemic matured. Offsetting the decrease in rates paid on the interest 31
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bearing liabilities was a decrease in the yield of the loan portfolio of 26 bps coupled with the yield on the investment portfolio declining 32 bps as legacy earning assets were paid down or matured.
The following is a table of average balances and associated returns for the three months ended
AVERAGE BALANCES AND INTEREST RATES Three Months Ended March 31, 2022 Three Months Ended March 31, 2021 (In Thousands) Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate Assets: Tax-exempt loans (3) $ 47,974$ 308 2.60 % $ 45,534$ 349 3.11 % All other loans 1,351,414 12,795 3.84 % 1,293,395 13,069 4.10 % Total loans (2) 1,399,388 13,103 3.80 % 1,338,929 13,418 4.06 % Federal funds sold 50,000 93 0.75 % - - - % Taxable securities 144,438 920 2.58 % 145,047 1,033 2.89 % Tax-exempt securities (3) 40,981 208 2.06 % 36,369 216 2.41 % Total securities 185,419 1,128 2.47 % 181,416 1,249 2.79 % Interest-bearing deposits 157,541 60 0.15 % 195,995 46 0.10 % Total interest-earning assets 1,792,348 14,384 3.25 % 1,716,340 14,713 3.48 % Other assets 127,421 124,074 Total assets $ 1,919,769 $ 1,840,414 Liabilities and shareholders' equity: Savings $ 240,953 22 0.04 % $ 214,636 44 0.08 % Super Now deposits 370,895 195 0.21 % 289,236 267 0.37 % Money market deposits 298,820 186 0.25 % 306,000 267 0.35 % Time deposits 190,819 385 0.82 % 254,460 1,106 1.76 % Total interest-bearing deposits 1,101,487 788 0.29 % 1,064,332 1,684 0.64 % Short-term borrowings 5,194 1 0.08 % 5,680 2 0.14 % Long-term borrowings 115,267 633 2.23 % 141,483 839 2.40 % Total borrowings 120,461 634 2.13 % 147,163 841 2.32 % Total interest-bearing liabilities 1,221,948 1,422 0.47 % 1,211,495 2,525 0.85 % Demand deposits 506,348 445,759 Other liabilities 23,357 22,872 Shareholders' equity 168,116 160,288 Total liabilities and shareholders' equity $ 1,919,769 $ 1,840,414 Interest rate spread 2.78 % 2.63 % Net interest income/margin$ 12,962 2.93 %$ 12,188 2.88 % 1. Information on this table has been calculated using average daily balance sheets to obtain average balances. 2. Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings. 3. Income and rates on fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% 32
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Table of Contents The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, (In Thousands) 2022 2021 Total interest income$ 14,275 $ 14,595 Total interest expense 1,422 2,525 Net interest income (GAAP) 12,853 12,070 Tax equivalent adjustment 109 118 Net interest income (fully taxable equivalent) (NON-GAAP) $
12,962
The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, 2022 vs. 2021 Increase (Decrease) Due to (In Thousands) Volume Rate Net Interest income: Tax-exempt loans $ 18$ (60) $ (42) All other loans 583 (856) (273) Federal funds sold 93 - 93 Taxable investment securities (4) (109) (113) Tax-exempt investment securities 26 (34) (8) Interest bearing deposits (10) 24 14 Total interest-earning assets 706 (1,035) (329) Interest expense: Savings deposits 4 (26) (22) Super Now deposits 63 (135) (72) Money market deposits (6) (75) (81) Time deposits (230) (491) (721) Short-term borrowings - (1) (1) Long-term borrowings (149) (57) (206) Total interest-bearing liabilities (318) (785) (1,103) Change in net interest income$ 1,024 $ (250) $ 774 Provision for Loan Losses The provision for loan losses is based upon management's quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed annually for the Banks. Management remains committed to an aggressive program of problem loan identification and resolution. The allowance for loan losses is determined by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management's consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards and trends with respect to non-performing loans and its knowledge and experience with specific lending segments. 33
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Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate atMarch 31, 2022 , future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination. When determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed. The allowance for loan losses decreased from$14,176,000 atDecember 31, 2021 to$14,023,000 atMarch 31, 2022 . The decrease in allowance was due to a lessening of the economic uncertainty caused by the COVID-19 pandemic and significant reduction in loans that were on payment deferral as a result of the COVID-19 pandemic impact. AtMarch 31, 2022 andDecember 31, 2021 , the allowance for loan losses to total loans was 1.00% and 1.02%, respectively. The provision for loan losses totaled$150,000 for the three months endedMarch 31, 2022 and the amount for the corresponding 2021 period was$515,000 . The decrease in the provision for loan losses for the three months endedMarch 31, 2022 compared to the corresponding 2021 period was the result of economic improvement along with the 2021 period provision being affected by the continued economic uncertainty caused by COVID-19 and supply chain shortages. Nonperforming loans decreased to$5,281,000 atMarch 31, 2022 from$6,250,000 atDecember 31, 2021 . The majority of nonperforming loans involve loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses. The ratio of nonperforming loans to total loans was 0.38% and 0.45% atMarch 31, 2022 andDecember 31, 2021 , respectively, and the ratio of the allowance for loan losses to nonperforming loans was 265.54% and 226.82% atMarch 31, 2022 andDecember 31, 2021 , respectively. Internal loan review and analysis coupled with changes in the loan portfolio composition resulted in a provision for loan losses of$150,000 for the three months endedMarch 31, 2022 .
Here is a table showing total non-performing loans as of:
Total Nonperforming Loans (In Thousands) 90 Days Past Due Non-accrual Total March 31, 2022$ 364 $ 4,917 $ 5,281 December 31, 2021 861 5,389 6,250 September 30, 2021 854 6,909 7,763 June 30, 2021 529 7,402 7,931 March 31, 2021 607 8,665 9,272 34
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Table of Contents March 31, 2022 Amount of Ratio of Net Allowance for Allowance for (Charge-Offs) Loan Losses Loan Losses to Net (Charge-Offs) Recoveries to Average (In Thousands) Allocated Total loans Total Loans Ratio Recoveries Average Loans Loans Commercial, financial, and agricultural $ 1,936$ 162,273 1.19 % $ 4$ 161,698 - % Real estate mortgage: Residential 4,801 613,161 0.78 % 3 606,449 - % Commercial 5,215 443,415 1.18 % (154) 445,914 (0.03) % Construction 197 41,923 0.47 % - 39,286 - % Consumer automobiles 1,376 135,568 1.01 % (120) 136,544 (0.09) % Other consumer installment loans 114 9,366 1.22 % (36) 9,497 (0.38) % Unallocated 384$ 14,023 $ 1,405,706 1.00 % $ (303)$ 1,399,388 (0.02) % Total non-accrual loans outstanding $ 4,917 Non-accrual loans to total loans outstanding 0.35 % Allowance for loan losses to non-accrual loans 285.19 % December 31, 2021 Amount of Ratio of Net Allowance for Allowance for (Charge-Offs) Loan Losses Loan Losses to Net (Charge-Offs) Recoveries to Average (In Thousands) Allocated Total loans Total Loans Ratio Recoveries Average Loans Loans Commercial, financial, and agricultural $ 1,946$ 163,285 1.19 % $ (10)$ 175,631 (0.01) % Real estate mortgage: Residential 4,701 595,847 0.79 % (107) 584,849 (0.02) % Commercial 5,336 446,734 1.19 % 95 381,306 0.02 % Construction 179 37,295 0.48 % 10 41,564 0.02 % Consumer automobiles 1,411 139,408 1.01 % (143) 152,496 (0.09) % Other consumer installment loans 111 9,277 1.20 % (112) 9,787 (1.14) % Unallocated 492$ 14,176 $ 1,391,846 1.02 % $ (267)$ 1,345,633 (0.02) %
Total unrecognized loans outstanding $5,389 Unrecognized loans to total loans outstanding
0.39 % Allowance for loan losses to non-accrual loans 263.05 % Non-interest Income Total non-interest income for the three months endedMarch 31, 2022 compared to the same period in 2021 decreased$202,000 . Excluding net securities gains, non-interest income for the three months endedMarch 31, 2022 decreased$22,000 compared to the same period in 2021. Gain on sale of loans decreased for the three month period as the product mix has caused the Company to increasingly act in a broker capacity with the fee income from broker activity included in loan broker commissions which increased$360,000 . Service charges increased for the three month period primarily due to an increase in overdraft fees. Brokerage commissions have fluctuated due to changes in the product mix and reduced consumer activity. The decrease in debit card fees is a result of an decrease in debit card usage. 35
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Non-interest income composition for the three months endedMarch 31, 2022 and 2021 was as follows: Three Months Ended March 31, 2022 March 31, 2021 Change (In Thousands) Amount % Total Amount % Total Amount % Service charges $ 495 20.52 % $ 383 14.65 %$ 112 29.24 % Net debt securities (losses) gains, available for sale (2) (0.08) 138 5.28 (140)
101.45
Net equity securities losses (58) (2.40) (23) (0.88) (35)
(152.17)
Net securities (losses) gains, trading (1) (0.04) 4 0.15 (5) (125.00) Bank-owned life insurance 170 7.05 173 6.62 (3) (1.73) Gain on sale of loans 345 14.30 908 34.74 (563) (62.00) Insurance commissions 170 7.05 157 6.01 13 8.28 Brokerage commissions 200 8.29 219 8.38 (19) (8.68) Loan broker commissions 541 22.43 181 6.92 360 198.90 Debit card income 345 14.30 380 14.54 (35) (9.21) Other 207 8.58 94 3.59 113 120.21 Total non-interest income$ 2,412
100.00 %$ 2,614 100.00 %$ (202) (7.73) % Non-interest Expense Total non-interest expense increased$1,056,000 for the three months endedMarch 31, 2022 compared to the same period of 2021. The increase in salaries and employee benefits is attributable to the current employment environment, employee retention efforts, and routine annual wage increases. Furniture and equipment expenses in addition to occupancy expenses increased as maintenance costs have increased and an increase in the level of depreciation. Software amortization increased due to increased software licensing costs. Other expense increased for the three month period primarily from a write down on leasehold improvements of$254,000 related to a branch closure. Non-interest expense composition for the three months endedMarch 31, 2022 and 2021 was as follows: Three Months Ended March 31, 2022 March 31, 2021 Change (In Thousands) Amount % Total Amount % Total Amount % Salaries and employee benefits$ 6,264 56.91 %$ 5,598 56.26 %$ 666 11.90 % Occupancy 910 8.27 976 9.81 (66) (6.76) Furniture and equipment 892 8.10 809 8.13 83 10.26 Software amortization 253 2.30 198 1.99 55 27.78 Pennsylvania shares tax 389 3.53 352 3.54 37 10.51 Professional fees 538 4.89 583 5.86 (45) (7.72)Federal Deposit Insurance Corporation deposit insurance 202 1.84 221 2.22 (19) (8.60) Marketing 64 0.58 63 0.63 1 1.59 Intangible amortization 43 0.39 53 0.53 (10) (18.87) Other 1,452 13.19 1,098 11.03 354 32.24 Total non-interest expense$ 11,007 100.00 %$ 9,951 100.00 %$ 1,056 10.61 % Provision for Income Taxes Income taxes decreased$95,000 for the three months endedMarch 31, 2022 compared to the same period of 2021. The effective tax rate for the three months endedMarch 31, 2022 was 16.46% compared to 18.28% for the same period of 2021. The Company currently is in a deferred tax asset position. A valuation allowance was established on the$1,003,000 of capital loss carryforwards for the twelve months endedDecember 31, 2021 , which remained unchanged during the first quarter of 2022. 36
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Table of Contents ASSET/LIABILITY MANAGEMENT Cash and Cash Equivalents
Cash and cash equivalents decreased
Loans held for sale
Activity regarding loans held for sale resulted in sales proceeds being greater than loan originations, less$345,000 in realized gains, by$2,365,000 for the three months endedMarch 31, 2022 .
Loans
Gross loans increased$13,819,000 sinceDecember 31, 2021 due primarily to an increase in both residential and construction real estate mortgage categories. Consumer automobile loans decreased as used car inventories declined due to supply constraints.
The breakdown of the loan portfolio, by category, at
March 31, 2022 December 31, 2021 Change (In Thousands) Amount % Total Amount % Total Amount % Commercial, financial, and agricultural$ 162,273 11.54 % $ 163,285 11.73 %$ (1,012) (0.62) % Real estate mortgage: Residential 613,161 43.61 595,847 42.80 17,314 2.91 % Commercial 443,415 31.54 446,734 32.09 (3,319) (0.74) % Construction 41,923 2.98 37,295 2.68 4,628 12.41 % Consumer automobile loans 135,568 9.64 139,408 10.01 (3,840) (2.75) % Other consumer installment loans 9,366 0.67 9,277 0.67 89 0.96 % Net deferred loan fees and discounts 260 0.02 301 0.02 (41) (13.62) % Gross loans$ 1,405,966 100.00 %$ 1,392,147 100.00 %$ 13,819 0.99 %
The following table shows the amount of cumulative and non-cumulative TDRs at
March 31, 2022 December 31, 2021 (In Thousands) Accrual Non-accrual Total Accrual Non-accrual Total Commercial, financial, and agricultural$ 308 $ 507 $ 815 $ 314 $ 574 $ 888 Real estate mortgage: Residential 3,961 177 4,138 3,999 178 4,177 Commercial 1,799 2,332 4,131 1,836 2,509 4,345$ 6,068 $ 3,016 $ 9,084 $ 6,149 $ 3,261 $ 9,410 Investments The fair value of the investment debt securities portfolio atMarch 31, 2022 increased$9,264,000 sinceDecember 31, 2021 , while the amortized cost of the portfolio increased$16,159,000 . The increase in the investment portfolio amortized value occurred within the state and political segment of the portfolio. The mortgage-backed segment was reduced as bonds prepaid due to the low interest rate environment. The other debt segment of the investment portfolio is primarily corporate bonds and this segment remained flat. The municipal segment was increased as primarily bonds with a final maturity of one to five years have been purchased. The portfolio continues to be actively managed in order to reduce interest rate and market risk. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 86.73% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody's. 37
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The Company considers various factors, which include examples from applicable accounting guidance, when analyzing the available for sale portfolio for possible other than temporary impairment. The Company primarily considers the following factors in its analysis: length of time and severity of the fair value being less than carrying value; reduction of dividend paid (equities); continued payment of dividend/interest, credit rating, and financial condition of an issuer; intent and ability to hold until anticipated recovery (which may be maturity); and general outlook for the economy, specific industry, and entity in question. The bond portion of the portfolio review is conducted with emphases on several factors. Continued payment of principal and interest is given primary importance with credit rating and financial condition of the issuer following as the next most important. Credit ratings were reviewed with the ratings of the bonds being satisfactory. Bonds that were not currently rated were discussed with a third party and/or underwent an internal financial review. Each bond is reviewed to determine whether it is a general obligation bond, which is backed by the credit and taxing power of the issuing jurisdiction, or a revenue bond, which is only payable from specified revenues. Based on the review undertaken by the Company, the Company determined that the decline in value of the various bond holdings were temporary and were the result of the general market downturns and interest rate/yield curve changes, not credit issues. The fact that almost all of such bonds are general obligation bonds further solidified the Company's determination that the decline in the value of these bond holdings is temporary. The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at$1,300,000 forMarch 31, 2022 andDecember 31, 2021 while the fair value decreased$58,000 over the same time period.
The distribution of credit ratings based on amortized cost and fair value of the debt securities portfolio at
A- toAAA B- to BBB+ C- to CCC+ Not Rated Total Amortized (In Thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Cost Fair Value Amortized Cost Fair Value Available for sale (AFS): Mortgage-backed securities $ 1,532 7$ 1,452 $ - $ - $ - $ - $ - $ - $ 1,532$ 1,452 State and political securities 128,568 126,258 120 121 - - 1,180 1,177 129,868 127,556 Other debt securities 25,639 24,618 5,505 5,396 - - 17,021 16,652 48,165 46,666 Total debt securities AFS$ 155,739 $ 152,328 $ 5,625 $ 5,517 $ - $ -$ 18,201 $ 17,829 $ 179,565 $ 175,674 Financing Activities Deposits Total deposits decreased$8,920,000 fromDecember 31, 2021 toMarch 31, 2022 . Time deposits decreased$31,767,000 over this period to a total of$173,600,000 as excess on balance sheet liquidity has allowed for a decrease in the reliance on higher rate time deposit funding. An increase in core deposits (deposits less time deposits) of$22,847,000 has provided relationship driven funding for the loan and investment portfolios. Emphasis during 2021 and through 2022 has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking has increased due to these efforts coupled with a change in consumer behavior due to the business and travel restrictions that were temporarily in effect due to the COVID-19 pandemic.
The deposit balances and their changes for the periods discussed are as follows:
March 31, 2022 December 31, 2021 Change (In Thousands) Amount % Total Amount % Total Amount % Demand deposits$ 514,130 31.89 % $ 494,360 30.49 %$ 19,770 4.00 % NOW accounts 379,838 23.56 366,399 22.60 13,439 3.67 Money market deposits 299,166 18.55 318,877 19.67 (19,711) (6.18) Savings deposits 245,661 15.24 236,312 14.58 9,349 3.96 Time deposits 173,600 10.76 205,367 12.66 (31,767) (15.47) Total deposits$ 1,612,395 100.00 %$ 1,621,315 100.00 %$ (8,920) (0.55) % 38
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Table of Contents Borrowed Funds Total borrowed funds decreased 9.23%, or$12,158,000 , to$119,552,000 atMarch 31, 2022 compared to$131,710,000 atDecember 31, 2021 . The decrease in long term borrowings occurred as fixed rate borrowings matured. Securities sold under agreements to repurchase have increased as customers balances have increased. March 31, 2022 December 31, 2021 Change (In Thousands) Amount % Total Amount % Total Amount % Short-term borrowings: Securities sold under agreement to repurchase$ 6,634 5.55 %$ 5,747 4.36 %$ 887 15.43 % Total short-term borrowings 6,634 5.55 5,747 4.36 887 15.43 Long-term borrowings: Long-term FHLB borrowings 105,000 87.82 118,000 89.59 (13,000) (11.02) Long-term finance lease 7,918 6.62 7,963 6.05 (45) (0.57) Total long-term borrowings 112,918 94.45 125,963 95.64 (13,045) (10.36) Total borrowed funds$ 119,552 100.00 %$ 131,710 100.00 %$ (12,158) (9.23) % Short-Term Borrowings
The following table provides additional information regarding secured borrowings that have been accounted for as repurchase agreements.
Remaining
Contractual expiry Night and
Continued
(In Thousands) March 31, 2022 December 31, 2021 Investment debt securities pledged, fair value $ 7,748 $ 8,881 Repurchase agreements 6,634 5,747 Capital The adequacy of the Company's capital is reviewed on an ongoing basis with reference to the size, composition, and quality of the Company's resources and regulatory guidelines. Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings. Banking institutions are generally required to comply with risk-based capital guidelines set by bank regulatory agencies. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets. Specifically, each is required to maintain certain minimum dollar amounts and ratios of common equity tier I risk-based, tier I risk-based, total risk-based, and tier I leverage capital. In addition to the capital requirements, theFederal Deposit Insurance Corporation Improvements Act ("FDICIA") established five capital categories for banks ranging from "well capitalized" to "critically undercapitalized" for purposes of theFDIC's prompt corrective action rules. To be classified as "well capitalized" under the prompt corrective action rules, common equity tier I risk-based, tier I risked-based, total risk-based, and tier I leverage capital ratios must be at least 6.5%, 8%, 10%, and 5%, respectively. Under existing capital rules, the minimum capital to risk-adjusted assets requirements for banking organizations are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered "well capitalized"), a tier 1 capital ratio of 6.0% (8.0% to be considered "well capitalized"), and total capital ratio of 8.0% (10.0% to be considered "well capitalized"). Under existing capital rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. 39
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Table of Contents The Company's capital ratios as ofMarch 31, 2022 andDecember 31, 2021 were as follows: March 31, 2022 December 31, 2021 (In Thousands) Amount Ratio Amount Ratio
$ 158,069 10.730 %$ 156,439 10.791 % For Capital Adequacy Purposes 66,292 4.500 65,237 4.500
Minimum to maintain the capital conservation buffer at the closing date
103,121 7.000 101,480 7.000 To Be Well Capitalized 95,755 6.500 94,232 6.500 Total Capital (to Risk-weighted Assets) Actual$ 172,198 11.690 %$ 170,708 11.776 % For Capital Adequacy Purposes 117,843 8.000 115,970 8.000
Minimum to maintain the capital conservation buffer at the closing date
154,669 10.500 152,211 10.500 To Be Well Capitalized 147,304 10.000 144,963 10.000Tier I Capital (to Risk-weighted Assets) Actual$ 158,069 10.730 %$ 156,439 10.791 % For Capital Adequacy Purposes 88,389 6.000 86,983 6.000
Minimum to maintain the capital conservation buffer at the closing date
125,218 8.500 123,226 8.500 To Be Well Capitalized 117,852 8.000 115,977 8.000Tier I Capital (to Average Assets) Actual$ 158,069 8.330 %$ 156,439 8.397 % For Capital Adequacy Purposes 75,903 4.000 74,521 4.000 To Be Well Capitalized 94,879 5.000 93,152 5.000Jersey Shore State Bank's capital ratios as ofMarch 31, 2022 andDecember 31, 2021 were as follows: March 31, 2022 December 31, 2021 (In Thousands) Amount Ratio Amount Ratio
$ 111,825 10.303 %$ 110,682 10.337 % For Capital Adequacy Purposes 48,841 4.500 48,183 4.500
Minimum to maintain the capital conservation buffer at the closing date
75,975 7.000 74,952 7.000 To Be Well Capitalized 70,549 6.500 69,598 6.500 Total Capital (to Risk-weighted Assets) Actual$ 122,280 11.266 %$ 121,094 11.309 % For Capital Adequacy Purposes 86,831 8.000 85,662 8.000
Minimum to maintain the capital conservation buffer at the closing date
113,966 10.500 112,431 10.500 To Be Well Capitalized 108,539 10.000 107,078 10.000 Tier I Capital (to Risk-weighted Assets) - - Actual$ 111,825 10.303 %$ 110,682 10.337 % For Capital Adequacy Purposes 65,122 6.000 64,244 6.000
Minimum to maintain the capital conservation buffer at the closing date
92,256 8.500 91,013 8.500 To Be Well Capitalized 86,829 8.000 85,659 8.000Tier I Capital (to Average Assets) Actual$ 111,825 8.315 %$ 110,682 8.326 % For Capital Adequacy Purposes 53,794 4.000 53,174 4.000 To Be Well Capitalized 67,243 5.000 66,468 5.000 40
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Luzerne Bank's capital ratios as ofMarch 31, 2022 andDecember 31, 2021 were as follows: March 31, 2022 December 31, 2021 (In Thousands) Amount Ratio Amount Ratio
$ 42,847 11.052 %$ 42,291 11.164 % For Capital Adequacy Purposes 17,446 4.500 17,047 4.500
Minimum to maintain the capital conservation buffer at the closing date
27,138 7.000 26,517 7.000 To Be Well Capitalized 25,200 6.500 24,623 6.500 Total Capital (to Risk-weighted Assets) Actual$ 46,521 11.999 %$ 46,148 12.182 % For Capital Adequacy Purposes 31,017 8.000 30,306 8.000
Minimum to maintain the capital conservation buffer at the closing date
40,709 10.500 39,776 10.500 To Be Well Capitalized 38,771 10.000 37,882 10.000Tier I Capital (to Risk-weighted Assets) Actual$ 42,847 11.052 %$ 42,291 11.164 % For Capital Adequacy Purposes 23,261 6.000 22,729 6.000
Minimum to maintain the capital conservation buffer at the closing date
32,953 8.500 32,199 8.500 To Be Well Capitalized 31,015 8.000 30,305 8.000Tier I Capital (to Average Assets) Actual$ 42,847 7.763 %$ 42,291 7.537 % For Capital Adequacy Purposes 22,078 4.000 22,444 4.000 To Be Well Capitalized 27,597 5.000 28,056 5.000
Liquidity; Sensitivity to interest rates and market risk
The asset/liability committee addresses the liquidity needs of the Company to ensure that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.
The following liquidity measures are monitored for compliance and were within the limits cited in
1. Net Loans to Total Assets, 85% maximum 2. Net Loans to Total Deposits, 100% maximum 3. Cumulative 90 day Maturity GAP %, +/- 15% maximum 4. Cumulative 1 Year Maturity GAP %, +/- 20% maximum Fundamental objectives of the Company's asset/liability management process are to maintain adequate liquidity while minimizing interest rate risk. The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations to depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates. The Banks, like other financial institutions, must have sufficient funds available to meet liquidity needs for deposit withdrawals, loan commitments and originations, and expenses. In order to control cash flow, the Banks estimate future cash flows from deposits, loan payments, and investment security payments. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, FHLB borrowings, and brokered deposits. Management believes the Banks have adequate resources to meet their normal funding requirements. Management monitors the Company's liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating 41
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money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides basic funding to meet the needs of depositors, borrowers and creditors.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a total current maximum borrowing capacity at the FHLB of$669,483,000 . In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of$100,000,000 . Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled$105,000,000 as ofMarch 31, 2022 . Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process segments both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be effected. Repriceable assets are subtracted from repriceable liabilities for a specific time period to determine the "gap", or difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In addition to gap management, the Company has an asset/liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders' equity and a simulation analysis to monitor the effects of interest rate changes on the Company's consolidated balance sheet. The Company currently maintains a gap position of being asset sensitive. The Company has strategically taken this position as it has decreased the duration of the earning asset portfolio by adding quality short and intermediate term loans such as home equity loans and the selling of long-term municipal bonds. Lengthening of the liability portfolio is being undertaken to build protection in a rising rate environment. A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Company's balance sheet and more specifically shareholders' equity. The Company does not manage the balance sheet structure in order to maintain compliance with this calculation. The calculation serves as a guideline with greater emphasis placed on interest rate sensitivity. Changes to calculation results from period to period are reviewed as changes in results could be a signal of future events. As of the most recent analysis, the results of the market value at risk calculation were within established guidelines due to the strategic direction being taken.
Sensitivity to interest rates
In this analysis the Company examines the result of a 100, 200, 300, and 400 basis point change in market interest rates and the effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner. Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.
The following is a rate shock forecast for the twelve month period ending
Parallel Rate Shock in Basis Points (In Thousands) -200 -100 Static +100 +200 +300 +400 Net interest income$ 51,824 $ 54,746 $ 57,374 $ 60,914 $ 64,502 $ 68,183 $ 71,893 Change from static (5,550) (2,628) - 3,540 7,128 10,809 14,519 Percent change from static -9.67 % -4.58 % - 6.17 % 12.42 % 18.84 % 25.31 % The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes. 42
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Inflation
The asset and liability structure of a financial institution is primarily monetary in nature. Therefore, interest rates rather than inflation have a more significant impact on the Company's performance. Interest rates are not always affected in the same direction or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors which are not measured by a price index.
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