NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., United Insurance Solutions, LLC., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). All significant inter-company balances and transactions have been eliminated in the consolidation.
The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.
CECL Adoption and Updated Significant Accounting Policy
On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology, and is referred to as CECL. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to off-balance sheet (“OBS”) credit exposures (loan commitments, standby letters of credit, financial guarantees, and other similar instruments.
The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, net of investments in leases and OBS credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Company recorded an overall decrease of $3,789,000 to the Allowance for Credit Losses (“ACL”) on January 1, 2023 as a result of the adoption of CECL with an associated increase to retained earnings of $2,993,000 and decrease to deferred tax assets of $796,000. The Company also recorded a liability of $1,703,000 for OBS credit exposures that resulted in a decrease to retained earnings of $1,346,000 and an increase to deferred tax assets of $357,000.
Allowance for Credit Losses: The discussion that follows describes the methodology for determining the ACL under the CECL model that was adopted effective January 1, 2023. The allowance methodology for prior periods is disclosed in the Company’s 2022 Annual Report on Form 10-K.
The Company 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.
Loans: The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses. The ACL also includes certain qualitative adjustments to the CECL model.
Loans Evaluated Collectively: Management believes that internal credit ratings are the most relevant credit quality indicator for these types of loans, however; the Company does not assign internal credit ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, and consumer automobile loans. For these loans, the most relevant credit quality indicator is delinquency status and management evaluates credit quality based on the aging status of the loan. In order to determine the ACL:
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• | Loans aggregated into pools based on similar risk characteristics. |
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• | The probability of default "PD" and loss given default rate "LGD" CECL model components are determined based on loss estimates driven by historical experience at the input level. |
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• | The PD model component uses "through the economic cycle transition" matrices based on the Company's historical loan and transaction data across each pool of loans. |
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• | The LGD model component calculates a lifetime LGD estimate across each pool of loans utilizing a nonparametric loss curve modeling approach. |
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• | Reasonable and supportable forecasts are incorporated into the PD model component. |
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• | Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate. |
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• | A constant prepayment rate is calculated for each loan pool in the CECL model. |
Loans Evaluated Individually: Loans evaluated individually for expected credit losses include loans determined to be collateral-dependant.
Loans evaluated individually may have specific allocations assigned. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans.
For loans secured by real estate, estimated fair values are determined through appraisals performed by third-party appraisers or third party evaluations for commercial real estate loans and our internal appraisal department for 1-4 family real estate secured loans, discounted to arrive at expected net sale proceeds. For collateral dependent loans, estimated real estate fair values are also net of estimated selling costs. When a real estate secured loan is impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Company’s experience and knowledge of the real estate market; the purpose of the loan; market factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Company generally obtains updated evaluations for collateral dependent loans secured predominantly by real estate every 12 months.
When updated evaluations are not obtained for loans secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and there has not been a significant deterioration in the collateral value since the original appraisal was performed.
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal credit rating process is used. The Company believes that internal credit ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal credit rating categories is a significant component of the ACL methodology for these loans, which bases the PD on this migration. Assigning credit ratings involves judgment. Credit ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.
The following is a summary of the Company's internal credit rating categories:
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• | Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk. |
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• | Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak. |
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• | Substandard or Lower: There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt. |
The allocation of the ACL is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Company considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type.
Qualitative and Other Adjustments to ACL: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These include changes in lending policy, volume of the portfolio, economy conditions, credit concentrations, level of problem loans, loan review, collateral value, and experience of credit staff. Qualitative adjustments are judgmental and are based on Management’s knowledge of the portfolio and the markets in which the Company operates. Qualitative adjustments are evaluated and approved on a quarterly basis.
OBS Credit Exposures: The ACL for OBS credit exposures is recorded in other liabilities on the consolidated balance sheet. This ACL represents management’s estimate of expected losses in its unfunded loan commitments and other OBS credit exposures, such as letters of credit and credit recourse on sold residential mortgage loans. The ACL specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for OBS credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses.
The impact from the adoption of CECL is shown below:
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| | January 1, 2023 |
(In Thousands) | | Pre-adoption | | Adoption impact | | As Reported |
Assets | | | | | | |
ACL on loans | | | | | | |
Commercial, financial, and agricultural | | $ | 1,914 | | | $ | 2,656 | | | $ | 4,570 | |
Real estate mortgage: | | | | | | |
Residential | | 5,061 | | | (3,893) | | | 1,168 | |
Commercial | | 6,110 | | | (2,660) | | | 3,450 | |
Construction | | 188 | | | (96) | | | 92 | |
Consumer automobile loans | | 1,617 | | | 240 | | | 1,857 | |
Other consumer installment loans | | 109 | | | 602 | | | 711 | |
Unallocated | | 638 | | | (638) | | | — | |
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Liabilities | | | | | | |
ACL for unfunded commitments | | 143 | | | 1,703 | | | 1,846 | |
| | $ | 15,780 | | | $ | (2,086) | | | $ | 13,694 | |
Note 2. Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component shown net of tax and parenthesis indicating debits, as of March 31, 2023 and 2022 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 |
(In Thousands) | | Net Unrealized Gain (Loss) on Available for Sale Securities | | Defined Benefit Plan | | Total | | Net Unrealized Gain (Loss) on Available for Sale Securities | | Defined Benefit Plan | | Total |
Beginning balance | | $ | (9,819) | | | $ | (4,139) | | | $ | (13,958) | | | $ | 2,373 | | | $ | (3,485) | | | $ | (1,112) | |
Other comprehensive income (loss) before reclassifications | | 1,843 | | | — | | | 1,843 | | | (5,449) | | | — | | | (5,449) | |
Amounts reclassified from accumulated other comprehensive gain | | 48 | | | 29 | | | 77 | | | 2 | | | 13 | | | 15 | |
Net current-period other comprehensive income (loss) | | 1,891 | | | 29 | | | 1,920 | | | (5,447) | | | 13 | | | (5,434) | |
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Ending balance | | $ | (7,928) | | | $ | (4,110) | | | $ | (12,038) | | | $ | (3,074) | | | $ | (3,472) | | | $ | (6,546) | |
The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of March 31, 2023 and 2022 were as follows: | | | | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Loss Components | | Amount Reclassified from Accumulated Other Comprehensive Loss | | Affected Line Item in the Consolidated Statement of Income |
| Three months ended March 31, 2023 | | Three months ended March 31, 2022 | |
Net unrealized losses on available for sale securities | | $ | (61) | | | $ | (2) | | | Net debt securities losses, available for sale |
Income tax effect | | 13 | | | — | | | Income tax provision |
Total reclassifications for the period | | $ | (48) | | | $ | (2) | | | |
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Net unrecognized pension costs | | $ | (37) | | | $ | (17) | | | Other non-interest expense |
Income tax effect | | 8 | | | 4 | | | Income tax provision |
Total reclassifications for the period | | $ | (29) | | | $ | (13) | | | |
Note 3. Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This standard, along with several other subsequent codification updates, replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses that are expected to occur over the remaining life of a financial asset and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model (“CECL”) will apply to the allowance for loan losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures.
Management has completed its implementation plan, segmentation and testing, and model validation. The implementation plan included drafting of additional controls and policies to govern data uploads to its third-party vendor, balancing and reconciling, testing and auditing of inputs, and review and decision-making surrounding segmentation, methodologies, qualitative factor adjustments, and reasonable and supportable forecasts and reversion techniques. Parallel runs were processed during 2022 and the results were consistent with management's expectations. The implementation plan is currently going through the Company's control structure and internal control testing is being performed.
As a result of adopting this standard, the Company recorded a decrease in its allowance effective January 1, 2023, of $2,086,000. As a result, the Company recorded a decrease in its loan allowance as of January 1, 2023, of $3,789,000; as well as an increase in its allowance for off-balance sheet credit exposures of $1,703,000. These estimates are subject to further refinements based on ongoing evaluations of our model, methodologies, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.
At adoption, the Company did not have any securities classified as HTM debt securities. No allowance was recorded related to AFS debt securities at the date of adoption, January 1, 2023.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance
calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. This Update did not have a significant impact on the Company’s financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This amendment clarifies the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. It also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The amendments will be applied prospectively, with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.
In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. This Update is not expected to have a significant impact on the Company’s financial statements.
Note 4. Per Share Data
There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 1,003,000 stock options, with an average exercise price of $25.56, outstanding on March 31, 2023. A portion of these options were included, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $25.96 for the quarter being greater than the strike price. There were a total of 1,268,525 stock options, with an average exercise price of $26.65 that were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $24.24 being less than the strike price for the period ending March 31, 2022.
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| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Weighted average common shares issued | | | | | | 7,568,622 | | | 7,552,800 | |
Weighted average treasury stock shares | | | | | | (510,225) | | | (480,225) | |
Weighted average common shares outstanding - basic | | | | | | 7,058,397 | | | 7,072,575 | |
Dilutive effect of outstanding stock options | | | | | | 275,800 | | | — | |
Weighted average common shares outstanding - diluted | | | | | | 7,334,197 | | | 7,072,575 | |
Note 5. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at March 31, 2023 and December 31, 2022 are as follows:
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| | March 31, 2023 |
| | | | Gross | | Gross | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
(In Thousands) | | Cost | | Gains | | Losses | | Value |
Available for sale (AFS): | | | | | | | | |
U.S. Government and agency securities | | $ | 3,002 | | | $ | — | | | $ | (82) | | | $ | 2,920 | |
Mortgage-backed securities | | 8,159 | | | 15 | | | (222) | | | 7,952 | |
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State and political securities | | 145,998 | | | 266 | | | (6,572) | | | 139,692 | |
Other debt securities | | 50,066 | | | 4 | | | (3,444) | | | 46,626 | |
Total debt securities | | $ | 207,225 | | | $ | 285 | | | $ | (10,320) | | | $ | 197,190 | |
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Investment equity securities: | | | | | | | | |
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Equity securities | | $ | 1,350 | | | $ | — | | | $ | (187) | | | $ | 1,163 | |
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| | December 31, 2022 |
| | | | Gross | | Gross | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
(In Thousands) | | Cost | | Gains | | Losses | | Value |
Available for sale (AFS): | | | | | | | | |
U.S. Government and agency securities | | $ | 3,002 | | | $ | — | | | $ | (106) | | | $ | 2,896 | |
Mortgage-backed securities | | 1,496 | | | — | | | (214) | | | 1,282 | |
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State and political securities | | 151,426 | | | 157 | | | (8,774) | | | 142,809 | |
Other debt securities | | 50,178 | | | 58 | | | (3,550) | | | 46,686 | |
Total debt securities | | $ | 206,102 | | | $ | 215 | | | $ | (12,644) | | | $ | 193,673 | |
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Investment equity securities: | | | | | | | | |
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Equity securities | | $ | 1,350 | | | $ | — | | | $ | (208) | | | $ | 1,142 | |
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The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at March 31, 2023 and December 31, 2022.
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| | March 31, 2023 |
| | Less than Twelve Months | | Twelve Months or Greater | | Total |
| | | | Gross | | | | Gross | | | | Gross |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(In Thousands) | | Value | | Losses | | Value | | Losses | | Value | | Losses |
Available for sale (AFS): | | | | | | | | | | | | |
U.S. Government and agency securities | | $ | 2,446 | | | $ | (56) | | | $ | 474 | | | $ | (26) | | | $ | 2,920 | | | $ | (82) | |
Mortgage-backed securities | | 5,139 | | | (36) | | | 1,297 | | | (186) | | | 6,436 | | | (222) | |
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State and political securities | | 53,390 | | | (1,264) | | | 72,923 | | | (5,308) | | | 126,313 | | | (6,572) | |
Other debt securities | | 5,332 | | | (89) | | | 40,190 | | | (3,355) | | | 45,522 | | | (3,444) | |
Total debt securities | | $ | 66,307 | | | $ | (1,445) | | | $ | 114,884 | | | $ | (8,875) | | | $ | 181,191 | | | $ | (10,320) | |
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| | December 31, 2022 |
| | Less than Twelve Months | | Twelve Months or Greater | | Total |
| | | | Gross | | | | Gross | | | | Gross |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
(In Thousands) | | Value | | Losses | | Value | | Losses | | Value | | Losses |
Available for sale (AFS): | | | | | | | | | | | | |
U.S. Government and agency securities | | $ | 2,896 | | | $ | (106) | | | $ | — | | | $ | — | | | $ | 2,896 | | | $ | (106) | |
Mortgage-backed securities | | — | | | — | | | 1,282 | | | (214) | | | 1,282 | | | (214) | |
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State and political securities | | 95,444 | | | (4,797) | | | 36,283 | | | (3,977) | | | 131,727 | | | (8,774) | |
Other debt securities | | 16,896 | | | (664) | | | 25,144 | | | (2,886) | | | 42,040 | | | (3,550) | |
Total debt securities | | $ | 115,236 | | | $ | (5,567) | | | $ | 62,709 | | | $ | (7,077) | | | $ | 177,945 | | | $ | (12,644) | |
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At March 31, 2023, there were a total of 70 securities in a continuous unrealized loss position for less than twelve months and 165 individual securities that were in a continuous unrealized loss position for twelve months or greater. No credit losses occurred for the period ending March 31, 2023.
The Company reviews its position quarterly and has determined that, at March 31, 2023, the declines outlined in the above table represent temporary non-credit declines and the Company does not intend to sell, and does not believe it will be required to sell, these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that the unrealized losses disclosed above are not credit-related but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at March 31, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
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(In Thousands) | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 30,883 | | | $ | 30,393 | |
Due after one year to five years | | 102,687 | | | 97,428 | |
Due after five years to ten years | | 65,362 | | | 61,218 | |
Due after ten years | | 8,293 | | | 8,151 | |
Total | | $ | 207,225 | | | $ | 197,190 | |
Total gross proceeds from sales of debt securities available for sale for the three months ended March 31, 2023 was $12,913,000, compared to $90,000 for the corresponding 2022 period.
The following table represents gross realized gains and losses from the sales of debt securities available for sale:
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| | | | Three Months Ended March 31, |
(In Thousands) | | | | | | 2023 | | 2022 |
Available for sale (AFS): | | | | | | | | |
Gross realized gains: | | | | | | | | |
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State and political securities | | | | | | $ | 54 | | | $ | 1 | |
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Gross realized losses: | | | | | | | | |
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State and political securities | | | | | | $ | (115) | | | $ | (3) | |
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Investment securities with a carrying value of approximately $149,415,000 and $154,946,000 at March 31, 2023 and December 31, 2022, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
At March 31, 2023 and December 31, 2022, we had $1,163,000 and $1,142,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2023 and 2022:
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| | | | | | | | |
| | | | Three Months Ended March 31, |
(In Thousands) | | | | | | 2023 | | 2022 |
Net gains (losses) recognized in equity securities during the period | | | | | | $ | 21 | | | $ | (59) | |
Less: Net gains realized on the sale of equity securities during the period | | | | | | — | | | — | |
Unrealized gains (losses) recognized in equity securities held at reporting date | | | | | | $ | 21 | | | $ | (59) | |
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Note 6. Loans
Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial, financial, and agricultural, real estate, and installment loans. Real estate loans are further segmented into three categories: residential, commercial, and construction, while installment loans are classified as either consumer automobile loans or other installment loans.
The following table presents the related aging categories of loans, by class, as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Past Due | | | | | | Past Due 90 |
| | 30 To 89 | | | | | | Days Or More |
(In Thousands) | | Days | | Current | | Total | | & Still Accruing |
Commercial, financial, and agricultural | | $ | 261 | | | $ | 200,171 | | | $ | 200,432 | | | $ | — | |
Real estate mortgage: | | | | | | | | |
Residential | | 5,068 | | | 717,710 | | | 723,932 | | | 1,154 | |
Commercial | | 914 | | | 507,190 | | | 509,466 | | | 1,362 | |
Construction | | 472 | | | 46,617 | | | 47,121 | | | 32 | |
Consumer automobile loans | | 1,121 | | | 206,482 | | | 207,747 | | | 144 | |
Other consumer installment loans | | 157 | | | 10,239 | | | 10,400 | | | 4 | |
| | $ | 7,993 | | | $ | 1,688,409 | | | 1,699,098 | | | $ | 2,696 | |
Net deferred loan fees and discounts | | | | | | 925 | | | |
Allowance for credit losses | | | | | | (11,734) | | | |
Loans, net | | | | | | $ | 1,688,289 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Past Due | | Past Due 90 | | | | | | |
| | 30 To 89 | | Days Or More | | Non- | | | | |
(In Thousands) | | Days | | & Still Accruing | | Accrual | | Current | | Total |
Commercial, financial, and agricultural | | $ | 94 | | | $ | — | | | $ | 432 | | | $ | 189,935 | | | $ | 190,461 | |
Real estate mortgage: | | | | | | | | | | |
Residential | | 5,472 | | | 1,120 | | | 524 | | | 701,093 | | | 708,209 | |
Commercial | | 2,564 | | | 60 | | | 2,659 | | | 495,349 | | | 500,632 | |
Construction | | 511 | | | — | | | — | | | 42,797 | | | 43,308 | |
Consumer automobile loans | | 2,089 | | | 80 | | | — | | | 183,943 | | | 186,112 | |
Other consumer installment loans | | 152 | | | 15 | | | — | | | 10,194 | | | 10,361 | |
| | $ | 10,882 | | | $ | 1,275 | | | $ | 3,615 | | | $ | 1,623,311 | | | 1,639,083 | |
Net deferred loan fees and discounts | | | | | | | | | | 648 | |
Allowance for loan losses | | | | | | | | | | (15,637) | |
Loans, net | | | | | | | | | | $ | 1,624,094 | |
The Allowance for Credit Losses ("ACL") related to loans consists of loans evaluated collectively and individually for expected credit losses. The ACL related to loans represents an estimate of expected credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. The ACL for off balance sheet credit exposure includes estimated losses on unfunded loan commitments, letters of credit and other off balance sheet credit exposures and is recorded in other liabilities. The total ACL is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.
The following table presents the components of the ACL as of March 31, 2023:
| | | | | | | | | | |
| | March 31, | | |
(In Thousands) | | 2023 | | |
ACL - loans | | $ | 11,734 | | | |
ACL - off balance sheet credit exposure | | 1,920 | | | |
Total ACL | | $ | 13,654 | | | |
Non-accrual Loans
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | | | | | December 31, 2022 |
| | Non-accrual Loans | | | | | | |
(In Thousands) | | With a Related ACL | | Without a Related ACL | | Total | | | | | | Total Non-accrual loans |
Commercial, financial, and agricultural | | $ | 456 | | | $ | — | | | $ | 456 | | | | | | | $ | 432 | |
Real estate mortgage: | | | | | | | | | | | | |
Residential | | 510 | | | — | | | 510 | | | | | | | 524 | |
Commercial | | 248 | | | 2,337 | | | 2,585 | | | | | | | 2,659 | |
Construction | | — | | | — | | | — | | | | | | | — | |
Consumer automobile | | — | | | — | | | — | | | | | | | — | |
Other consumer installment loans | | — | | | — | | | — | | | | | | | — | |
| | $ | 1,214 | | | $ | 2,337 | | | $ | 3,551 | | | | | | | $ | 3,615 | |
Total interest income recorded on non-accrual loans at March 31, 2023 totaled $32,000.
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of December 31, 2022: | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Recorded | | Unpaid Principal | | Related |
(In Thousands) | | Investment | | Balance | | Allowance |
With no related allowance recorded: | | | | | | |
Commercial, financial, and agricultural | | $ | 295 | | | $ | 295 | | | $ | — | |
Real estate mortgage: | | | | | | |
Residential | | 3,388 | | | 3,388 | | | — | |
Commercial | | 2,588 | | | 2,588 | | | — | |
Construction | | — | | | — | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Installment loans to individuals | | — | | | — | | | — | |
| | 6,271 | | | 6,271 | | | — | |
With an allowance recorded: | | | | | | |
Commercial, financial, and agricultural | | 403 | | | 403 | | | 4 | |
Real estate mortgage: | | | | | | |
Residential | | 933 | | | 933 | | | 111 | |
Commercial | | 3,607 | | | 3,607 | | | 827 | |
Construction | | — | | | — | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Installment loans to individuals | | 19 | | | — | | | 19 | |
| | 4,962 | | | 4,943 | | | 961 | |
Total: | | | | | | |
Commercial, financial, and agricultural | | 698 | | | 698 | | | 4 | |
Real estate mortgage: | | | | | | |
Residential | | 4,321 | | | 4,321 | | | 111 | |
Commercial | | 6,195 | | | 6,195 | | | 827 | |
Construction | | — | | | — | | | — | |
Consumer automobile loans | | — | | | — | | | — | |
Installment loans to individuals | | 19 | | | — | | | 19 | |
| | $ | 11,233 | | | $ | 11,214 | | | $ | 961 | |
The following table presents outstanding loan balances of collateral-dependent loans by class as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | Real estate | | Other* | | Unsecured** |
| | | | | | |
Real estate mortgage: | | | | | | |
Residential | | $ | 525 | | | $ | — | | | $ | — | |
Commercial | | 154 | | | 1,225 | | | 332 | |
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Total | | $ | 679 | | | $ | 1,225 | | | $ | 332 | |
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* 90% of loan balances guaranteed by USDA remaining 10% is unsecured
** Loan considered unsecured due to lien position on property
The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, |
| | | | 2022 |
(In Thousands) | | | | | | | | Average Investment in Impaired Loans | | Interest Income Recognized on an Accrual Basis on Impaired Loans | | Interest Income Recognized on a Cash Basis on Impaired Loans |
Commercial, financial, and agricultural | | | | | | | | $ | 853 | | | $ | 5 | | | $ | — | |
Real estate mortgage: | | | | | | | | | | | | |
Residential | | | | | | | | 4,944 | | | 46 | | | — | |
Commercial | | | | | | | | 7,757 | | | 52 | | | — | |
Construction | | | | | | | | 85 | | | 1 | | | — | |
Consumer automobile | | | | | | | | — | | | — | | | — | |
Other consumer installment loans | | | | | | | | 20 | | | — | | | — | |
| | | | | | | | $ | 13,659 | | | $ | 104 | | | $ | — | |
Troubled Debt Restructurings
The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.
There were no loan modifications considered to be TDRs completed during the three months ended March 31, 2023 and 2022. There were no loan modification considered to be a TDR made during the twelve months prior to March 31, 2023 that defaulted during the three months ended March 31, 2023. There was one loan modifications considered to be a TDR made during the twelve months previous to March 31, 2022 that defaulted during the three months ended March 31, 2022. The defaulted loan type and recorded investments at March 31, 2022 were as follows: one residential real estate loan with a recorded investment of $400,000.
Troubled debt restructurings amounted to $7,328,000 and $7,468,000 as of March 31, 2023 and December 31, 2022, respectively.
The amount of foreclosed residential real estate held at March 31, 2023 and December 31, 2022, totaled $846,000 and $950,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2023 and December 31, 2022, totaled $722,000 and $890,000, respectively.
Internal Credit Ratings
Management uses a ten point internal credit rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated for substandard classification. Loans in the doubtful category exhibit the same weaknesses found in the substandard loans; however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Loans classified as loss are considered uncollectible and charge-off is imminent.
To help ensure that credit ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight. Generally, consumer and
residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 2022 loan review will evaluate 55% of the Banks' average outstanding commercial portfolio which can consist of outstanding loans, commercial real estate mortgages and outstanding commitments. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.
The following table presents the credit quality categories identified above as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
(In Thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans | | Revolving Loans Converted to Term | | Total |
Commercial, financial, and agricultural | | | | | | | | | | | | | | | | | | |
Pass | | $ | 17,392 | | | $ | 57,070 | | | $ | 40,861 | | | $ | 34,532 | | | $ | 9,298 | | | $ | 10,195 | | | $ | 29,713 | | | $ | 131 | | | $ | 199,192 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | 97 | | | — | | | — | | | 97 | |
Substandard or Lower | | — | | | — | | | — | | | — | | | — | | | — | | | 430 | | | 713 | | | 1,143 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 17,392 | | | $ | 57,070 | | | $ | 40,861 | | | $ | 34,532 | | | $ | 9,298 | | | $ | 10,292 | | | $ | 30,143 | | | $ | 844 | | | $ | 200,432 | |
| | | | | | | | | | | | | | | | | | |
Current period gross write offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | |
Residential | | | | | | | | | | | | | | | | | | |
Pass | | $ | 32,256 | | | $ | 218,074 | | | $ | 127,155 | | | $ | 74,334 | | | $ | 49,003 | | | $ | 68,165 | | | $ | 44,114 | | | $ | 108,180 | | | $ | 721,281 | |
Special Mention | | — | | | — | | | 163 | | | — | | | — | | | — | | | — | | | — | | | 163 | |
Substandard or Lower | | — | | | — | | | — | | | 90 | | | — | | | 2,301 | | | 68 | | | 29 | | | 2,488 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 32,256 | | | $ | 218,074 | | | $ | 127,318 | | | $ | 74,424 | | | $ | 49,003 | | | $ | 70,466 | | | $ | 44,182 | | | $ | 108,209 | | | $ | 723,932 | |
| | | | | | | | | | | | | | | | | | |
Current period gross write offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5 | | | $ | 73 | | | $ | — | | | $ | 78 | |
| | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | | |
Pass | | $ | 11,022 | | | $ | 102,142 | | | $ | 140,306 | | | $ | 52,744 | | | $ | 27,194 | | | $ | 157,392 | | | $ | 10,849 | | | $ | 599 | | | $ | 502,248 | |
Special Mention | | — | | | — | | | 186 | | | — | | | — | | | 48 | | | — | | | — | | | 234 | |
Substandard or Lower | | — | | | — | | | — | | | — | | | — | | | 6,921 | | | 22 | | | 41 | | | 6,984 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 11,022 | | | $ | 102,142 | | | $ | 140,492 | | | $ | 52,744 | | | $ | 27,194 | | | $ | 164,361 | | | $ | 10,871 | | | $ | 640 | | | $ | 509,466 | |
| | | | | | | | | | | | | | | | | | |
Current period gross write offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | |
| | | | | | | | | | | | | | | | | | |
Construction | | | | | | | | | | | | | | | | | | |
Pass | | $ | 10,388 | | | $ | 17,545 | | | $ | 11,711 | | | $ | 1,726 | | | $ | 611 | | | $ | 4,775 | | | $ | 269 | | | $ | — | | | $ | 47,025 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard or Lower | | — | | | — | | | — | | | — | | | — | | | 96 | | | — | | | — | | | 96 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 10,388 | | | $ | 17,545 | | | $ | 11,711 | | | $ | 1,726 | | | $ | 611 | | | $ | 4,871 | | | $ | 269 | | | $ | — | | | $ | 47,121 | |
| | | | | | | | | | | | | | | | | | |
Current period gross write offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Consumer Automobile | | | | | | | | | | | | | | | | | | |
Pass | | $ | 35,550 | | | $ | 100,204 | | | $ | 27,682 | | | $ | 22,834 | | | $ | 12,400 | | | $ | 9,077 | | | $ | — | | | $ | — | | | $ | 207,747 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard or Lower | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 35,550 | | | $ | 100,204 | | | $ | 27,682 | | | $ | 22,834 | | | $ | 12,400 | | | $ | 9,077 | | | $ | — | | | $ | — | | | $ | 207,747 | |
| | | | | | | | | | | | | | | | | | |
Current period gross write offs | | $ | 1 | | | $ | 58 | | | $ | — | | | $ | 29 | | | $ | — | | | $ | 3 | | | $ | — | | | $ | — | | | $ | 91 | |
| | | | | | | | | | | | | | | | | | |
Installment loans to individuals | | | | | | | | | | | | | | | | | | |
Pass | | $ | 888 | | | $ | 3,334 | | | $ | 1,590 | | | $ | 701 | | | $ | 499 | | | $ | 3,339 | | | $ | — | | | $ | 49 | | | $ | 10,400 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard or Lower | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 888 | | | $ | 3,334 | | | $ | 1,590 | | | $ | 701 | | | $ | 499 | | | $ | 3,339 | | | $ | — | | | $ | 49 | | | $ | 10,400 | |
| | | | | | | | | | | | | | | | | | |
Current period gross write offs | | $ | 40 | | | $ | 5 | | | $ | 21 | | | $ | — | | | $ | 3 | | | $ | 6 | | | $ | 13 | | | $ | — | | | $ | 88 | |
The information presented in the table above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, internal credit ratings for the report loan segments as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Commercial, Financial, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment loans | | |
(In Thousands) | | | Residential | | Commercial | | Construction | | | | Totals |
Pass | | $ | 184,783 | | | $ | 705,515 | | | $ | 488,993 | | | $ | 43,209 | | | $ | 186,112 | | | $ | 10,361 | | | $ | 1,618,973 | |
Special Mention | | 125 | | | 266 | | | 4,526 | | | — | | | — | | | — | | | 4,917 | |
Substandard | | 5,553 | | | 2,428 | | | 7,113 | | | 99 | | | — | | | — | | | 15,193 | |
| | $ | 190,461 | | | $ | 708,209 | | | $ | 500,632 | | | $ | 43,308 | | | $ | 186,112 | | | $ | 10,361 | | | $ | 1,639,083 | |
Allowance for Credit Losses
Maintaining an appropriate Allowance for Credit Losses ("ACL") is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, residential construction, commercial and industrial, and commercial real estate, an internal credit rating process is used. Management believes that internal credit ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal credit rating categories is a significant component of the ACL methodology for these loans, which bases the probability of default on this migration. Assigning credit ratings involves judgment. The Company's loan review process provide a separate assessment of credit rating accuracy. Credit ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff or if specific loan review assessments identify a deterioration or an improvement in the loans.
Management considers the performance of the loan portfolio and its impact on the ACL. The Company does not assign internal Credit ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, and consumer automobile loans. For these loans, the most relevant credit quality indicator is delinquency status and management evaluates credit quality based on the aging status of the loan.
Historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing the charge-off and recovery data over the past ten years. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ACL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ACL.
Activity in the allowance is presented for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
t | | Three Months Ended March 31, 2023 |
| | Commercial, Financial, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | | | |
(In Thousands) | | | Residential | | Commercial | | Construction | | | | Unallocated | | Totals |
Beginning Balance | | $ | 1,914 | | | $ | 5,061 | | | $ | 6,110 | | | $ | 188 | | | $ | 1,617 | | | $ | 109 | | | $ | 638 | | | $ | 15,637 | |
Impact of adopting ASC 326 | | 2,656 | | | (3,893) | | | (2,660) | | | (96) | | | 240 | | | 602 | | | (638) | | | (3,789) | |
Charge-offs | | — | | | (78) | | | (3) | | | — | | | (93) | | | (88) | | | — | | | (262) | |
Recoveries | | 105 | | | 2 | | | 3 | | | — | | | 12 | | | 17 | | | — | | | 139 | |
Provision | | (813) | | | 320 | | | 31 | | | 92 | | | 337 | | | 42 | | | — | | | 9 | |
Ending Balance | | $ | 3,862 | | | $ | 1,412 | | | $ | 3,481 | | | $ | 184 | | | $ | 2,113 | | | $ | 682 | | | $ | — | | | $ | 11,734 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | Commercial, Financial, and Agricultural | | Real Estate Mortgages | | Consumer automobile | | Other consumer installment | | | | |
(In Thousands) | | | Residential | | Commercial | | Construction | | | | Unallocated | | Totals |
Beginning Balance | | $ | 1,946 | | | $ | 4,701 | | | $ | 5,336 | | | $ | 179 | | | $ | 1,411 | | | $ | 111 | | | $ | 492 | | | $ | 14,176 | |
Charge-offs | | — | | | — | | | (155) | | | — | | | (129) | | | (60) | | | — | | | (344) | |
Recoveries | | 4 | | | 3 | | | 1 | | | — | | | 9 | | | 24 | | | — | | | 41 | |
Provision | | (14) | | | 97 | | | 33 | | | 18 | | | 85 | | | 39 | | | (108) | | | 150 | |
Ending Balance | | $ | 1,936 | | | $ | 4,801 | | | $ | 5,215 | | | $ | 197 | | | $ | 1,376 | | | $ | 114 | | | $ | 384 | | | $ | 14,023 | |
The shift in allocation and the increase in the loan provision is primarily due to changes in the credit metrics within the loan portfolio coupled with the adoption of CECL on January 1, 2023. The increase in provision for the period end March 31, 2023 for residential real estate and consumer auto was loan volume driven.
The Company grants commercial, industrial, residential, and installment loans to customers primarily throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.
The Company has a concentration of the following to gross loans at March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | March 31, |
| | 2023 | | 2022 |
Owners of residential rental properties | | 19.12 | % | | 19.95 | % |
Owners of commercial rental properties | | 15.28 | % | | 15.60 | % |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Commercial, Financial, and Agricultural | | Real Estate Mortgages | | Consumer Automobile | | Other consumer installment | | Unallocated | | |
(In Thousands) | | | Residential | | Commercial | | Construction | | | | | Totals |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | |
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 4 | | | $ | 111 | | | $ | 827 | | | $ | — | | | $ | — | | | $ | 19 | | | $ | — | | | $ | 961 | |
Collectively evaluated for impairment | | 1,910 | | | 4,950 | | | 5,283 | | | 188 | | | 1,617 | | | 90 | | | 638 | | | 14,676 | |
Total ending allowance balance | | $ | 1,914 | | | $ | 5,061 | | | $ | 6,110 | | | $ | 188 | | | $ | 1,617 | | | $ | 109 | | | $ | 638 | | | $ | 15,637 | |
| | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 698 | | | $ | 4,321 | | | $ | 6,195 | | | $ | — | | | $ | — | | | $ | 19 | | | | | $ | 11,233 | |
| | | | | | | | | | | | | | | | |
Collectively evaluated for impairment | | 189,763 | | | 703,888 | | | 494,437 | | | 43,308 | | | 186,112 | | | 10,342 | | | | | 1,627,850 | |
Total ending loans balance | | $ | 190,461 | | | $ | 708,209 | | | $ | 500,632 | | | $ | 43,308 | | | $ | 186,112 | | | $ | 10,361 | | | | | $ | 1,639,083 | |
Note 7. Net Periodic Benefit Cost-Defined Benefit Plans
For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2022.
The following sets forth the components of the net periodic expense/(gain) of the domestic non-contributory defined benefit plan for the three months ended March 31, 2023 and 2022, respectively:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(In Thousands) | | | | | | 2023 | | 2022 |
| | | | | | | | |
Interest cost | | | | | | $ | 198 | | | $ | 138 | |
Expected return on plan assets | | | | | | (326) | | | (412) | |
| | | | | | | | |
| | | | | | | | |
Amortization of net loss | | | | | | 37 | | | 17 | |
Net periodic benefit | | | | | | $ | (91) | | | $ | (257) | |
Employer Contributions
The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2022, that it does not expect to contribute to its defined benefit plan in 2023. As of March 31, 2023, there were no contributions made to the pension plan.
Note 8. Stock Purchase Plans
The Company maintains an Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to 1,500,000 shares to be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. During the three months ended March 31, 2023 and 2022, there were 854 and 880 shares issued under the Plan, respectively, for total proceeds of $21,000 and $21,000.
The Company maintains the 2020 Non-Employee Director Compensation Plan ("Director Plan"). Under this Director Plan, non-employee directors who have not attained specified stock ownership levels are required to receive a portion of their annual compensation in the form of common stock (currently 50%of total annual compensation), with the ability to elect to receive up to 100% of annual compensation in the form of common stock by making a written election prior to the calendar year to which the compensation relates. The Director Plan allows for up to 100,000 shares to be issued. As of March 31 2023, the Company has issued a total of 37,053 shares of common stock to non-employee directors under the Director Plan in lieu of otherwise payable cash compensation with 2,422 and 3,415 shares issued, respectively with an associated expense of $64,000 and $84,000 during the three months ended March 31, 2023 and 2022.
Note 9. Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily comprised of commitments to extend credit, standby letters of credit, and credit exposure from the sale of assets with recourse. These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
(In Thousands) | | March 31, 2023 | | December 31, 2022 |
Commitments to extend credit | | $ | 175,959 | | | $ | 169,365 | |
Standby letters of credit | | 10,197 | | | 9,915 | |
Credit exposure from the sale of assets with recourse | | 7,358 | | | 7,358 | |
| | $ | 193,514 | | | $ | 186,638 | |
Allowance for credit losses | | $ | 1,920 | | | $ | 143 | |
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, on an extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
Note 10. Fair Value Measurements
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.
| | | | | | | | |
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, the parameters 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 judgment or estimation. |
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of March 31, 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets measured on a recurring basis: | | | | | | | | |
Investment securities, available for sale: | | | | | | | | |
U.S. Government and agency securities | | $ | — | | | $ | 2,920 | | | $ | — | | | $ | 2,920 | |
Mortgage-backed securities | | — | | | 7,952 | | | — | | | 7,952 | |
| | | | | | | | |
State and political securities | | — | | | 139,692 | | | — | | | 139,692 | |
Other debt securities | | — | | | 46,626 | | | — | | | 46,626 | |
Investment equity securities: | | | | | | | | |
| | | | | | | | |
Equity securities | | 1,163 | | | — | | | — | | | 1,163 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets measured on a recurring basis: | | | | | | | | |
Investment securities, available for sale: | | | | | | | | |
U.S. Government and agency securities | | $ | — | | | $ | 2,896 | | | $ | — | | | $ | 2,896 | |
Mortgage-backed securities | | — | | | 1,282 | | | — | | | 1,282 | |
| | | | | | | | |
State and political securities | | — | | | 142,809 | | | — | | | 142,809 | |
Other debt securities | | — | | | 46,686 | | | — | | | 46,686 | |
Investment equity securities: | | | | | | | | |
| | | | | | | | |
Equity securities | | 1,142 | | | — | | | — | | | 1,142 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of March 31, 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets measured on a non-recurring basis: | | | | | | | | |
Collateral dependent loans | | $ | — | | | $ | — | | | $ | 1,905 | | | $ | 1,905 | |
Other real estate owned | | — | | | — | | | 83 | | | 83 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(In Thousands) | | Level I | | Level II | | Level III | | Total |
Assets measured on a non-recurring basis: | | | | | | | | |
Impaired loans | | $ | — | | | $ | — | | | $ | 1,923 | | | $ | 1,923 | |
Other real estate owned | | — | | | — | | | 83 | | | 83 | |
| | | | | | | | |
The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Quantitative Information About Level III Fair Value Measurements |
(In Thousands) | | Fair Value | | Valuation Technique(s) | | Unobservable Inputs | | Range | | Weighted Average |
| | | | | | | | | | |
Collateral dependent loans | | $ | 1,905 | | | Appraisal of collateral (1) | | Appraisal adjustments (1) | | (10)% to (34)% | | (14)% |
Other real estate owned | | $ | 83 | | | Appraisal of collateral (1) | | Appraisal adjustments (1) | | (20)% | | (20)% |
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Quantitative Information About Level III Fair Value Measurements |
(In Thousands) | | Fair Value | | Valuation Technique(s) | | Unobservable Inputs | | Range | | Weighted Average |
| | | | | | | | | | |
Impaired loans | | $ | 1,923 | | | Appraisal of collateral (1) | | Appraisal adjustments (1) | | 0% to (34)% | | (14)% |
Other real estate owned | | $ | 83 | | | Appraisal of collateral (1) | | Appraisal adjustments (1) | | (20)% | | (20)% |
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses. The significant unobservable input used in the fair value measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of collateral valuation technique.
Note 11. Fair Value of Financial Instruments
The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair values.
Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments. The Company’s fair values are set forth below for the Company’s other financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, this fair value of financial instruments would not represent the full market value of the Company.
The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying | | Fair | | Fair Value Measurements at March 31, 2023 |
(In Thousands) | | Value | | Value | | Level I | | Level II | | Level III |
Financial assets: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Loans held for sale (1) | | $ | 1,705 | | | $ | 1,705 | | | $ | 1,705 | | | $ | — | | | $ | — | |
Loans, net | | 1,688,289 | | | 1,672,564 | | | — | | | — | | | 1,672,564 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
| | | | | | | | | | |
Time deposits & brokered deposits | | 233,136 | | | 228,079 | | | — | | | — | | | 228,079 | |
Short-term borrowings | | 97,102 | | | 97,102 | | | 97,102 | | | — | | | — | |
Long-term borrowings | | 132,738 | | | 130,067 | | | — | | | — | | | 130,067 | |
| | | | | | | | | | |
(1) The financial instrument is carried at cost at, March 31, 2023 which approximate the fair value of the instruments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying | | Fair | | Fair Value Measurements at December 31, 2022 |
(In Thousands) | | Value | | Value | | Level I | | Level II | | Level III |
Financial assets: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Loans held for sale (1) | | $ | 3,298 | | | $ | 3,298 | | | $ | 3,298 | | | $ | — | | | $ | — | |
Loans, net | | 1,624,094 | | | 1,594,073 | | | — | | | — | | | 1,594,073 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
| | | | | | | | | | |
Time deposits & brokered deposits | | 146,282 | | | 137,559 | | | — | | | — | | | 137,559 | |
Short-term borrowings | | 153,349 | | | 153,349 | | | 153,349 | | | — | | | — | |
Long-term borrowings | | 102,783 | | | 99,118 | | | — | | | — | | | 99,118 | |
| | | | | | | | | | |
(1) The financial instrument is carried at cost at, December 31, 2022 which approximate the fair value of the instruments
The methods and assumptions used by the Company in estimating fair values of financial instruments is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables.
Note 12. Stock Options
In 2020, the Company adopted the 2020 Equity Incentive Plan which replaced the 2014 Equity Incentive Plan that did not have any remaining shares available for issuance. The plans are designed to help the Company attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, restricted stock, restricted stock units, and other equity-based awards may be granted as part of the plan.
As of January 1, 2023, the Company had a total of 914,000 stock options outstanding. During the period ended March 31, 2023, the Company issued 89,000 stock options with a strike price of $27.77 to a group of employees. The options granted in 2023 all expire ten years from the grant date. Of the 89,000 grants awarded in 2023, 59,500 of the options vest in three years while the 29,500 remaining options vest in five years.
Stock options outstanding as of March 31, 2023 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Options Granted |
Date | | Shares | | Forfeited | | Cash Settlement | | Outstanding | | Strike Price | | Vesting Period | | Expiration |
| | | | | | | | | | | | | | |
January 20, 2023 | | 59,500 | | | — | | | — | | | 59,500 | | | $ | 27.77 | | | 3 years | | 10 years |
January 20, 2023 | | 29,500 | | | — | | | — | | | 29,500 | | | 27.77 | | | 5 years | | 10 years |
January 18, 2022 | | 156,000 | | | — | | | — | | | 156,000 | | | 24.10 | | | 3 years | | 10 years |
January 18, 2022 | | 78,000 | | | — | | | — | | | 78,000 | | | 24.10 | | | 5 years | | 10 years |
April 9, 2021 | | 156,500 | | | — | | | — | | | 156,500 | | | 24.23 | | | 3 years | | 10 years |
April 9, 2021 | | 78,000 | | | — | | | — | | | 78,000 | | | 24.23 | | | 5 years | | 10 years |
March 11, 2020 | | 119,300 | | | — | | | — | | | 119,300 | | | 25.34 | | | 3 years | | 10 years |
March 11, 2020 | | 119,200 | | | — | | | — | | | 119,200 | | | 25.34 | | | 5 years | | 10 years |
March 15, 2019 | | 120,900 | | | (18,300) | | | — | | | 102,600 | | | 28.01 | | | 3 years | | 10 years |
March 15, 2019 | | 119,100 | | | (17,700) | | | — | | | 101,400 | | | 28.01 | | | 5 years | | 10 years |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
August 27, 2015 | | 58,125 | | | (26,250) | | | (28,875) | | | 3,000 | | | 28.02 | | | 5 years | | 10 years |
A summary of stock option activity is presented below:
| | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | |
| | Shares | | Weighted Average Exercise Price | | | | |
Outstanding, beginning of year | | 914,000 | | | $ | 25.34 | | | | | |
Granted | | 89,000 | | | 27.77 | | | | | |
Cash settlement | | — | | | — | | | | | |
Forfeited | | — | | | — | | | | | |
Expired | | — | | | — | | | | | |
Outstanding, end of period | | 1,003,000 | | | $ | 25.56 | | | | | |
| | | | | | | | |
Exercisable, end of period | | 224,900 | | | $ | 26.59 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straight line basis over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the value of the vested portion of the award at that date.
The fair value of stock options is estimated using the Black-Scholes option pricing model. The following is a summary of the assumptions used in this model for stock options granted for the three months ended March 31, 2023:
| | | | | | | | | | | | | | |
| | Three months ended March 31, | | | | | | |
| | 2023 | | | | |
Risk-free interest rate | | 3.76 | % | | | | | | |
Expected volatility | | 31 | % | | | | | | |
Expected Annual dividend | | $ | 1.28 | | | | | | | |
Expected life | | 6.84 years | | | | | | |
Weighted average grant date fair value per option | | $ | 6.11 | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense related to stock options was $253,000 for the three months ended March 31, 2023 compared to $315,000 for the same period of 2022. As of March 31, 2023, a total of 224,900 stock options were exercisable and the weighted average years to expiration of these options was 6.44 years. Total unrecognized
compensation cost for non-vested options was $1,906,000 and will be recognized over their weighted average remaining vesting period of 1.24 years.
Note 13. Reclassification of Comparative Amounts
Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; (vi) the length and extent of the economic contraction as a result of the COVID-19 pandemic; or (vii) the effect of changes in the business cycle and downturns in the local, regional or national economies, including the effects of inflation,; and (viii) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and in other filings made by the Company under the Securities Exchange Act of 1934.
You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.