(3)| (2) | Income tax amounts are included in the provision for income taxes on the Consolidated Statements of Income. |
| (3) | Amounts included in interest income on the Consolidated Statements of Income. |
See Notes to Consolidated Financial Statements Juniata Valley Financial Corp. and Subsidiary Consolidated Statements of Stockholders’ Equity (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2023 | | | | | | | | | | | | | Accumulated | | | | | | (Dollars in thousands, except share data) | | Number | | | | | | | | | Other | | | | Total | | | of Shares | | Common | | | | Retained | | Comprehensive | | Treasury | | Stockholders’ | | | Outstanding | | Stock | | Surplus | | Earnings | | Income (Loss) | | Stock | | Equity | Balance, January 1, 2023 | | 5,003,059 | | $ | 5,151 | | $ | 24,986 | | $ | 51,217 | | $ | (41,867) | | $ | (2,538) | | $ | 36,949 | Cumulative change in accounting principle (Note 2) | | | | | | | | | | | (854) | | | | | | | | | (854) | Net income | | | | | | | | | | | 1,733 | | | | | | | | | 1,733 | Other comprehensive income | | | | | | | | | | | | | | 779 | | | | | | 779 | Cash dividends at $0.22 per share | | | | | | | | | | | (1,101) | | | | | | | | | (1,101) | Stock-based compensation | | | | | | | | 32 | | | | | | | | | | | | 32 | Purchase of treasury stock | | (569) | | | | | | | | | | | | | | | (9) | | | (9) | Treasury stock issued for stock plans | | 11,409 | | | | | | (195) | | | | | | | | | 195 | | | — | Balance, March 31, 2023 | | 5,013,899 | | $ | 5,151 | | $ | 24,823 | | $ | 50,995 | | $ | (41,088) | | $ | (2,352) | | $ | 37,529 |
| | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, 2022 | | | | | | | | | | | | | Accumulated | | | | | | (Dollars in thousands, except share data) | | Number | | | | | | | | | Other | | | | Total | | | of Shares | | Common | | | | Retained | | Comprehensive | | Treasury | | Stockholders’ | | | Outstanding | | Stock | | Surplus | | Earnings | | Loss | | Stock | | Equity | Balance, January 1, 2022 | | 4,988,542 | | $ | 5,151 | | $ | 25,008 | | $ | 47,298 | | $ | (3,365) | | $ | (2,802) | | $ | 71,290 | Net income | | | | | | | | | | | 2,115 | | | | | | | | | 2,115 | Other comprehensive loss | | | | | | | | | | | | | | (15,614) | | | | | | (15,614) | Cash dividends at $0.22 per share | | | | | | | | | | | (1,100) | | | | | | | | | (1,100) | Stock-based compensation | | | | | | | | 37 | | | | | | | | | | | | 37 | Purchase of treasury stock | | (170) | | | | | | | | | | | | | | | (3) | | | (3) | Treasury stock issued for stock plans | | 10,486 | | | | | | (181) | | | | | | | | | 181 | | | — | Balance, March 31, 2022 | | 4,998,858 | | $ | 5,151 | | $ | 24,864 | | $ | 48,313 | | $ | (18,979) | | $ | (2,624) | | $ | 56,725 |
See Notes to Consolidated Financial Statements Juniata Valley Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) | | | | | | | (Dollars in thousands) | | Three Months Ended March 31, | | | 2023 | | 2022 | Operating activities: | | | | | | Net income | | $ | 1,733 | | $ | 2,115 | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Provision for credit losses | | | 243 | | | 28 | Depreciation | | | 145 | | | 160 | Net amortization of securities premiums | | | 34 | | | 157 | Net amortization of loan origination (costs) fees | | | (30) | | | 237 | Deferred net loan origination costs | | | (111) | | | (144) | Amortization of intangibles | | | 11 | | | 13 | Amortization of investment in low income housing partnerships | | | 112 | | | 200 | Net amortization of purchase fair value adjustments | | | (5) | | | (30) | Change in value of equity securities | | | 22 | | | 23 | Net gain on other real estate owned | | | — | | | (7) | Earnings on bank owned life insurance and annuities | | | (55) | | | (52) | Deferred income tax expense (benefit) | | | 250 | | | (8) | Stock-based compensation expense | | | 32 | | | 37 | Proceeds from mortgage loans sold to others | | | 15 | | | 16 | Mortgage banking income | | | (13) | | | (7) | Increase in accrued interest receivable and other assets | | | (1,154) | | | (1,008) | Increase (decrease) in accrued interest payable and other liabilities | | | 324 | | | (1,027) | Net cash provided by operating activities | | | 1,553 | | | 703 | Investing activities: | | | | | | | Purchases of: | | | | | | | Securities available for sale | | | — | | | (27,283) | Premises and equipment | | | (47) | | | (145) | Bank owned life insurance and annuities | | | (7) | | | (7) | Proceeds from: | | | | | | | Maturities of and principal repayments on securities available for sale | | | 1,054 | | | 11,076 | Maturities of and principal repayments on securities held to maturity | | | 3,101 | | | — | Redemption of FHLB stock | | | 348 | | | 290 | Sale of other real estate owned | | | — | | | 94 | Net decrease in interest bearing time deposits with banks | | | — | | | 245 | Net (increase) decrease in loans | | | (3,846) | | | 5,705 | Net cash provided by (used in) investing activities | | | 603 | | | (10,025) | Financing activities: | | | | | | | Net increase in deposits | | | 12,746 | | | 12,422 | Net (decrease) increase in short-term borrowings and securities sold under agreements to repurchase | | | (12,888) | | | 526 | Cash dividends | | | (1,101) | | | (1,100) | Purchase of treasury stock | | | (9) | | | (3) | Net cash provided by financing activities | | | (1,252) | | | 11,845 | Net increase in cash and cash equivalents | | | 904 | | | 2,523 | Cash and cash equivalents at beginning of year | | | 10,999 | | | 13,526 | Cash and cash equivalents at end of period | | $ | 11,903 | | $ | 16,049 | Supplemental information: | | | | | | | Interest paid | | $ | 1,691 | | $ | 636 | Income tax paid | | | 215 | | | 50 |
See Notes to Consolidated Financial Statements JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES The consolidated financial statements include the accounts of Juniata Valley Financial Corp. (the “Company” or “Juniata”) and its wholly owned subsidiary, The Juniata Valley Bank (the “Bank” or “JVB”). All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete consolidated financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to the financial statements. Estimates that are particularly susceptible to material change include the determination of the allowance for credit losses, and possible impairment of goodwill and other intangible assets. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three month period ended March 31, 2023 are not necessarily indicative of the results that can be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and notes thereto included in Juniata Valley Financial Corp.’s Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2022. The Company has evaluated events and transactions occurring subsequent to the consolidated statement of financial condition date of March 31, 2023 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued. 2. RECENT ACCOUNTING STANDARDS UPDATES Adoption of New Accounting Standards: ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments On, January 1, 2023, the Company adopted ASC 326, as amended, which replaces the incurred loss methodology with an expected loss methodology referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including held to maturity debt securities and loan receivables (see Notes 5 and 6, respectively). It also applies to certain off-balance sheet (“OBS”) credit exposures such as unfunded commitments. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities that management does not intend to sell or does not believe that it is more likely than not they will be required to be sold. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $854,000 as of January 1, 2023 for the cumulative effect of adopting ASC 326. At adoption of ASC 326, management did not record an allowance for credit losses for the held to maturity or the available for sale debt securities portfolio. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $354,000 to the allowance for credit losses. The following table illustrates the impact of ASC 326. | | | | | | | | | | | | January 1, 2023 | | | As Reported | | | | Impact of | (Dollars in thousands) | | Under | | Pre-ASC 326 | | ASC 326 | | | ASC 326 | | Adoption | | Adoption | Assets: | | | | | | | | | | Loans | | | | | | | | | | Commercial, financial and agricultural | | $ | 634 | | $ | 297 | | $ | 337 | Real estate - commercial | | | 2,420 | | | 1,110 | | | 1,310 | Real estate - construction: | | | | | | | | | | 1-4 family residential construction | | | 183 | | | 69 | | | 114 | Other construction loans | | | 670 | | | 1,077 | | | (407) | Real estate - mortgage | | | 1,136 | | | 1,385 | | | (249) | Obligations of states and political subdivisions | | | 45 | | | 54 | | | (9) | Personal | | | 50 | | | 35 | | | 15 | Allowance for credit losses on loans | | $ | 5,138 | | $ | 4,027 | | $ | 1,111 | Liabilities: | | | | | | | | | | Allowance for credit losses on OBS credit exposures | | $ | 448 | | $ | 8 | | $ | 440 |
ASU 2022-02, Financial Instruments – Credit Losses (Topic 326); Troubled Debt Restructurings and Vintage Disclosures On, January 1, 2023, the Company also adopted ASU 2022-02, which eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted ASC 326. Due to the removal of the TDR accounting model, all loan modifications will now be accounted for under the general loan modification guidance in Subtopic 310-20. In addition, on a prospective basis, the Company will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty. Vintage disclosure requirements are also required to prospectively disclose current period gross write-off information by vintage (see Note 6). 3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Components of accumulated other comprehensive income (loss), net of tax, consisted of the following: | | | | | | | | | | (Dollars in thousands) | | | | | | | | | March 31, 2023 | | Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Securities | | Total | Beginning balance, December 31, 2022 | | $ | 211 | | $ | (42,078) | | $ | (41,867) | Current period other comprehensive income (loss): | | | | | | | | | | Other comprehensive income before reclassification | | | 1 | | | 29 | | | 30 | Amounts reclassified from accumulated other comprehensive income (loss) | | | (169) | | | 918 | | | 749 | Net current period other comprehensive income (loss) | | | (168) | | | 947 | | | 779 | Ending balance, March 31, 2023 | | $ | 43 | | $ | (41,131) | | $ | (41,088) |
| | | | | | | | | | (Dollars in thousands) | | | | | | | | | March 31, 2022 | | Gains on Cash Flow Hedges | | Unrealized Losses on Securities | | Total | Beginning balance, December 31, 2021 | | $ | 427 | | $ | (3,792) | | $ | (3,365) | Current period other comprehensive income (loss): | | | | | | | | | | Other comprehensive income (loss) before reclassification | | | 517 | | | (16,140) | | | (15,623) | Amounts reclassified from accumulated other comprehensive income | | | 9 | | | — | | | 9 | Net current period other comprehensive income (loss) | | | 526 | | | (16,140) | | | (15,614) | Ending balance, March 31, 2022 | | $ | 953 | | $ | (19,932) | | $ | (18,979) |
4. EARNINGS PER SHARE Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilutive effect on EPS that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, increasing the total number of shares outstanding. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. The following tables set forth the computation of basic and diluted earnings per share: | | | | | | | (Amounts in thousands, except earnings per share data) | | Three months ended March 31, | | | 2023 | | 2022 | Net income | | $ | 1,733 | | $ | 2,115 | Weighted-average common shares outstanding | | | 5,008 | | | 4,993 | Basic earnings per share | | | 0.35 | | | 0.42 | | | | | | | | Weighted-average common shares outstanding | | $ | 5,008 | | $ | 4,993 | Common stock equivalents due to effect of stock options | | | 10 | | | 11 | Total weighted-average common shares and equivalents | | $ | 5,018 | | $ | 5,004 | Diluted earnings per share | | $ | 0.35 | | $ | 0.42 | Anti-dilutive stock options outstanding | | | 7 | | | 5 |
| | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, 2022 | | | | | | | | | | | | | Accumulated | | | | | | (Dollars in thousands, except share data) | | Number | | | | | | | | | Other | | | | Total | | | of Shares | | Common | | | | Retained | | Comprehensive | | Treasury | | Stockholders’ | | | Outstanding | | Stock | | Surplus | | Earnings | | Loss | | Stock | | Equity | Balance, July 1, 2022 | | 5,003,059 | | $ | 5,151 | | $ | 24,926 | | $ | 49,196 | | $ | (30,310) | | $ | (2,538) | | $ | 46,425 | Net income | | | | | | | | | | | 2,120 | | | | | | | | | 2,120 | Other comprehensive loss | | | | | | | | | | | | | | (12,570) | | | | | | (12,570) | Cash dividends at $0.22 per share | | | | | | | | | | | (1,100) | | | | | | | | | (1,100) | Stock-based compensation | | | | | | | | 30 | | | | | | | | | | | | 30 | Balance, September 30, 2022 | | 5,003,059 | | $ | 5,151 | | $ | 24,956 | | $ | 50,216 | | $ | (42,880) | | $ | (2,538) | | $ | 34,905 |
| | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, 2022 | | | | | | | | | | | | | Accumulated | | | | | | (Dollars in thousands, except share data) | | Number | | | | | | | | | Other | | | | Total | | | of Shares | | Common | | | | Retained | | Comprehensive | | Treasury | | Stockholders’ | | | Outstanding | | Stock | | Surplus | | Earnings | | Loss | | Stock | | Equity | Balance, January 1, 2022 | | 4,988,542 | | | 5,151 | | | 25,008 | | | 47,298 | | | (3,365) | | | (2,802) | | $ | 71,290 | Net income | | | | | | | | | | | 6,218 | | | | | | | | | 6,218 | Other comprehensive loss | | | | | | | | | | | | | | (39,515) | | | | | | (39,515) | Cash dividends at $0.66 per share | | | | | | | | | | | (3,300) | | | | | | | | | (3,300) | Stock-based compensation | | | | | | | | 146 | | | | | | | | | | | | 146 | Purchase of treasury stock | | (995) | | | | | | | | | | | | | | | (3) | | | (3) | Treasury stock issued for stock plans | | 15,512 | | | | | | (198) | | | | | | | | | 267 | | | 69 | Balance, September 30, 2022 | | 5,003,059 | | $ | 5,151 | | $ | 24,956 | | $ | 50,216 | | $ | (42,880) | | $ | (2,538) | | $ | 34,905 |
Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Stockholders’ Equity (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, 2021 | | | | | | | | | | | | | | Accumulated | | | | | | (Dollars in thousands, except share data) | | Number | | | | | | | | | Other | | | | Total | | | of Shares | | Common | | | | Retained | | Comprehensive | | Treasury | | Stockholders’ | | | Outstanding | | Stock | | Surplus | | Earnings | | Income (Loss) | | Stock | | Equity | Balance, July 1, 2021 | | 5,000,026 | | $ | 5,151 | | $ | 24,922 | | $ | 46,266 | | $ | 26 | | $ | (2,616) | | $ | 73,749 | Net income | | | | | | | | | | | 1,897 | | | | | | | | | 1,897 | Other comprehensive income | | | | | | | | | | | | | | (1,481) | | | | | | (1,481) | Cash dividends at $0.22 per share | | | | | | | | | | | (1,100) | | | | | | | | | (1,100) | Stock-based compensation | | | | | | | | 38 | | | | | | | | | | | | 38 | Balance, September 30, 2021 | | 5,000,026 | | $ | 5,151 | | $ | 24,960 | | $ | 47,063 | | $ | (1,455) | | $ | (2,616) | | $ | 73,103 |
| | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, 2021 | | | | | | | | | | | | | Accumulated | | | | | | (Dollars in thousands, except share data) | | Number | | | | | | | | | Other | | | | Total | | | of Shares | | Common | | | | Retained | | Comprehensive | | Treasury | | Stockholders’ | | | Outstanding | | Stock | | Surplus | | Earnings | | Income (Loss) | | Stock | | Equity | Balance, January 1, 2021 | | 5,025,441 | | $ | 5,151 | | $ | 25,011 | | $ | 45,096 | | $ | 3,518 | | $ | (2,179) | | $ | 76,597 | Net income | | | | | | | | | | | 5,271 | | | | | | | | | 5,271 | Other comprehensive loss | | | | | | | | | | | | | | (4,973) | | | | | | (4,973) | Cash dividends at $0.66 per share | | | | | | | | | | | (3,304) | | | | | | | | | (3,304) | Stock-based compensation | | | | | | | | 110 | | | | | | | | | | | | 110 | Purchase of treasury stock | | (39,198) | | | | | | | | | | | | | | | (675) | | | (675) | Treasury stock issued for stock plans | | 13,783 | | | | | | (161) | | | | | | | | | 238 | | | 77 | Balance, September 30, 2021 | | 5,000,026 | | $ | 5,151 | | $ | 24,960 | | $ | 47,063 | | $ | (1,455) | | $ | (2,616) | | $ | 73,103 |
See Notes to Consolidated Financial Statements
Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | (Dollars in thousands) | | Nine Months Ended September 30, | | | 2022 | | 2021 | Operating activities: | | | | | | Net income | | $ | 6,218 | | $ | 5,271 | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Provision for loan losses | | | 350 | | | (536) | Depreciation | | | 480 | | | 548 | Net amortization of securities premiums | | | 370 | | | 972 | Net amortization of loan origination fees | | | 405 | | | 454 | Deferred net loan origination costs | | | (468) | | | (474) | Amortization of intangibles | | | 41 | | | 49 | Amortization of investment in low income housing partnerships | | | 600 | | | 600 | Net amortization of purchase fair value adjustments | | | (84) | | | (123) | Net realized (gain) loss on sales and calls of available for sale securities | | | 1,452 | | | (58) | Change in value of equity securities | | | 110 | | | (139) | Net gain on other real estate owned | | | (7) | | | (49) | Earnings on bank owned life insurance and annuities | | | (164) | | | (186) | Deferred income tax benefit | | | (49) | | | (206) | Stock-based compensation expense | | | 146 | | | 110 | Proceeds from mortgage loans sold to others | | | 48 | | | 56 | Mortgage banking income | | | (24) | | | (26) | Gain from life insurance proceeds | | | (380) | | | — | Increase in accrued interest receivable and other assets | | | (1,251) | | | (563) | Increase in accrued interest payable and other liabilities | | | 87 | | | 85 | Net cash provided by operating activities | | | 7,880 | | | 5,785 | Investing activities: | | | | | | | Purchases of: | | | | | | | Securities available for sale | | | (53,295) | | | (173,765) | FHLB stock | | | (988) | | | — | Premises and equipment | | | (362) | | | (164) | Bank owned life insurance and annuities | | | (28) | | | (36) | Proceeds from: | | | | | | | Sales of debt securities available for sale | | | 23,271 | | | 119 | Maturities of and principal repayments on securities available for sale | | | 26,478 | | | 32,856 | Redemption of FHLB stock | | | — | | | 61,315 | Life insurance claims | | | 2,285 | | | 907 | Sale of other real estate owned | | | 94 | | | — | Sale of other assets | | | — | | | 1 | Net decrease in interest bearing time deposits with banks | | | 735 | | | — | Net (increase) decrease in loans | | | (43,964) | | | 11,150 | Net cash used in investing activities | | | (45,774) | | | (67,617) | Financing activities: | | | | | | | Net increase in deposits | | | 9,387 | | | 84,712 | Net increase (decrease) in short-term borrowings and securities sold under agreements to repurchase | | | 31,642 | | | (19,946) | Repayment of FRB advances | | | — | | | (27,955) | Cash dividends | | | (3,300) | | | (3,304) | Purchase of treasury stock | | | (3) | | | (675) | Treasury stock issued for employee stock plans | | | 69 | | | 77 | Net cash provided by financing activities | | | 37,795 | | | 32,909 | Net decrease in cash and cash equivalents | | | (99) | | | (28,923) | Cash and cash equivalents at beginning of year | | | 13,526 | | | 41,621 | Cash and cash equivalents at end of period | | $ | 13,427 | | $ | 12,698 | Supplemental information: | | | | | | | Interest paid | | $ | 2,169 | | $ | 2,640 | Income tax paid | | | 400 | | | 179 | Supplemental schedule of noncash investing and financing activities: | | | | | | | Transfer of loans to other real estate owned | | $ | 30 | | $ | 61 | Transfer of loans to repossessed vehicles | | | — | | | 1 |
See Notes to Consolidated Financial Statements
JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Juniata Valley Financial Corp. (the “Company” or “Juniata”) and its wholly owned subsidiary, The Juniata Valley Bank (the “Bank” or “JVB”). All significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete consolidated financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to the financial statements. Estimates that are particularly susceptible to material change include the determination of the allowance for loan losses, and possible impairment of goodwill and other intangible assets.
In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2022 are not necessarily indicative of the results that can be expected for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and notes thereto included in Juniata Valley Financial Corp.’s Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2021.
The Company has evaluated events and transactions occurring subsequent to the consolidated statement of financial condition date of September 30, 2022 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
2. RECENT ACCOUNTING STANDARDS UPDATES
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Issued: June 2016
Summary: ASU 2016-13 requires credit losses on most financial assets to be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.
The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.
Further, the ASU made certain targeted amendments to the existing impairment model for available for sale debt securities. For an available for sale debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.
Effective Date: On October 16, 2019, the FASB voted and approved a delay of the effective date of this ASU for smaller reporting companies until fiscal years beginning after December 15, 2022. Since the Company is a smaller reporting company, the delay of the effective date of ASU 2016-13 approved by the FASB applies to the Company. In preparation, the Company has taken steps to prepare for the implementation when it becomes effective by forming a CECL transition team, gathering pertinent data, assessing the sufficiency of data currently available through its core database, participating in training courses, and partnering with a software provider that specializes in ALLL analysis. The Company’s CECL transition team started running parallel calculations between CECL and the incurred loss model beginning in the second quarter to evaluate the impact of the amended guidance on its consolidated financial statements and disclosures. The team expects the allowance for loan and lease losses (“ALLL”) to increase upon adoption because it will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss under current U.S. GAAP. The extent of this increase will depend on economic conditions and the composition of the Company’s loan portfolio at the time of adoption.
ASU 2022-02, Financial Instruments – Credit Losses (Topic 326); Troubled Debt Restructurings and Vintage Disclosures
Issued: March 2022
Summary: ASU 2022-02 eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted Topic 326 “Financial Instruments – Credit Losses”. All other creditors must continue to apply the TDR accounting model until they adopt Topic 326. Due to the removal of the TDR accounting model, all loan modifications will now be accounted for under the general loan modification guidance in Subtopic 310-20. In addition, on a prospective basis, entities will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty. Vintage disclosure requirements will also be required to prospectively disclose current period gross write-off information by vintage (i.e., year of origination) for public business entities within the scope of the Topic 326.
Effective Date: Effective upon adoption of the amendments in ASU 2016-13 for entities that have not yet adopted ASU 2016-13. Early adoption is not permitted before adoption of ASU 2016-13. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that adopted ASU 2016-13. The Company is in the process of evaluating the amendments but does not expect the adoption of this ASU will have a material impact on the Corporation's financial statements.
3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Components of accumulated other comprehensive income (loss), net of tax, consisted of the following:
| | | | | | | | | | (Dollars in thousands) | | | | | | | | | September 30, 2022 | | Gains on Cash Flow Hedges | | Unrealized Losses on Available for Sale Securities | | Total | Beginning balance, December 31, 2021 | | $ | 427 | | $ | (3,792) | | $ | (3,365) | Current period other comprehensive income (loss): | | | | | | | | | | Other comprehensive income (loss) before reclassification | | | 944 | | | (40,566) | | | (39,622) | Amounts reclassified from accumulated other comprehensive income (loss) | | | (1,040) | | | 1,147 | | | 107 | Net current period other comprehensive loss | | | (96) | | | (39,419) | | | (39,515) | Ending balance, September 30, 2022 | | $ | 331 | | $ | (43,211) | | $ | (42,880) |
| | | | | | | | | | (Dollars in thousands) | | | | | | | | | September 30, 2021 | | Gains and (Losses) on Cash Flow Hedges | | Unrealized Gains and (Losses) on Available for Sale Securities | | Total | Beginning balance, December 31, 2020 | | $ | (45) | | $ | 3,563 | | $ | 3,518 | Current period other comprehensive income (loss): | | | | | | | | | | Other comprehensive income (loss) before reclassification | | | 355 | | | (5,316) | | | (4,961) | Amounts reclassified from accumulated other comprehensive income (loss) | | | 34 | | | (46) | | | (12) | Net current period other comprehensive income (loss) | | | 389 | | | (5,362) | | | (4,973) | Ending balance, September 30, 2021 | | $ | 344 | | $ | (1,799) | | $ | (1,455) |
4. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilutive effect on EPS that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, increasing the total number of shares outstanding. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.
The following tables set forth the computation of basic and diluted earnings per share:
| | | | | | | (Amounts in thousands, except earnings per share data) | | Three Months Ended September 30, | | | 2022 | | 2021 | Net income | | $ | 2,120 | | $ | 1,897 | Weighted-average common shares outstanding | | | 5,003 | | | 5,000 | Basic earnings per share | | | 0.42 | | | 0.38 | | | | | | | | Weighted-average common shares outstanding | | $ | 5,003 | | $ | 5,000 | Common stock equivalents due to effect of stock options | | | 9 | | | 11 | Total weighted-average common shares and equivalents | | $ | 5,012 | | $ | 5,011 | Diluted earnings per share | | $ | 0.42 | | $ | 0.38 | Anti-dilutive stock options outstanding | | | — | | | — |
| | | | | | | (Amounts in thousands, except earnings per share data) | | Nine months ended September 30, | | | 2022 | | 2021 | Net income | | $ | 6,218 | | $ | 5,271 | Weighted-average common shares outstanding | | | 4,999 | | | 5,008 | Basic earnings per share | | | 1.24 | | | 1.05 | | | | | | | | Weighted-average common shares outstanding | | $ | 4,999 | | $ | 5,008 | Common stock equivalents due to effect of stock options | | | 9 | | | 9 | Total weighted-average common shares and equivalents | | $ | 5,008 | | $ | 5,017 | Diluted earnings per share | | $ | 1.24 | | $ | 1.05 | Anti-dilutive stock options outstanding | | | 1 | | | — |
5. SECURITIES Equity Securities Equity securities owned by the Company consist of common stock of various financial services providers. ASC Topic 321, Investments – Equity Securities requires all equity securities within its scope to be measured at fair value with changes in fair value recognized in net income. As of September 30, 2022,March 31, 2023, the Company had $1.0 million in equity securities recorded at fair value and $1.1 million in equity securities were recorded at fair value at December 31, 2021.2022. The Company recorded net losses of $30,000$22,000 and $110,000$23,000 during the respective three and nine months ended September 30,March 31, 2023 and 2022, and net gains of $38,000 and $139,000 during the respective three and nine months ended September 30, 2021,respectively, due to changes in the fair value of the Company’s portfolio of equity securities during the applicable periods. Debt Securities Available for Sale Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities not classified as held to maturity or trading are classified as available for sale. Securities available for sale which include marketable investment securities, are within the scope of ASC Topic 320, Investments – Debt Securities. Topic 320 requires all debt securities within its scope to be statedcarried at fair value, with the unrealized holding gains and losses reported in other comprehensive income, net of tax, reported as a componenttax. The Company reassessed classification of certain investments and, effective October 1, 2022, transferred $28.4 million of obligations of U.S. Government sponsored enterprises and $183.9 million in mortgage-backed securities from the available for sale to held to maturity security classification. The transfer occurred at fair value. The combined related unrealized loss of $46.8 million, included in other comprehensive income, remained in other comprehensive income to be amortized out of other comprehensive income (loss). Securities classified as available for sale are those securities that the Company intendswith an offsetting entry to hold for an indefinite period but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Interest and dividends are recognized as income when earned. Premiums and discounts are recognized in interest income using the interest methodas a yield adjustment through earnings over the termsremaining term of the securities. GainsNo gain or losses onloss was recorded at the dispositiontime of securities available for sale are based on the net proceeds and the adjusted carrying amount of the securities sold, determined on a specific identification basis.transfer. The Company’s available for sale investmentdebt securities portfolio includes primarily bonds issued by U.S. Government sponsored enterprises (approximately 15% of the investment portfolio), mortgage-backed securities issued by Government-sponsored entities and backed by residential mortgages (approximately 77%), corporate debt securities (approximately 5%) and municipal bonds (approximately 3%) as of September 30, 2022.March 31, 2023. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years. At each of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company had holdings of securities from two issuers in excess of 10% of stockholders’ equity, other than the U.S. Government and its agencies. Holdings in Federal Farm Credit Bank and Pennsylvania Housing Finance securities had fair values of $10.8$11.2 million and $6.2 million, respectively, as of March 31, 2023, and $10.9 million and $6.1 million, respectively, as of September 30, 2022,December 31, 2022. The amortized cost and $12.4 million and $7.5 million, respectively,fair value of debt securities as of March 31, 2023 and December 31, 2021.2022, by contractual maturity, are shown in the tables below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid, with or without prepayment penalties. Securities not due at a single maturity date are shown separately. | | | | | | | | | | | | | (Dollars in thousands) | | March 31, 2023 | | | | | | | Gross | | Gross | | | Amortized | | Fair | | Unrealized | | Unrealized | Debt Securities Available for Sale | | Cost | | Value | | Gains | | Losses | Obligations of U.S. Government sponsored enterprises | | | | | | | | | | | | | After one year but within five years | | $ | 15,500 | | $ | 13,927 | | $ | — | | $ | (1,573) | | | | 15,500 | | | 13,927 | | | — | | | (1,573) | Obligations of state and political subdivisions | | | | | | | | | | | | | Within one year | | | 1,212 | | | 1,207 | | | — | | | (5) | After one year but within five years | | | 2,755 | | | 2,645 | | | — | | | (110) | After five years but within ten years | | | 4,610 | | | 3,901 | | | — | | | (709) | | | | 8,577 | | | 7,753 | | | — | | | (824) | Corporate debt securities | | | | | | | | | | | | | After one year but within five years | | | 4,657 | | | 4,166 | | | — | | | (491) | After five years but within ten years | | | 13,000 | | | 10,282 | | | — | | | (2,718) | | | | 17,657 | | | 14,448 | | | — | | | (3,209) | Mortgage-backed securities | | | 38,514 | | | 36,357 | | | — | | | (2,157) | Total | | $ | 80,248 | | $ | 72,485 | | $ | — | | $ | (7,763) |
| | | | | | | | | | | | | (Dollars in thousands) | | March 31, 2023 | | | | | | | Gross | | Gross | | | Amortized | | Fair | | Unrecognized | | Unrecognized | Debt Securities Held to Maturity | | Cost | | Value | | Gains | | Losses | Obligations of U.S. Government sponsored enterprises | | | | | | | | | | | | | After one year but within five years | | $ | 13,135 | | $ | 13,313 | | $ | 182 | | $ | (4) | After five years but within ten years | | | 15,691 | | | 15,846 | | | 156 | | | (1) | | | | 28,826 | | | 29,159 | | | 338 | | | (5) | Mortgage-backed securities | | | 178,811 | | | 180,217 | | | 2,944 | | | (1,538) | Total | | $ | 207,637 | | $ | 209,376 | | $ | 3,282 | | $ | (1,543) |
The amortized cost and fair value of debt securities available for sale as of September 30, 2022 and December 31, 2021, by contractual maturity, are shown in the tables below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.
| | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | September 30, 2022 | | December 31, 2022 | | | | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | Amortized | | Fair | | Unrealized | | Unrealized | | Amortized | | Fair | | Unrealized | | Unrealized | Debt Securities Available for Sale | | Cost | | Value | | Gains | | Losses | | Cost | | Value | | Gains | | Losses | Type and Maturity | | | | | | | | | | | | | | Obligations of U.S. Government sponsored enterprises | | | | | | | | | | | | | | | | | | | | | | | | | After one year but within five years | | $ | 20,450 | | $ | 18,118 | | $ | — | | $ | (2,332) | | $ | 15,500 | | $ | 13,705 | | $ | — | | $ | (1,795) | After five years but within ten years | | | 28,928 | | | 23,832 | | | — | | | (5,096) | | | | | 49,378 | | | 41,950 | | | — | | | (7,428) | | | 15,500 | | | 13,705 | | | — | | | (1,795) | Obligations of state and political subdivisions | | | | | | | | | | | | | | | | | | | | | | | | | After one year but within five years | | | 3,474 | | | 3,394 | | | | | | (80) | | | 4,076 | | | 3,924 | | | — | | | (152) | After five years but within ten years | | | 3,877 | | | 3,116 | | | — | | | (761) | | | 4,608 | | | 3,755 | | | — | | | (853) | After ten years | | | 1,501 | | | 1,171 | | | — | | | (330) | | | | | 8,852 | | | 7,681 | | | — | | | (1,171) | | | 8,684 | | | 7,679 | | | — | | | (1,005) | Corporate debt securities | | | | | | | | | | | | | | | | | | | | | | | | | After one year but within five years | | | 4,688 | | | 4,227 | | | — | | | (461) | | | 4,673 | | | 4,190 | | | — | | | (483) | After five years but within ten years | | | 13,000 | | | 11,349 | | | — | | | (1,651) | | | 13,000 | | | 11,151 | | | — | | | (1,849) | | | | 17,688 | | | 15,576 | | | — | | | (2,112) | | | 17,673 | | | 15,341 | | | — | | | (2,332) | Mortgage-backed securities | | | 266,030 | | | 222,044 | | | — | | | (43,986) | | | 39,479 | | | 36,811 | | | — | | | (2,668) | Total | | $ | 341,948 | | $ | 287,251 | | $ | — | | $ | (54,697) | | $ | 81,336 | | $ | 73,536 | | $ | — | | $ | (7,800) |
| | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | December 31, 2021 | | December 31, 2022 | | | | | | | | | Gross | | Gross | | | | | | Gross | | Gross | | | Amortized | | Fair | | Unrealized | | Unrealized | | Amortized | | Fair | | Unrecognized | | Unrecognized | Debt Securities Available for Sale | | Cost | | Value | | Gains | | Losses | | Type and Maturity | | | | | | | | | | | | | | Debt Securities Held to Maturity | | | Cost | | Value | | Gains | | Losses | Obligations of U.S. Government sponsored enterprises | | | | | | | | | | | | | | | | | | | | | | | | | After one year but within five years | | $ | 6,000 | | $ | 5,807 | | $ | — | | $ | (193) | | After five years but within ten years | | | 35,881 | | | 34,719 | | | — | | | (1,162) | | | | | 41,881 | | | 40,526 | | | — | | | (1,355) | | Obligations of state and political subdivisions | | | | | | | | | | | | | | After one year but within five years | | | 3,810 | | | 3,937 | | | 129 | | | (2) | | After five years but within ten years | | | 1,246 | | | 1,221 | | | — | | | (25) | | After ten years | | | 4,118 | | | 4,062 | | | — | | | (56) | | | | | 9,174 | | | 9,220 | | | 129 | | | (83) | | Corporate debt securities | | | | | | | | | | | | | | After one year but within five years | | | 2,000 | | | 1,972 | | | — | | | (28) | | $ | 13,039 | | $ | 13,067 | | $ | 28 | | $ | — | After five years but within ten years | | | 32,408 | | | 33,024 | | | 805 | | | (189) | | | 15,561 | | | 15,605 | | | 56 | | | (12) | | | | 34,408 | | | 34,996 | | | 805 | | | (217) | | | 28,600 | | | 28,672 | | | 84 | | | (12) | Mortgage-backed securities | | | 254,762 | | | 250,682 | | | 812 | | | (4,892) | | | 180,965 | | | 181,215 | | | 1,682 | | | (1,432) | Total | | $ | 340,225 | | $ | 335,424 | | $ | 1,746 | | $ | (6,547) | | $ | 209,565 | | $ | 209,887 | | $ | 1,766 | | $ | (1,444) |
Certain obligations of the U.S. Government and state and political subdivisions, as well as mortgage-backed securities are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The carrying value of the pledged assets was $100.0$121.8 million and $82.7$102.3 million on September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. In addition to cash received from the scheduled maturities of investment securities, some securities available for sale are sold or called at current market values during normal operations. There were no sales or calls of available for sale investment securities resulting in realized gains or losses during the three months ended March 31, 2023 and March 31, 2022. In addition to cash received from the scheduled maturities of investment securities, some securities available for sale are sold or called at current market values during normal operations.
The following table summarizes proceeds received from sales or calls of available for sale investment securities transactions and the resulting realized gains and losses during the nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | (Dollars in thousands) | | Three Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | | 2022 | | 2021 | | 2022 | | 2021 | Gross proceeds from sales and calls of securities | | $ | 6,137 | | $ | 106 | | $ | 23,271 | | $ | 32,975 | Securities available for sale: | | | | | | | | | | | | | Gross realized gains from sold and called securities | | $ | — | | $ | — | | $ | 25 | | $ | 130 | Gross realized losses from sold and called securities | | | (378) | | | — | | | (1,477) | | | (72) | Net gains (losses) from sales and calls of securities | | $ | (378) | | $ | — | | $ | (1,452) | | $ | 58 |
The Bank sold $24.7 million, par value, of subordinated debt of unconsolidated financial institutions, classified as corporate debt securities, at a loss of $1.5 million during the nine months ended September 30, 2022. Management’s intent with respect to these securities changed in the second quarter of 2022 due to the adverse regulatory impact of substantial (relative to capital) holdings of subordinated debt.
Topic 320 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. Management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are taken before an assessment is made as to whether the entity will recover the cost basis of the investment. In instances when a determination is made that an other-than-temporary impairment exists and the entity does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
The following tables show gross unrealized losses and fair values of debt securities available for sale, aggregated by category and length of time the individual securities have been in a continuous unrealized loss position at September 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized Losses at September 30, 2022 | | | Less Than 12 Months | | 12 Months or More | | Total | (Dollars in thousands) | | Number | | | | | | | | Number | | | | | | | | Number | | | | | | | | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | | Securities | | Value | | Losses | | Securities | | Value | | Losses | | Securities | | Value | | Losses | Obligations of U.S. Government sponsored enterprises | | 2 | | $ | 6,995 | | $ | (455) | | 8 | | $ | 34,955 | | $ | (6,973) | | 10 | | $ | 41,950 | | $ | (7,428) | Obligations of state and political subdivisions | | 5 | | | 3,394 | | | (80) | | 6 | | | 4,287 | | | (1,091) | | 11 | | | 7,681 | | | (1,171) | Corporate debt securities | | 6 | | | 10,444 | | | (1,556) | | 3 | | | 5,132 | | | (556) | | 9 | | | 15,576 | | | (2,112) | Mortgage-backed securities | | 47 | | | 77,474 | | | (9,061) | | 37 | | | 144,570 | | | (34,925) | | 84 | | | 222,044 | | | (43,986) | Total temporarily impaired securities | | 60 | | $ | 98,307 | | $ | (11,152) | | 54 | | $ | 188,944 | | $ | (43,545) | | 114 | | $ | 287,251 | | $ | (54,697) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized Losses at December 31, 2021 | | | Less Than 12 Months | | 12 Months or More | | Total | (Dollars in thousands) | | Number | | | | | | | | Number | | | | | | | | Number | | | | | | | | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | | Securities | | Value | | Losses | | Securities | | Value | | Losses | | Securities | | Value | | Losses | Obligations of U.S. Government sponsored enterprises | | 5 | | $ | 22,130 | | $ | (752) | | 3 | | $ | 18,396 | | $ | (603) | | 8 | | $ | 40,526 | | $ | (1,355) | Obligations of state and political subdivisions | | 7 | | | 5,781 | | | (83) | | — | | | — | | | — | | 7 | | | 5,781 | | | (83) | Corporate debt securities | | 6 | | | 10,144 | | | (217) | | — | | | — | | | — | | 6 | | | 10,144 | | | (217) | Mortgage-backed securities | | 36 | | | 182,328 | | | (3,504) | | 5 | | | 26,443 | | | (1,388) | | 41 | | | 208,771 | | | (4,892) | Total temporarily impaired securities | | 54 | | $ | 220,383 | | $ | (4,556) | | 8 | | $ | 44,839 | | $ | (1,991) | | 62 | | $ | 265,222 | | $ | (6,547) |
The following tables summarize debt securities with unrealized and unrecognized losses at March 31, 2023 and December 31, 2022, aggregated by category and length of time in a continuous unrealized loss position. | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized Losses at March 31, 2023 | | | Less Than 12 Months | | 12 Months or More | | Total | (Dollars in thousands) | | Number | | | | | | | | Number | | | | | | | | Number | | | | | | | | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | | Securities | | Value | | Losses | | Securities | | Value | | Losses | | Securities | | Value | | Losses | Securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | Obligations of U.S. Government sponsored enterprises | | 1 | | $ | 2,463 | | $ | (37) | | 2 | | $ | 11,464 | | $ | (1,536) | | 3 | | $ | 13,927 | | $ | (1,573) | Obligations of state and political subdivisions | | 1 | | | 1,466 | | | (2) | | 8 | | | 5,767 | | | (822) | | 9 | | | 7,233 | | | (824) | Corporate debt securities | | 1 | | | 3,030 | | | (970) | | 8 | | | 11,418 | | | (2,239) | | 9 | | | 14,448 | | | (3,209) | Mortgage-backed securities | | 10 | | | 23,244 | | | (1,061) | | 24 | | | 13,113 | | | (1,096) | | 34 | | | 36,357 | | | (2,157) | Total temporarily impaired securities available for sale | | 13 | | $ | 30,203 | | $ | (2,070) | | 42 | | $ | 41,762 | | $ | (5,693) | | 55 | | $ | 71,965 | | $ | (7,763) | Securities held to maturity | | | | | | | | | | | | | | | | | | | | | | | | | Obligations of U.S. Government sponsored enterprises | | 2 | | $ | 9,406 | | $ | (5) | | — | | $ | — | | $ | — | | 2 | | $ | 9,406 | | $ | (5) | Mortgage-backed securities | | 2 | | | 4,848 | | | (56) | | 15 | | | 52,502 | | | (1,482) | | 17 | | | 57,350 | | | (1,538) | Total temporarily impaired securities held to maturity | | 4 | | $ | 14,254 | | $ | (61) | | 15 | | $ | 52,502 | | $ | (1,482) | | 19 | | $ | 66,756 | | $ | (1,543) | Total | | 17 | | $ | 44,457 | | $ | (2,131) | | 57 | | $ | 94,264 | | $ | (7,175) | | 74 | | $ | 138,721 | | $ | (9,306) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized Losses at December 31, 2022 | | | Less Than 12 Months | | 12 Months or More | | Total | (Dollars in thousands) | | Number | | | | | | | | Number | | | | | | | | Number | | | | | | | | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | of | | Fair | | Unrealized | | | Securities | | Value | | Losses | | Securities | | Value | | Losses | | Securities | | Value | | Losses | Securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | Obligations of U.S. Government sponsored enterprises | | 1 | | $ | 2,456 | | $ | (44) | | 2 | | $ | 11,248 | | $ | (1,751) | | 3 | | $ | 13,704 | | $ | (1,795) | Obligations of state and political subdivisions | | 4 | | | 2,781 | | | (20) | | 7 | | | 4,898 | | | (985) | | 11 | | | 7,679 | | | (1,005) | Corporate debt securities | | 5 | | | 9,831 | | | (1,669) | | 4 | | | 5,510 | | | (663) | | 9 | | | 15,341 | | | (2,332) | Mortgage-backed securities | | 33 | | | 36,493 | | | (2,630) | | 1 | | | 319 | | | (38) | | 34 | | | 36,812 | | | (2,668) | Total temporarily impaired securities available for sale | | 43 | | $ | 51,561 | | $ | (4,363) | | 14 | | $ | 21,975 | | $ | (3,437) | | 57 | | $ | 73,536 | | $ | (7,800) | Securities held to maturity | | | | | | | | | | | | | | | | | | | | | | | | | Obligations of U.S. Government sponsored enterprises | | 1 | | $ | 3,463 | | $ | (12) | | — | | $ | — | | $ | — | | 1 | | $ | 3,463 | | $ | (12) | Mortgage-backed securities | | 9 | | | 21,643 | | | (392) | | 12 | | | 48,788 | | | (1,040) | | 21 | | | 70,431 | | | (1,432) | Total temporarily impaired securities held to maturity | | 10 | | $ | 25,106 | | $ | (404) | | 12 | | $ | 48,788 | | $ | (1,040) | | 22 | | $ | 73,894 | | $ | (1,444) | Total | | 53 | | $ | 76,667 | | $ | (4,767) | | 26 | | $ | 70,763 | | $ | (4,477) | | 79 | | $ | 147,430 | | $ | (9,244) |
At September 30, 2022, tenMarch 31, 2023, five obligations of U.S. Government sponsored enterprises, elevennine obligations of state and political subdivisions, nine corporate debt securities, and eighty-fourfifty-one mortgage-backed securities had unrealized losses. Fifty-fourFifty-seven of these securities have been in a continuous loss position for twelve months or more. The mortgage-backed securities in the Company’s portfolio are government sponsored enterprise (“GSE”) pass-through instruments issued by the Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”), which guarantees the timely payment of principal on these investments. ASC 326 made targeted improvements to the accounting for credit losses on securities available for sale. The concept of other-than-temporarily impaired has been replaced with the allowance for credit losses. Unlike held to maturity debt securities, available for sale securities are evaluated on an individual level and pooling of securities is not allowed. For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses notedor other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the tables aboveallowance for credit losses are considered temporary impairments. Therecorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. As of March 31, 2023, management determined that an immaterial credit loss existed because the decline in the valuesfair value of the available for sale debt securities is due onlyalmost entirely attributable to changes in interest rate fluctuations,rates and other market conditions, rather than erosion of issuer credit quality. Management reviews debt securities for ratings downgrades at least quarterly. No downgrades were notedquality, and as of September 30, 2022 and December 31, 2021. Because of this, thea result, timely payment of contractual cash flows, including principal repayment,and interest, has continued and is not considered at risk. Included in corporate debt securities is $1.5 million par value of PacWest Bancorp (“PACW”) subordinated debt. In August 2022, Fitch Ratings downgraded PACW’s subordinated debt Viability Rating to BB+ from BBB- with a stable ratings outlook due primarily to the rapid growth-driven decrease in its common equity tier 1 capital. The Company does not intendmonitors this situation and, at March 31, 2023, determined any credit loss associated with the PACW subordinated debt was immaterial (See also Note 14). Credit Quality Indicators All the Company’s held to sellmaturity debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities are either [explicitly or implicitly] guaranteed by the securities, does not believeU.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Therefore, the Company will be requireddid not record an allowance for credit losses for these securities as of March 31, 2023. The Company monitors the credit quality of held to sellmaturity debt securities through the securities before recovery and expectsuse of credit ratings. The credit ratings are sourced from nationally recognized rating agencies. All held to recover the entire amortized cost basis, nomaturity debt securities were deemedcurrent in their payment of principal and interest as of March 31, 2023. The following table summarizes the amortized cost of held to be other-than-temporarily impaired formaturity debt securities aggregated by credit quality indicator based on the periods ended September 30, 2022 or Decemberlatest information available as of March 31, 2021, respectively.2023. | | | | | | | (Dollars in thousands) | | | | | | | | | | | | | | March 31, 2023 | | AAA | | Total | Securities held to maturity | | | | | | | Obligations of U.S. Government sponsored enterprises | | $ | 28,826 | | $ | 28,826 | Mortgage-backed securities | | | 178,811 | | | 178,811 | | | $ | 207,637 | | $ | 207,637 |
6. LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES Loans that the Company originated and has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the outstanding unpaid principal balances, net of any deferred fees or costs and the allowance for loancredit losses. Loans acquired through a business combination are discussed under the heading “Acquired Loans”. Interest income on all loans, other than nonaccrual loans, is accrued over the term of the loans based on the amount of principal outstanding. Unearned income is amortized to income over the life of the loans, using the interest method. The loan portfolio includes the following classes: (1) commercial, financial and agricultural, (2) real estate - commercial, (3) real estate - construction, (4) real estate – mortgage, (5) obligations of states and political subdivisions, and (6) personal loans. Interest income on consumer, mortgage and commercial loans is discontinued, and loans are placed on non-accrual status at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Loans are charged off to the extent principal or interest is deemed uncollectible. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Non-accrual loans and loans past due 90 days still on accrual include both homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan principal balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms for a reasonable period and future payments are reasonably assured.
The Company originates loans in the portfolio with the intent to hold them until maturity. Should the Company no longer intend to hold loans to maturity based on asset/liability management practices, the Company transfers loans from its portfolio to held for sale at fair value. Any write-down recorded upon transfer is charged against the allowance for loancredit losses. Any write-downs recorded after the initial transfers are recorded as a charge to other non-interest expense. Gains or losses recognized upon sale are included in gains on sales of loans, which is a component of non-interest income. Loans Held for Sale The Company has originated residential mortgage loans with the intent to sell. These individual loans are normally sold to the buyer immediately. The Company maintains servicing rights on these loans. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur, which are included with mortgage banking income on the income statement. The fair values of servicing rights are subject to fluctuations because of changes in estimated and actual prepayment speeds and default rates and losses. Servicing fee income, which is reported on the income statement as mortgage banking income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are not material. Allowance for Credit Losses (“ACL”) The Company adopted ASU 2013-13 on January 1, 2023 to calculate the ACL, which requires a projection of credit losses estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a loan modification will be executed with an individual borrower, or the extension or renewal options are included in the original or modified contract at the reporting date and not unconditionally cancellable by the Company. The allowance for credit losses is a valuation account that is deducted from the loan’s amortized cost basis to present the net amount expected to be collected on the loan. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions and reasonable and supportable forecasts of certain macro-economic variables. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, lending personnel, delinquency trends, credit concentrations, loan review results, changes in collateral values, as well as the impact of changes in the regulatory and business environment or other relevant factors. The Company utilizes the Discounted Cash Flow (“DCF”) method to analyze most loan segments, particularly loan segments with longer average lives and regular payment structures, as it allows for the effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner. The DCF model has two key components, a loss driver analysis combined with a cash flow analysis. The contractual cash flow is adjusted for probability of default/loss given defaults (“PD/LGD”) and prepayment speed to establish a reserve level. The prepayment and curtailment studies are updated quarterly by a third-party for each applicable pool of loans. The Company estimates losses over a four quarter forecast period using Federal Open Market Committee (“FOMC”) estimates for real GDP and unemployment rate. Based on the final values in the forecast and the uncertainty of a post-pandemic recovery, management has elected to revert historical loss experience over four quarters. The economic factors considered as part of the ACL were selected after a rigorous regression analysis and model selection process. Additionally, the Company uses reasonable credit risk assumptions based on an annual report produced by Moody’s for the obligations of states and political subdivisions segment. The Weighted Average Remaining Life (“WARM”) method is used to analyze the personal loan segment, which includes revolving credit plans, automobile loans and other consumer loans, because this segment contains loans with many different structures, payment streams and collateral. The WARM method uses an average annual charge-off rate applied to the contractual term, further adjusted for estimated prepayments to determine the unadjusted historical charge-off rate for the remaining balance of assets. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods: | | | | | Portfolio Segments | | Methodology | | Loss Drivers | Commercial, financial and agricultural | | DCF | | National unemployment | Real estate - commercial | | DCF | | National unemployment & national GDP | Real estate - construction: | | | | | 1-4 family residential construction | | DCF | | National unemployment & national GDP | Other construction loans | | DCF | | National unemployment & national GDP | Real estate - mortgage | | DCF | | National unemployment & national GDP | Obligations of states and political subdivisions | | DCF | | Moody's report | Personal | | Remaining Life | | Call report loss history |
Risks associated with each portfolio segment are as follows: Commercial, Financial and Agricultural LendingLending: The Company originates commercial, financial and agricultural loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is shorter and does not exceed the projected useful life of such machinery and equipment. Most business lines of credit are written with a five year maturity, subject to an annual credit review. Commercial loans are generally secured with short-term assets; however, in many cases, additional collateral, such as real estate, is provided as additional security for the loan. Loan-to-value maximum values have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, and other methods. In underwriting commercial loans, the Company performs an analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation ofand conditions affecting the borrower, is performed.borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Company’s analysis. Concentration analysis assists in identifying industry specific risk inherent in commercial, financial and agricultural lending. Mitigants include the identification of secondary and tertiary sources of repayment and appropriate increases in oversight. Commercial, financial and agricultural loans generally present a higher level of risk than certain other types of loans, particularly during slow economic conditions. Real Estate - Commercial LendingLending: The Company engages in real estate - commercial lending in its primary market area and surrounding areas. The Company’s real estate - commercial portfolio is secured primarily by residential housing, commercial buildings, raw land and hotels. Generally, real estate - commercial loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property and are typically secured by personal guarantees of the borrowers. As economic conditions deteriorate, the Company reduces its exposure in real estate loans with higher risk characteristics. In underwriting these loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers. Real estate - commercial loans generally present a higher level of risk than certain other types of loans, particularly during slow economic conditions. Real Estate - Construction LendingLending: The Company engages in real estate - construction lending in its primary market area and surrounding areas. The Company’s real estate - construction lending consists of commercial1-4 family residential construction loans and other construction loans, which are construction loans for purposes other than constructing 1-4 family residential siteproperties such as land development loans, as well asand commercial building construction and residential housing construction loans. The Company’s commercial real estate -1-4 family residential construction loans are loans for constructing 1-4 family residential properties, which will secure the loan. Other construction loans are generally secured with the subject property, and advances are made in conformity with a pre-determined draw schedule supported by independent inspections. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc. In underwriting commercial real estate - construction loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and when applicable, the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, and other resources. AppraisalsMost appraisals on properties securing real estate - commercialconstruction loans originated by the Company are performed by independent appraisers. Real estate - construction loans generally present a higher level of risk than certain other types of loans, particularly during slow economic conditions. The difficulty of estimating total construction costs adds to the risk as well. Real Estate - Mortgage LendingLending: The Company’s real estate - mortgage portfolio is comprised of one-to-four1-4 family residential mortgages and business loans secured by one-to-four1-4 family properties. One-to-four family residential mortgage loan originations, including home equity installment and home equity lines of credit loans, are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within the Company’s market area or with customers primarily from the market area. The Company offers fixed-rate and adjustable rate real estate - mortgage loans with a term up to a maximum of 25-years for both permanent structures and those under construction. The Company’s one-to-four1-4 family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. Most of the Company’s residential real estate - mortgage loans originate with a loan-to-value of 80% or less. Home equity installment loans are secured by the borrower’s primary residence with a maximum loan-to-value of 80% and a maximum term of 15 years.years. Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years.years. In underwriting one-to-four1-4 family residential real estate loans, the Company evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. The ability to repay is determined by the borrower’s employment history, current financial conditions, and credit background. The analysis is based primarily on the customer’s ability to repay and secondarily on the collateral or security. Most properties securing real estate loans made by the Company are appraised by independent fee appraisers. The Company generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Company does not engage in sub-prime residential mortgage originations. Residential mortgage loans and home equity loans generally present a lower level of risk than certain other types of consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Company is in a subordinate position for the loan collateral. Obligations of States and Political SubdivisionsSubdivisions: The Company lends to local municipalities and other tax-exempt organizations. These loans are primarily tax-anticipation notes and, as such, carry littleminimal risk. Historically, the Company has never had a loss on any loan of this type. Personal LendingLending: The Company offers a variety of secured and unsecured personal loans, including vehicle loans, mobile home loans and loans secured by savings deposits as well as other types of personal loans. Personal loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis of the borrower’s willingness and financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial conditions and credit background. Personal loans may entail greater credit risk than do residential mortgage loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Allowance for Loan Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (“allowance”) represents management’s estimate of probable incurred losses in the loan portfolio as of the consolidated statement of financial condition date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of probable incurred losses in its unfunded lending commitments and is recorded in other liabilities on the consolidated statement of financial condition, when necessary. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries and loan loss provision credits. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
For financial reporting purposes, the provision for loan losses charged to current operating income is based on management’s estimates, and actual losses may vary from estimates. These estimates are reviewed and adjusted at least quarterly and are reported in earnings in the periods in which they become known.
Loans included in any class are considered for charge-off when:
| ● | principal or interest has been in default for 120 days or more and for which no payment has been received during the previous four months; |
| ● | all collateral securing the loan has been liquidated and a deficiency balance remains; |
| ● | a bankruptcy notice is received for an unsecured loan; |
| ● | a confirming loss event has occurred; or |
| ● | the loan is deemed to be uncollectible for any other reason. |
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
Impairment for substantially all the Company’s impaired loans is measured based on the estimated fair value of the loan’s collateral. For real estate - commercial loans, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified 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 current appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include the estimated costs to sell the property. For commercial, financial and agricultural, and obligations of states and political subdivision loans, estimated fair values are determined based on the borrower’s financial statements, inventory reports, aging accounts receivable, equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The Company generally does not separately identify individual consumer segment loans for impairment analysis unless such loans are subject to a restructuring agreement.
Troubled debt restructurings are individually evaluated for impairment and included in the separately identified impairment disclosures. Loans whose terms are modified are classified as troubled debt restructurings if the Company grants borrowers’ concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a below-market interest rate based on the loan’s risk characteristics, an extension of a loan’s stated maturity date or a significant delay in payment. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period after modification. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually
identified as impaired. The Company incorporates recent historical experience related to TDRs, including the performance of TDRs that subsequently default, into the calculation of the allowance by loan portfolio class.
Acquired Loans
Loans that Juniata acquires through business combinations are recorded at fair value with no carryover of the related allowance for loan losses. Some of these loans have shown evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.
Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics, such as credit score, loan type, and date of origination. Juniata estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows more than the amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
PCI loans that met the criteria for impairment or non-accrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if Juniata expects to fully collect the new carrying value (i.e., fair value) of the loans. As such, Juniata may no longer consider the loan to be non-accrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.
Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for in accordance with this guidance. As a result, related discounts are recognized subsequently through accretion based on the contractual cash flows of the acquired loans.
Paycheck Protection Program Loans
The CARES Act established the Paycheck Protection Program (“PPP”) which is administered by the Small Business Administration (“SBA”). The PPP began on April 3, 2020 and provided economic relief to small businesses nationwide that were adversely impacted under the COVID-19 Emergency Declaration issued on March 13, 2020. It also provided for forgiveness of the PPP loans in an amount up to the full principal amount of qualifying loans. The Company participated in the PPP and funded 870 PPP loans totaling $51.0 million. PPP loans are included in the commercial, financial and agricultural loan class. As of September 30, 2022, four PPP loans, totaling $25,000, remained outstanding with related unamortized net fees of $3,000. As of December 31, 2021, 194 PPP loans, totaling $10.1 million remained outstanding, with related unamortized net fees of $485,000.
According to ASC 326, an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivable for all loan segments. Accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt or when a loan becomes contractually past due by 90 days or more with respect to principal or interest, except for loans that are well-secured and in the process of collection. When a loan is placed on nonaccrual status, any accrued but uncollected interest is reversed from current income. ASC 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. At March 31, 2023, the Company had $65.3 million in unfunded commitments and $397,000 in anticipated credit losses in the reserve for unfunded lending commitments; the reserve is recorded in other liabilities on the Consolidated Balance Sheets as opposed to in the ACL. Provisions to the reserve for unfunded lending commitments are recorded as other noninterest expense on the Consolidated Statements of Income. The determination of the ACL is complex, and the Company makes decisions on the effects of matters that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgements as to the facts and circumstances related to particular situations or credits. There may be significant changes in the ACL in future periods determined by factors prevailing at that point in time along with future forecasts. Loan Portfolio Classification The following table presents the loan portfolio by class at September 30, 2022March 31, 2023 and December 31, 2021.2022. | | | | | | | (Dollars in thousands) | | | | | | | | | September 30, 2022 | | December 31, 2021 | Commercial, financial and agricultural | | $ | 58,585 | | $ | 62,639 | Real estate - commercial | | | 189,860 | | | 159,806 | Real estate - construction | | | 48,108 | | | 43,281 | Real estate - mortgage | | | 142,149 | | | 131,754 | Obligations of states and political subdivisions | | | 19,761 | | | 16,323 | Personal | | | 3,967 | | | 4,500 | Total | | $ | 462,430 | | $ | 418,303 |
The following table summarizes the activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | Obligations | | | | | | | | | | | | Commercial, | | | | | | | | of states | | | | | | | | | | | | financial and | | Real estate- | | Real estate- | | and political | | Real estate- | | | | | | | | | agricultural | | commercial | | construction | | subdivisions | | mortgage | | Personal | | Total | Three Months Ended | | | | | | | | | | | | | | | | | | | | | | September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of period | | $ | 286 | | $ | 934 | | $ | 1,208 | | $ | 56 | | $ | 1,294 | | $ | 35 | | $ | 3,813 | Provision for loan losses | | | (4) | | | 129 | | | (123) | | | — | | | 94 | | | 4 | | | 100 | Charge-offs | | | — | | | — | | | — | | | — | | | (22) | | | (4) | | | (26) | Recoveries | | | — | | | — | | | — | | | — | | | 18 | | | — | | | 18 | Balance, end of period | | $ | 282 | | $ | 1,063 | | $ | 1,085 | | $ | 56 | | $ | 1,384 | | $ | 35 | | $ | 3,905 | September 30, 2021 | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of period | | $ | 289 | | $ | 1,435 | | $ | 924 | | $ | 33 | | $ | 1,164 | | $ | 61 | | $ | 3,906 | Provision for loan losses | | | (9) | | | (104) | | | (81) | | | (5) | | | (54) | | | (4) | | | (257) | Charge-offs | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | Recoveries | | | — | | | 36 | | | 27 | | | — | | | 12 | | | 3 | | | 78 | Balance, end of period | | $ | 280 | | $ | 1,367 | | $ | 870 | | $ | 28 | | $ | 1,122 | | $ | 58 | | $ | 3,725 | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | | | | | | | | | | | | | | | | | | | | | September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of period | | $ | 251 | | $ | 1,020 | | $ | 884 | | $ | 45 | | $ | 1,269 | | $ | 39 | | $ | 3,508 | Provision for loan losses | | | 31 | | | 43 | | | 201 | | | 11 | | | 61 | | | 3 | | | 350 | Charge-offs | | | — | | | — | | | — | | | — | | | (23) | | | (9) | | | (32) | Recoveries | | | — | | | — | | | — | | | — | | | 77 | | | 2 | | | 79 | Balance, end of period | | $ | 282 | | $ | 1,063 | | $ | 1,085 | | $ | 56 | | $ | 1,384 | | $ | 35 | | $ | 3,905 | September 30, 2021 | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of period | | $ | 302 | | $ | 908 | | $ | 1,586 | | $ | 28 | | $ | 1,200 | | $ | 70 | | $ | 4,094 | Provision for loan losses | | | (29) | | | 423 | | | (799) | | | — | | | (119) | | | (12) | | | (536) | Charge-offs | | | — | | | — | | | — | | | — | | | — | | | (10) | | | (10) | Recoveries | | | 7 | | | 36 | | | 83 | | | — | | | 41 | | | 10 | | | 177 | Balance, end of period | | $ | 280 | | $ | 1,367 | | $ | 870 | | $ | 28 | | $ | 1,122 | | $ | 58 | | $ | 3,725 |
| | | | | | | (Dollars in thousands) | | | | | | | | | March 31, 2023 | | December 31, 2022 | Commercial, financial and agricultural | | $ | 59,090 | | $ | 61,458 | Real estate - commercial | | | 198,558 | | | 199,206 | Real estate - construction: | | | | | | | 1-4 family residential construction | | | 6,957 | | | 7,995 | Other construction loans | | | 46,096 | | | 42,753 | Real estate - mortgage | | | 152,746 | | | 150,290 | Obligations of states and political subdivisions | | | 21,012 | | | 18,770 | Personal | | | 4,038 | | | 4,040 | Total | | $ | 488,497 | | $ | 484,512 |
The following table summarizes loans by loan class, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | Obligations | | | | | | | | | | | | Commercial, | | | | | | | | of states | | | | | | | | | | | | financial and | | Real estate- | | Real estate- | | and political | | Real estate- | | | | | | | | | agricultural | | commercial | | construction | | subdivisions | | mortgage | | Personal | | Total | September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | Loans allocated by: | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | — | | $ | 2,048 | | $ | — | | $ | — | | $ | 387 | | $ | — | | $ | 2,435 | Acquired with credit deterioration | | | — | | | 299 | | | — | | | — | | | 424 | | | — | | | 723 | Collectively evaluated for impairment | | | 58,585 | | | 187,513 | | | 48,108 | | | 19,761 | | | 141,338 | | | 3,967 | | | 459,272 | | | $ | 58,585 | | $ | 189,860 | | $ | 48,108 | | $ | 19,761 | | $ | 142,149 | | $ | 3,967 | | $ | 462,430 | Allowance for loan losses allocated by: | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | Acquired with credit deterioration | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Collectively evaluated for impairment | | | 282 | | | 1,063 | | | 1,085 | | | 56 | | | 1,384 | | | 35 | | | 3,905 | | | $ | 282 | | $ | 1,063 | | $ | 1,085 | | $ | 56 | | $ | 1,384 | | $ | 35 | | $ | 3,905 | | | | | | | | | | | | | | | | | | | | | | | December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | Loans allocated by: | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | — | | $ | 5,262 | | $ | — | | $ | — | | $ | 437 | | $ | — | | $ | 5,699 | Acquired with credit deterioration | | | — | | | 357 | | | — | | | — | | | 481 | | | — | | | 838 | Collectively evaluated for impairment | | | 62,639 | | | 154,187 | | | 43,281 | | | 16,323 | | | 130,836 | | | 4,500 | | | 411,766 | | | $ | 62,639 | | $ | 159,806 | | $ | 43,281 | | $ | 16,323 | | $ | 131,754 | | $ | 4,500 | | $ | 418,303 | Allowance for loan losses allocated by: | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2 | | $ | — | | $ | 2 | Acquired with credit deterioration | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Collectively evaluated for impairment | | | 251 | | | 1,020 | | | 884 | | | 45 | | | 1,267 | | | 39 | | | 3,506 | | | $ | 251 | | $ | 1,020 | | $ | 884 | | $ | 45 | | $ | 1,269 | | $ | 39 | | $ | 3,508 |
The Company has certain loans in its portfolio that it considers to be impaired. It is the policy of the Company to recognize income on impaired loans that have been transferred to nonaccrual status on a cash basis, only to the extent that it exceeds anticipated principal balance recovery. Until an impaired loan is placed on nonaccrual status, income is recognized on the accrual basis. Collateral analysis is performed on each impaired loan at least quarterly, and results are used to determine if a specific reserve is necessary to adjust the carrying value of each individual loan down to the estimated fair value. Generally, specific reserves are carried against impaired loans based upon estimated collateral value until a confirming loss event occurs or until termination of the credit is scheduled through liquidation of the collateral or foreclosure. There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2022. As of December 31, 2021, there was $85,000 in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process. Charge-offs will occur when a confirmed loss is identified. Professional appraisals of collateral, discounted for expected selling costs, appraisal age, economic conditions and other known factors, are used to determine the charge-off amount.
The following table summarizes information regarding impaired loansdiscloses allowance for credit loss activity by portfolioloan class as of September 30, 2022 and December 31, 2021. One loan was determined to have insufficient collateral as of December 31, 2021, requiring the establishment of a specific reserve of $2,000. | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | As of September 30, 2022 | | As of December 31, 2021 | | | Recorded | | Unpaid Principal | | Related | | Recorded | | Unpaid Principal | | Related | | | Investment | | Balance | | Allowance | | Investment | | Balance | | Allowance | Impaired loans | | | | | | | | | | | | | | | | | | | With no related allowance recorded: | | | | | | | | | | | | | | | | | | | Real estate - commercial | | $ | 2,048 | | $ | 2,499 | | $ | — | | $ | 5,262 | | $ | 5,720 | | $ | — | Acquired with credit deterioration | | | 299 | | | 350 | | | — | | | 357 | | | 366 | | | — | Real estate – construction | | | — | | | — | | | — | | | — | | | 649 | | | — | Real estate - mortgage | | | 387 | | | 1,010 | | | — | | | 368 | | | 1,054 | | | — | Acquired with credit deterioration | | | 424 | | | 640 | | | — | | | 481 | | | 660 | | | — | With an allowance recorded: | | | | | | | | | | | | | | | | | | | Real estate - mortgage | | $ | — | | $ | — | | $ | — | | $ | 69 | | $ | 68 | | $ | 2 | Total: | | | | | | | | | | | | | | | | | | | Real estate - commercial | | $ | 2,048 | | $ | 2,499 | | $ | — | | $ | 5,262 | | $ | 5,720 | | $ | — | Acquired with credit deterioration | | | 299 | | | 350 | | | — | | | 357 | | | 366 | | | — | Real estate - construction | | | — | | | — | | | — | | | — | | | 649 | | | — | Real estate – mortgage | | | 387 | | | 1,010 | | | — | | | 437 | | | 1,122 | | | 2 | Acquired with credit deterioration | | | 424 | | | 640 | | | — | | | 481 | | | 660 | | | — | | | $ | 3,158 | | $ | 4,499 | | $ | — | | $ | 6,537 | | $ | 8,517 | | $ | 2 |
Average recorded investment of impaired loans and related interest income recognized for the three and nine months ended September 30,March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate- | | | | | Obligations | | | | | | | | | | | | Commercial, | | | | | construction | | Real estate- | | of states | | | | | | | | | | (Dollars in thousands) | | financial and | | Real estate- | | 1-4 family | | construction | | and political | | Real estate- | | | | | | | | | agricultural | | commercial | | residential | | other | | subdivisions | | mortgage | | Personal | | Total | Three Months Ended | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2023 | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance, prior to ASC 326 adoption | | $ | 297 | | $ | 1,110 | | $ | 69 | | $ | 1,077 | | $ | 54 | | $ | 1,385 | | $ | 35 | | $ | 4,027 | Impact of adopting ASC 326 | | | 337 | | | 1,204 | | | 114 | | | (407) | | | (9) | | | (497) | | | 15 | | | 757 | Initial allowance on loans purchased with credit deterioration | | | | | | 106 | | | | | | | | | | | | 248 | | | | | | 354 | Credit loss expense (1) | | | (2) | | | 176 | | | (26) | | | 101 | | | — | | | (23) | | | 17 | | | 243 | Loans charged off | | | — | | | — | | | — | | | — | | | — | | | (19) | | | (7) | | | (26) | Recoveries collected | | | — | | | — | | | — | | | — | | | — | | | 18 | | | 1 | | | 19 | Total ending allowance balance (1) | | $ | 632 | | $ | 2,596 | | $ | 157 | | $ | 771 | | $ | 45 | | $ | 1,112 | | $ | 61 | | $ | 5,374 |
| (1) | Allowance/credit loss expense are not comparable to prior periods due to the adoptions of ASC 326. |
The following table discloses allowance for credit loss activity by loan class for the three months ended March 31, 2022, and 2021 are summarized inprior to the tables below.adoption of ASC 326. | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | | Average | | Interest | | Cash Basis | | Average | | Interest | | Cash Basis | | | Recorded | | Income | | Interest | | Recorded | | Income | | Interest | | | Investment | | Recognized | | Income | | Investment | | Recognized | | Income | Impaired loans | | | | | | | | | | | | | | | | | | | With no related allowance recorded: | | | | | | | | | | | | | | | | | | | Real estate - commercial | | $ | 2,058 | | $ | 98 | | $ | — | | $ | 5,291 | | $ | 55 | | $ | — | Acquired with credit deterioration | | | 341 | | | — | | | — | | | 364 | | | — | | | — | Real estate - mortgage | | | 348 | | | 4 | | | 19 | | | 483 | | | 3 | | | 10 | Acquired with credit deterioration | | | 440 | | | — | | | — | | | 595 | | | — | | | — | Total: | | | | | | | | | | | | | | | | | | | Real estate - commercial | | $ | 2,058 | | $ | 98 | | $ | — | | $ | 5,291 | | $ | 55 | | $ | — | Acquired with credit deterioration | | | 341 | | | — | | | — | | | 364 | | | — | | | — | Real estate - mortgage | | | 348 | | | 4 | | | 19 | | | 483 | | | 3 | | | 10 | Acquired with credit deterioration | | | 440 | | | — | | | — | | | 595 | | | — | | | — | | | $ | 3,187 | | $ | 102 | | $ | 19 | | $ | 6,733 | | $ | 58 | | $ | 10 |
| | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | Obligations | | | | | | | | | | | | Commercial, | | | | | | | of states | | | | | | | | | | (Dollars in thousands) | | financial and | | Real estate- | | Real estate- | | and political | | Real estate- | | | | | | | | | agricultural | | commercial | | construction | | subdivisions | | mortgage | | Personal | | Total | Three Months Ended | | | | | | | | | | | | | | | | | | | | | | March 31, 2022 | | | | | | | | | | | | | | | | | | | | | | Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 251 | | $ | 1,020 | | $ | 884 | | $ | 45 | | $ | 1,269 | | $ | 39 | | $ | 3,508 | Provision for credit losses | | | 8 | | | (184) | | | 286 | | | 2 | | | (82) | | | (2) | | | 28 | Loans charged off | | | — | | | — | | | — | | | — | | | (1) | | | (2) | | | (3) | Recoveries collected | | | — | | | — | | | — | | | — | | | 42 | | | 1 | | | 43 | Total ending allowance balance | | $ | 259 | | $ | 836 | | $ | 1,170 | | $ | 47 | | $ | 1,228 | | $ | 36 | | $ | 3,576 |
The following table summarizes loans by loan class, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2022, prior to the adoption of ASC 326. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Obligations | | | | | | | | | | | | Commercial, | | | | | | | | of states | | | | | | | | | | (Dollars in thousands) | | financial and | | Real estate- | | Real estate- | | and political | | Real estate- | | | | | | | | | agricultural | | commercial | | construction | | subdivisions | | mortgage | | Personal | | Total | December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | Loans allocated by: | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | — | | $ | 2,025 | | $ | — | | $ | — | | $ | 377 | | $ | — | | $ | 2,402 | Acquired with credit deterioration | | | — | | | 334 | | | — | | | — | | | 419 | | | — | | | 753 | Collectively evaluated for impairment | | | 61,458 | | | 196,847 | | | 50,748 | | | 18,770 | | | 149,494 | | | 4,040 | | | 481,357 | | | $ | 61,458 | | $ | 199,206 | | $ | 50,748 | | $ | 18,770 | | $ | 150,290 | | $ | 4,040 | | $ | 484,512 | Allowance for loan losses allocated by: | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | Acquired with credit deterioration | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Collectively evaluated for impairment | | | 297 | | | 1,110 | | | 1,146 | | | 54 | | | 1,385 | | | 35 | | | 4,027 | | | $ | 297 | | $ | 1,110 | | $ | 1,146 | | $ | 54 | | $ | 1,385 | | $ | 35 | | $ | 4,027 |
| | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 | | | Average | | Interest | | Cash Basis | | Average | | Interest | | Cash Basis | | | Recorded | | Income | | Interest | | Recorded | | Income | | Interest | | | Investment | | Recognized | | Income | | Investment | | Recognized | | Income | Impaired Loans | | | | | | | | | | | | | | | | | | | With no related allowance recorded: | | | | | | | | | | | | | | | | | | | Real estate - commercial | | $ | 4,187 | | $ | 161 | | $ | — | | $ | 4,346 | | $ | 166 | | $ | — | Acquired with credit deterioration | | | 347 | | | — | | | — | | | 345 | | | — | | | — | Real estate - mortgage | | | 397 | | | 7 | | | 29 | | | 579 | | | 10 | | | 30 | Acquired with credit deterioration | | | 455 | | | — | | | — | | | 602 | | | — | | | — | Total: | | | | | | | | | | | | | | | | | | | Real estate - commercial | | $ | 4,187 | | $ | 161 | | $ | — | | $ | 4,346 | | $ | 166 | | $ | — | Acquired with credit deterioration | | | 347 | | | — | | | — | | | 345 | | | — | | | — | Real estate - mortgage | | | 397 | | | 7 | | | 29 | | | 579 | | | 10 | | | 30 | Acquired with credit deterioration | | | 455 | | | — | | | — | | | 602 | | | — | | | — | | | $ | 5,386 | | $ | 168 | | $ | 29 | | $ | 5,872 | | $ | 176 | | $ | 30 |
There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of March 31, 2023. As of December 31, 2022, there was $123,000 in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process. Charge-offs will occur when a confirmed loss is identified. Professional appraisals of collateral, discounted for expected selling costs, appraisal age, economic conditions and other known factors, are used to determine the charge-off amount. Following the adoption of ASC 326 as of January 1, 2023, the definitions of impairment and related impaired loan disclosures were removed. However, under ASC 326, loans that do not share risk characteristics are not evaluated collectively and are instead individually evaluated. When management determines foreclosure is probable, expected credit losses are based on the fair value of the collateral, adjusted for selling costs as appropriate. The following table presents the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of March 31, 2023. | | | | (Dollars in thousands) | | | | | | Real Estate | Real estate - mortgage | | $ | 28 | Total | | $ | 28 |
The following table summarizes information regarding impaired loans by portfolio class as of December 31, 2022, prior to the adoption of ASC 326. | | | | | | | | | | (Dollars in thousands) | | As of December 31, 2022 | | | Recorded | | Unpaid Principal | | Related | | | Investment | | Balance | | Allowance | Impaired loans | | | | | | | | | | With no related allowance recorded: | | | | | | | | | | Real estate - commercial | | $ | 2,025 | | $ | 2,471 | | $ | — | Acquired with credit deterioration | | | 334 | | | 344 | | | — | Real estate - mortgage | | | 377 | | | 993 | | | — | Acquired with credit deterioration | | | 419 | | | 634 | | | — | Total: | | | | | | | | | | Real estate - commercial | | $ | 2,025 | | $ | 2,471 | | $ | — | Acquired with credit deterioration | | | 334 | | | 344 | | | — | Real estate – mortgage | | | 377 | | | 993 | | | — | Acquired with credit deterioration | | | 419 | | | 634 | | | — | | | $ | 3,155 | | $ | 4,442 | | $ | — |
Average recorded investment of impaired loans and related interest income recognized for the three months ended March 31, 2022 are summarized in the table below, prior to the adoption of ASC 326. | | | | | | | | | | (Dollars in thousands) | | Three Months Ended March 31, 2022 | | | Average | | Interest | | Cash Basis | | | Recorded | | Income | | Interest | | | Investment | | Recognized | | Income | Impaired Loans | | | | | | | | | | With no related allowance recorded: | | | | | | | | | | Real estate - commercial | | $ | 5,263 | | $ | 63 | | $ | — | Acquired with credit deterioration | | | 353 | | | — | | | — | Real estate - mortgage | | | 357 | | | 3 | | | 10 | Acquired with credit deterioration | | | 470 | | | — | | | — | With an allowance recorded: | | | | | | | | | | Real estate - mortgage | | $ | 69 | | $ | — | | $ | — | Total: | | | | | | | | | | Real estate - commercial | | $ | 5,263 | | $ | 63 | | $ | — | Acquired with credit deterioration | | | 353 | | | — | | | — | Real estate - mortgage | | | 426 | | | 3 | | | 10 | Acquired with credit deterioration | | | 470 | | | — | | | — | | | $ | 6,512 | | $ | 66 | | $ | 10 |
The recorded investment in loans excludes accrued interest receivable and loan origination fees, net, due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when the contractual payment of principal or interest has become 90 days past due or reasonable doubt exists as to the full, timely collection of principal or interest. However, it is the Company’s policy to continue to accrue interest on loans over 90 days past due if (1) they are guaranteed or well secured and (2) there is an effective means of timely collection in process. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income, and unpaid interest accrued in prior years is charged against the allowance for loancredit losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The Company’s nonaccrual and charge-off policies are the same, regardless of the loan type. The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2022 and December 31, 2021.
| | | | | | | (Dollars in thousands) | | | | | | | | | September 30, 2022 | | December 31, 2021 | Non-accrual loans: | | | | | | | Real estate - mortgage | | $ | 142 | | $ | 141 | Total | | $ | 142 | | $ | 141 |
terms for a reasonable period and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The Company’s nonaccrual and charge-off policies are the same, regardless of the loan type. The following tables present the amortized cost basis of loans on nonaccrual status, including nonaccrual status loans with no allowance, and loans past due over 89 days still accruing. | | | | | | | | | | (Dollars in thousands) | | Nonaccrual with | | | | Loans Past Due | | | No Allowance | | | | Over 89 Days | As of March 31, 2023 | | for Credit Loss | | Nonaccrual | | Still Accruing(1) | Commercial, financial and agricultural | | $ | — | | $ | 23 | | $ | — | Real estate - mortgage | | | 28 | | | — | | | — | Total | | $ | 28 | | $ | 23 | | $ | — |
| | | | | | | | | | (Dollars in thousands) | | | | | | Loans Past Due | | | Nonaccrual with | | | | Over 89 Days | As of December 31, 2022 | | No Allowance | | Nonaccrual | | Still Accruing(1) | Commercial, financial and agricultural | | $ | — | | $ | — | | $ | 24 | Real estate - commercial | | | — | | | — | | | 7 | Real estate - mortgage | | | — | | | 139 | | | 4 | Personal | | | — | | | — | | | 4 | Total | | $ | — | | $ | 139 | | $ | 39 |
| (1) | These loans are guaranteed, or well-secured, and there is an effective means of collection in process. |
The Company recognized $10,000 of interest income on nonaccrual loans during the three months ended March 31, 2023. The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. Past due status is determined by the contractual terms of the loan. The following tables present the classes of the loan portfolio, summarized by the past due status as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | Past Due | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Greater | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | Greater | | | | | | | | than 89 | | | | | | | | Greater | | | | | | | | | 30‑59 Days | | 60‑89 Days | | than 89 | | Total Past | | | | | Days and | | 30‑59 Days | | 60‑89 Days | | Than 89 Days | | Total Past | | | Current | | Past Due(2) | | Past Due | | Days | | Due | | Total Loans | | Accruing(1) | | As of September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | Commercial, financial and agricultural | | $ | 58,560 | | $ | — | | $ | 25 | | $ | — | | $ | 25 | | $ | 58,585 | | $ | — | | Real estate - commercial | | | 188,870 | | | 683 | | | — | | | 8 | | | 691 | | | 189,561 | | | 8 | | Real estate - construction | | | 48,108 | | | — | | | — | | | — | | | — | | | 48,108 | | | — | | As of March 31, 2023 | | | Past Due(1) | | Past Due | | Past Due | | Due | Real estate - mortgage | | | 141,019 | | | 148 | | | 445 | | | 113 | | | 706 | | | 141,725 | | | — | | $ | 135 | | $ | 2 | | $ | — | | $ | 137 | Obligations of states and political subdivisions | | | 19,761 | | | — | | | — | | | — | | | — | | | 19,761 | | | — | | Personal | | | 3,959 | | | 8 | | | — | | | — | | | 8 | | | 3,967 | | | — | | | 4 | | | — | | | — | | | 4 | Subtotal | | | 460,277 | | | 839 | | | 470 | | | 121 | | | 1,430 | | | 461,707 | | | 8 | | Loans acquired with credit deterioration | | | | | | | | | | | | | | | | | | | | | | | Real estate - commercial | | | 299 | | | — | | | — | | | — | | | — | | | 299 | | | — | | Real estate - mortgage | | | 424 | | | — | | | — | | | — | | | — | | | 424 | | | — | | Subtotal | | | 723 | | | — | | | — | | | — | | | — | | | 723 | | | — | | | | $ | 461,000 | | $ | 839 | | $ | 470 | | $ | 121 | | $ | 1,430 | | $ | 462,430 | | $ | 8 | | Total | | | $ | 139 | | $ | 2 | | $ | — | | $ | 141 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | Past Due | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Greater | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | Greater | | | | | | | | than 89 | | | | | | | | Greater | | | | | | | | | 30‑59 Days | | 60‑89 Days | | than 89 | | Total Past | | | | | Days and | | 30‑59 Days | | 60‑89 Days | | Than 89 Days | | Total Past | | | Current | | Past Due(2) | | Past Due | | Days | | Due | | Total Loans | | Accruing(1) | | As of December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2022 | | | Past Due(1) | | Past Due | | Past Due | | Due | Commercial, financial and agricultural | | $ | 62,628 | | $ | 11 | | $ | — | | $ | — | | $ | 11 | | $ | 62,639 | | $ | — | | $ | 75 | | $ | — | | $ | 24 | | $ | 99 | Real estate - commercial | | | 159,396 | | | 53 | | | — | | | — | | | 53 | | | 159,449 | | | — | | | — | | | 104 | | | 7 | | | 111 | Real estate - construction | | | 43,281 | | | — | | | — | | | — | | | — | | | 43,281 | | | — | | Real estate - mortgage | | | 130,242 | | | 440 | | | 488 | | | 103 | | | 1,031 | | | 131,273 | | | 85 | | | 205 | | | 36 | | | 142 | | | 383 | Obligations of states and political subdivisions | | | 16,323 | | | — | | | — | | | — | | | — | | | 16,323 | | | — | | Personal | | | 4,492 | | | 8 | | | — | | | — | | | 8 | | | 4,500 | | | — | | | 27 | | | 1 | | | 4 | | | 32 | Subtotal | | | 416,362 | | | 512 | | | 488 | | | 103 | | | 1,103 | | | 417,465 | | | 85 | | Loans acquired with credit deterioration | | | | | | | | | | | | | | | | | | | | | | | Real estate - commercial | | | 357 | | | — | | | — | | | — | | | — | | | 357 | | | — | | Real estate - mortgage | | | 481 | | | — | | | — | | | — | | | — | | | 481 | | | — | | Subtotal | | | 838 | | | — | | | — | | | — | | | — | | | 838 | | | — | | | | $ | 417,200 | | $ | 512 | | $ | 488 | | $ | 103 | | $ | 1,103 | | $ | 418,303 | | $ | 85 | | $ | 307 | | $ | 141 | | $ | 177 | | $ | 625 |
(1) | These loans are guaranteed, or well-secured, and there is an effective means of collection in process. |
(2)(1) | Loans are considered past due when the borrower is in arrears on two or more monthly payments. |
Troubled Debt RestructuringsOccasionally, the Company modifies loans to borrowers in financial difficulty by providing principal forgiveness, term extension, an other-then-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged off against the allowance for credit losses. In some cases, the Company may provide multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. There were no loans modified to borrowers experiencing financial difficulty during the three months ended March 31, 2023, and as such, there were no payment defaults on loans modified to borrowers experiencing financial difficulty during the three months ended March 31, 2023.
The Company’s troubled debt restructurings are impaired loans, which may result in
If the Company determines a specific allocation and subsequent charge-off if appropriate. The amended termsmodified loan (or a portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the restructured loans vary,loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and may include interest rates that have been reduced, principal payments that have been reduced or deferredthe allowance for a period and/or maturity dates that have been extended.credit losses is adjusted by the same amount. As of September 30,December 31, 2022, the Company had a recorded investment in troubled debt restructurings of $2.3 million with no specific reserves or any charge-offs related to the troubled debt restructured loans. Asloans and no commitments to lend additional amounts to these customers as of December 31, 2021, the Company had a recorded investment in troubled debt restructurings of $5.6 million with no specific reserves or any charge-offs related to the troubled debt restructured loans. In the third quarter of 2022, a $3.1 million troubled debt restructured loan was paid off.2022. There were no troubled debt restructured loans in default within 12 months of restructure during the three and nine monthsyear ended September 30,December 31, 2022, or 2021.
The following table presents the loannor were there any loans whose terms were modified, resulting in troubled debt restructuringrestructurings during the nine months ended September 30, 2021. There were no loan terms modified resulting in troubled debt restructuring during the three and nine months ended September 30, 2022, or the three months ended September 30, 2021.2022.
| | | | | | | | | | | | | (Dollars in thousands) | | | | | Pre-Modification | | Post-Modification | | | | | | | Number of | | Outstanding | | Outstanding | | | | | | | Contracts | | Recorded Investment | | Recorded Investment | | Recorded Investment | Nine months ended September 30, 2021 | | | | | | | | | | | | | Accruing troubled debt restructurings: | | | | | | | | | | | | | Real estate - commercial | | | 1 | | $ | 2,254 | | $ | 2,254 | | $ | 1,854 | | | | 1 | | $ | 2,254 | | $ | 2,254 | | $ | 1,854 |
Credit Quality Indicators The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans to commercial customers with an aggregate loan exposure greater than $500,000 and for lines of credit more than $50,000. This analysis is performed on a continuing basis, with all such loans reviewed annually. The Company uses the following definitions for risk ratings: Special Mention. - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Loans in this category are reviewed no less than quarterly. Substandard. - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans in this category are reviewed no less than monthly. Doubtful. - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. Loans in this category are reviewed no less than monthly. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | | | | Special | | | | | | | | | | | | | | Special | | | | | | | | | | As of September 30, 2022 | | Pass | | Mention | | Substandard | | Doubtful | | Total | | As of March 31, 2023 | | | Pass | | Mention | | Substandard | | Doubtful | | Total | Commercial, financial and agricultural | | $ | 57,812 | | $ | 773 | | $ | — | | $ | — | | $ | 58,585 | | $ | 58,493 | | $ | 574 | | $ | 23 | | $ | — | | $ | 59,090 | Real estate - commercial | | | 176,300 | | | 11,102 | | | 2,458 | | | — | | | 189,860 | | | 188,070 | | | 9,435 | | | 1,053 | | | — | | | 198,558 | Real estate - construction | | | 46,668 | | | 1,440 | | | — | | | — | | | 48,108 | | Real estate - construction: | | | | | | | | | | | | | | | | | 1-4 family residential construction | | | | 6,757 | | | 200 | | | — | | | — | | | 6,957 | Other construction loans | | | | 41,011 | | | 5,085 | | | — | | | — | | | 46,096 | Real estate - mortgage | | | 140,901 | | | 427 | | | 821 | | | — | | | 142,149 | | | 152,098 | | | 217 | | | 431 | | | — | | | 152,746 | Obligations of states and political subdivisions | | | 19,761 | | | — | | | — | | | — | | | 19,761 | | | 21,012 | | | — | | | — | | | — | | | 21,012 | Personal | | | 3,967 | | | — | | | — | | | — | | | 3,967 | | | 4,038 | | | — | | | — | | | — | | | 4,038 | Total | | $ | 445,409 | | $ | 13,742 | | $ | 3,279 | | $ | — | | $ | 462,430 | | $ | 471,479 | | $ | 15,511 | | $ | 1,507 | | $ | — | | $ | 488,497 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | | | | Special | | | | | | | | | | | | | | Special | | | | | | | | | | As of December 31, 2021 | | Pass | | Mention | | Substandard | | Doubtful | | Total | | As of December 31, 2022 | | | Pass | | Mention | | Substandard | | Doubtful | | Total | Commercial, financial and agricultural | | $ | 61,372 | | $ | 577 | | $ | 690 | | $ | — | | $ | 62,639 | | $ | 60,990 | | $ | 468 | | $ | — | | $ | — | | $ | 61,458 | Real estate - commercial | | | 137,684 | | | 16,429 | | | 5,693 | | | — | | | 159,806 | | | 186,977 | | | 9,802 | | | 2,427 | | | — | | | 199,206 | Real estate - construction | | | 42,394 | | | — | | | 887 | | | — | | | 43,281 | | | 50,008 | | | 740 | | | | | | | | | 50,748 | Real estate - mortgage | | | 130,584 | | | 252 | | | 918 | | | — | | | 131,754 | | | 149,272 | | | 222 | | | 796 | | | — | | | 150,290 | Obligations of states and political subdivisions | | | 16,323 | | | — | | | — | | | — | | | 16,323 | | | 18,770 | | | — | | | — | | | — | | | 18,770 | Personal | | | 4,500 | | | — | | | — | | | — | | | 4,500 | | | 4,040 | | | — | | | — | | | — | | | 4,040 | Total | | $ | 392,857 | | $ | 17,258 | | $ | 8,188 | | $ | — | | $ | 418,303 | | $ | 470,057 | | $ | 11,232 | | $ | 3,223 | | $ | — | | $ | 484,512 |
The decline in special mention real estate – commercial
Based on the most recent analysis performed, the amortized cost basis by risk category of loans by class of loan and by origination year is as of September 30, 2022 compared to December 31, 2021 was largely due to a $2.9 million payoff of a special mention loan in the first quarter of 2022, as well as paydowns and the upgrade of two loan relationships to pass ratings. The decline in substandard real estate – commercial as of September 30, 2022 compared to December 31, 2021 was primarily due to the payoff of a $3.1 million substandard loan relationship in the third quarter of 2022.follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revolving | | Revolving | | | | (Dollars in thousands) | | | | | | | | | | | | | | Loans | | Loans | | | | | | | | | | | | | | | | | | | | | | Amortized | | Converted | | | | As of March 31, 2023 | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Cost Basis | | to Term | | Total | Commercial, financial and agricultural: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 1,402 | | $ | 7,712 | | $ | 14,484 | | $ | 6,448 | | $ | 4,717 | | $ | 2,499 | | $ | 21,253 | | $ | — | | $ | 58,515 | Special Mention | | | — | | | — | | | — | | | — | | | 75 | | | — | | | 500 | | | — | | | 575 | Substandard | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Doubtful | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Total commercial, financial and agricultural loans | | $ | 1,402 | | $ | 7,712 | | $ | 14,484 | | $ | 6,448 | | $ | 4,792 | | $ | 2,499 | | $ | 21,753 | | $ | — | | $ | 59,090 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial, financial and agricultural loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current period gross write offs | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate - commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 3,300 | | $ | 59,190 | | $ | 23,498 | | $ | 16,737 | | $ | 18,539 | | $ | 62,878 | | $ | 3,455 | | $ | 621 | | $ | 188,218 | Special Mention | | | — | | | — | | | — | | | 3,998 | | | 236 | | | 4,954 | | | 198 | | | — | | | 9,386 | Substandard | | | — | | | — | | | — | | | — | | | — | | | 954 | | | — | | | — | | | 954 | Doubtful | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Total real estate - commercial loans | | $ | 3,300 | | $ | 59,190 | | $ | 23,498 | | $ | 20,735 | | $ | 18,775 | | $ | 68,786 | | $ | 3,653 | | $ | 621 | | $ | 198,558 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate - commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current period gross write offs | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate - construction - 1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | — | | $ | 6,026 | | $ | — | | $ | 683 | | $ | — | | $ | 48 | | $ | — | | $ | — | | $ | 6,757 | Special Mention | | | 200 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 200 | Substandard | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Doubtful | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Total real estate - construction - 1-4 family residential loans | | $ | 200 | | $ | 6,026 | | | — | | $ | 683 | | | — | | $ | 48 | | $ | — | | $ | — | | $ | 6,957 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate - construction - 1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current period gross write offs | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate - construction - other: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 155 | | $ | 3,730 | | $ | 16,359 | | $ | 9,254 | | $ | 523 | | $ | 3,764 | | $ | 7,073 | | $ | 168 | | $ | 41,026 | Special Mention | | | — | | | — | | | 2 | | | 5,068 | | | — | | | — | | | — | | | — | | | 5,070 | Substandard | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Doubtful | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Total real estate - construction - other loans | | $ | 155 | | $ | 3,730 | | $ | 16,361 | | $ | 14,322 | | $ | 523 | | $ | 3,764 | | $ | 7,073 | | $ | 168 | | $ | 46,096 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate - construction - other: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current period gross write offs | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revolving | | Revolving | | | | (Dollars in thousands) | | | | | | | | | | | | | | Loans | | Loans | | | | | | | | | | | | | | | | | | | | | | Amortized | | Converted | | | | As of March 31, 2023 (cont.) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Cost Basis | | to Term | | Total | Real estate - mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 3,928 | | $ | 44,574 | | $ | 21,773 | | $ | 16,098 | | $ | 5,978 | | $ | 51,829 | | $ | 8,240 | | $ | 310 | | $ | 152,730 | Special Mention | | | — | | | — | | | — | | | — | | | — | | | 16 | | | — | | | — | | | 16 | Substandard | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Doubtful | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Total real estate - mortgage loans | | $ | 3,928 | | $ | 44,574 | | $ | 21,773 | | $ | 16,098 | | $ | 5,978 | | $ | 51,845 | | $ | 8,240 | | $ | 310 | | $ | 152,746 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate - mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current period gross write offs | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 19 | | $ | — | | $ | — | | $ | 19 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Obligations of states and political subdivisions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 2,822 | | $ | 4,130 | | $ | 2,630 | | $ | 5,281 | | $ | 38 | | $ | 6,111 | | $ | — | | $ | — | | $ | 21,012 | Special Mention | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Substandard | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Doubtful | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Total Obligations of states and political subdivisions | | $ | 2,822 | | $ | 4,130 | | $ | 2,630 | | $ | 5,281 | | $ | 38 | | $ | 6,111 | | $ | — | | $ | — | | $ | 21,012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Obligations of states and political subdivisions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current period gross write offs | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Personal: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 645 | | $ | 1,733 | | $ | 750 | | $ | 196 | | $ | 246 | | $ | 339 | | $ | 93 | | $ | 36 | | $ | 4,038 | Special Mention | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Substandard | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | $ | — | Doubtful | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Total personal loans | | $ | 645 | | $ | 1,733 | | $ | 750 | | $ | 196 | | $ | 246 | | $ | 339 | | $ | 93 | | $ | 36 | | $ | 4,038 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Personal: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current period gross write offs | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 7 | | $ | — | | $ | — | | $ | 7 |
7. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill On September 8, 2006, the Company acquired a branch office in Richfield, PA. Goodwill associated with this transaction is carried at $2.0 million. On November 30, 2015, the Company acquired FNBPA Bancorp, Inc. and, as a result, carries goodwill of $3.4 million relating to the acquisition. On April 30, 2018, the Company acquired the remainder of the outstanding common stock of Liverpool Community Bank and, as a result, carries goodwill of $3.6 million relating to the acquisition. Total goodwill at September 30, 2022March 31, 2023 and December 31, 20212022 was $9.0 million. Goodwill is not amortized but is tested annually for impairment as of December 31, or more frequently if certain events occur which might indicate goodwill has been impaired. There was no goodwill impairment during the ninethree months ended September 30, 2022March 31, 2023 or September 30, 2021.March 31, 2022. Intangible Assets On November 30, 2015, a core deposit intangible in the amount of $303,000 associated with the FNBPA Bancorp, Inc. acquisition was recorded and is being amortized over a ten-year period using a sum of the year’s digits basis. Amortization expense recognized for the intangibles related to the FNBPA acquisition for the respective three and nine months ended September 30,March 31, 2023 and March 31, 2022 was $4,000 and $5,000, and $16,000 and for the respective three and nine months ended September 30, 2021 was $6,000 and $20,000.respectively. On April 30, 2018, a core deposit intangible in the amount of $289,000 associated with the Liverpool Community Bank acquisition was recorded and is being amortized over a ten-year period using a sum of the year’s digit basis. Amortization expense recognized for the intangible related to the Liverpool Community Bank acquisition for the respective three and nine months ended September 30,March 31, 2023 and March 31, 2022 was $9,000$7,000 and $25,000 and for the respective three and nine months ended September 30, 2021 was $10,000 and $29,000.$8,000, respectively. The following table shows the amortization schedule for each of the intangible assets recorded. | | | | | | | | | | | | | (Dollars in thousands) | | FNBPA | | LCB | | FNBPA | | LCB | | | Acquisition | | Acquisition | | Acquisition | | Acquisition | | | Core | | Core | | Core | | Core | | | Deposit | | Deposit | | Deposit | | Deposit | | | Intangible | | Intangible | | Intangible | | Intangible | Beginning Balance at Acquisition Date | | $ | 303 | | $ | 289 | | $ | 303 | | $ | 289 | Amortization expense recorded prior to January 1, 2021 | | | 223 | | | 128 | | Amortization expense recorded prior to January 1, 2022 | | | | 250 | | | 167 | Amortization expense recorded in the twelve months | | | | | | | | | | | | | ended December 31, 2021 | | | 27 | | | 39 | | Unamortized balance as of December 31, 2021 | | | 53 | | | 122 | | ended December 31, 2022 | | | | 21 | | | 33 | Unamortized balance as of December 31, 2022 | | | | 32 | | | 89 | Amortization expense recorded in the | | | | | | | | | | | | | nine months ended September 30, 2022 | | | 16 | | | 25 | | Unamortized balance as of September 30, 2022 | | $ | 37 | | $ | 97 | | three months ended March 31, 2023 | | | | 4 | | | 7 | Unamortized balance as of March 31, 2023 | | | $ | 28 | | $ | 82 | | | | | | | | | | | | | | Scheduled remaining amortization expense for years ended: | | | | | | | | | | | | | December 31, 2022 | | $ | 6 | | $ | 8 | | December 31, 2023 | | | 16 | | | 28 | | $ | 12 | | $ | 21 | December 31, 2024 | | | 10 | | | 23 | | | 11 | | | 23 | December 31, 2025 | | | 5 | | | 17 | | | 5 | | | 17 | December 31, 2026 | | | — | | | 12 | | | — | | | 12 | December 31, 2027 | | | | — | | | 7 | Thereafter | | | — | | | 9 | | | — | | | 2 |
8. DEPOSITS At March 31, 2023 and December 31, 2022, time deposits that met or exceeded the FDIC insurance limit of $250,000 were $28.0 million and $13.2 million, respectively. 9. BORROWINGS Borrowings consisted of the following as of March 31, 2023 and December 31, 2022. | | | | | | | (Dollars in thousands) | | March 31, | | December 31, | | | 2023 | | 2022 | Securities sold under agreements to repurchase | | $ | 8,822 | | $ | 7,585 | Overnight advances with FHLB | | | 14,000 | | | 28,125 | Short-term debt with FHLB | | | 20,000 | | | 20,000 | Long-term debt with FHLB | | | 20,000 | | | 20,000 | | | $ | 62,822 | | $ | 75,710 |
8. BORROWINGS
Borrowings consisted of the following as of September 30, 2022 and December 31, 2021.
| | | | | | | (Dollars in thousands) | | September 30, | | December 31, | | | 2022 | | 2021 | Securities sold under agreements to repurchase | | $ | 6,869 | | $ | 4,227 | Overnight advances with FHLB | | | 9,000 | | | — | Short-term debt with FHLB | | | 20,000 | | | — | Long-term debt with FHLB | | | 20,000 | | | 20,000 | | | $ | 55,869 | | $ | 24,227 |
Long-term debt is comprised only of Federal Home Loan Bank (“FHLB”) advances with an original maturity of one year or more. The following table summarizes the scheduled maturities of long-term debt as of September 30, 2022.March 31, 2023. | | | | | | | | | | | | | (Dollars in thousands) | | Scheduled | | Weighted Average | | | Scheduled | | Weighted Average | | Year | | Maturities | | Interest Rate | | | Maturities | | Interest Rate | | 2022 | | $ | — | | — | % | | 2023 | | | — | | — | | | $ | — | | — | % | 2024 | | | 15,000 | | 2.29 | | | | 15,000 | | 2.29 | | 2025 | | | 5,000 | | 2.41 | | | | 5,000 | | 2.41 | | 2026 | | | — | | — | | | | — | | — | | 2027 | | | | — | | — | | Thereafter | | | — | | — | | | | — | | — | | | | $ | 20,000 | | 2.32 | % | | $ | 20,000 | | 2.32 | % |
9.10. STOCK COMPENSATION PLAN
Long-Term Incentive Plan The Company maintains the 2016 Long-Term Incentive Plan (the “Plan”); the Plan amended and restated the former 2011 Stock Option Plan (the “2011 Plan”). The Plan continues in effect for any outstanding awards under the 2011 Plan in accordance with the terms and conditions governing such awards immediately prior to the effective date of the Plan. The Plan expanded the types of awards authorized by the 2011 Plan to include, among others, restricted stock. Under the provisions of the Plan, awards may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and performance shares to officers and key employees of the Company, as well as directors. The Plan is administered by a committee of the Board of Directors. The maximum number of shares of common stock that may be issued under the Plan is 300,000 shares, and 163,990162,503 shares remained available for grant as of September 30, 2022.March 31, 2023. Shares of common stock issued under the Plan may be treasury shares or authorized but unissued shares. Forfeited awards are returned to the pool of shares available for grant for future awards. Through the ninethree months ended September 30, 2022, 10,486March 31, 2023, 11,409 restricted shares were awarded to certain officers and all directors. Each of the awards vest after three-years, with no interim vesting. As of September 30, 2022,March 31, 2023, there was $169,000$292,000 of unrecognized compensation cost related to all non-vested restricted stock awards. This cost is expected to be recognized over the vesting period through February 20252026. Compensation expense for stock options granted and restricted stock awarded is measured using the fair value of the award on the grant date and is recognized over the vesting period. The Company recognized stock-based compensation expense of $32,000 for the three months ended March 31, 2023, and $37,000 for the three months ended March 31, 2022. The following table presents a summary of the status of the Company’s non-vested restricted stock awards as of March 31, 2023. Changes during the period then ended are presented further below: | | | | | | | | | | Weighted | | | | | Average | | | | | Grant Date | | | Shares | | Fair Value | Non-vested at January 1, 2023 | | 20,975 | | $ | 17.10 | Vested | | (6,307) | | | 19.25 | Forfeited | | — | | | — | Granted | | 11,409 | | | 16.25 | Non-vested at March 31, 2023 | | 26,077 | | $ | 16.21 |
of $30,000 and $146,000 for the three and nine months ended September 30, 2022, and $38,000 and $110,000 for the three and nine months ended September 30, 2021.
The following table presents a summary of the status of the Company’s non-vested restricted stock awards as of September 30, 2022, and changes during the period then ended is presented below:
| | | | | | | | | | Weighted | | | | | Average | | | | | Grant Date | | | Shares | | Fair Value | Non-vested at January 1, 2022 | | 22,789 | | $ | 18.48 | Vested | | (11,475) | | | 18.72 | Forfeited | | (825) | | | 17.32 | Granted | | 10,486 | | | 15.90 | Non-vested at September 30, 2022 | | 20,975 | | $ | 17.10 |
No stock options were awarded during the ninethree months ended September 30, 2022.March 31, 2023. Previously granted stock options vest over a period of three to five years and are exercisable at the grant price, which is at least the fair market value of the stock on the grant date. The Plan provides that the option price per share may not be less than the fair market value of the stock on the day the option was granted, and in no event less than the par value of such stock. Options granted under the Plan are exercisable no earlier than one year after the date of grant and expire ten years after the date of the grant. All options previously granted under the Plans are scheduled to expire by February 17, 2025. Total options outstanding as of September 30, 2022March 31, 2023 have exercise prices between $17.65$17.72 and $17.80, with a weighted average exercise price of $17.74$17.76 and a weighted average remaining contractual life of 1.661.41 years. As of September 30, 2022,March 31, 2023, there was no unrecognized compensation cost related to options granted under the Plan and no options were exercised under the Plan during the period. A summary of the status of the outstanding stock options as of September 30, 2022,March 31, 2023, and changes during the period then ended, is presented below:
| | | | | | | | | | | | | | | Weighted | | | | Weighted | | | | | Average | | | | Average | | | | | Exercise | | | | Exercise | | | Shares | | Price | | Shares | | Price | Outstanding at beginning of year | | 71,947 | | $ | 17.78 | | 60,347 | | $ | 17.74 | Granted | | — | | | — | | — | | | — | Exercised | | — | | | — | | — | | | — | Expired | | (11,600) | | | 18.00 | | (9,922) | | | 17.65 | Outstanding at end of year | | 60,347 | | $ | 17.74 | | 50,425 | | $ | 17.76 | | | | | | | |
Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan under which employees, through payroll deductions, may purchase shares of Company stock annually. The option price of the stock purchases is between 95% and 100% of the fair market value of the stock on the offering termination date as determined annually by the Board of Directors. The maximum number of shares which employees may purchase under the Plan is 250,000; however, the annual issuance of shares may not exceed 5,000 shares plus any unissued shares from prior offerings. There were 5,026 and 4,944no shares issued from treasury under this plan during the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively. As of September 30, 2022,March 31, 2023, there were 156,650 shares reserved for issuance under the Employee Stock Purchase Plan. 10.11. FAIR VALUE MEASUREMENT
Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes guidanceinstruction on identifying circumstances when a transaction may not be considered orderly. Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes that there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed, and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance. This guidance clarifies that, when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. Level 2 Inputs – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 Inputs – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. EquitiesEquity Securities – The fair value of equity securities is based upon quoted prices in active markets and is reported using Level 1 inputs.
Debt Securities Available for Sale – For debt securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities and are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurement from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the debt securities’ terms and conditions, among other things. For debt securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using other market indicators and are reported at fair value utilizing Level 3 inputs. Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date utilizing Level 2 inputs. The Company’s derivatives are comprised of interest rate swaps traded in an over-the-counter market where quoted market prices are not always available; therefore, the fair values are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of yield curves, prepayment rates and volatility factors used to value the position. Most market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Impaired Loans – Certain impaired loans are reported on a non-recurring basis at the fair value of the underlying collateral since repayment is expected solely from the collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Other Real Estate Owned – Certain assets included in other real estate owned are carried at fair value as a result of impairment and accordingly are presented as measured on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in the proximate vicinity. Mortgage Servicing Rights – The fair value of servicing assets is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date and are considered Level 3 inputs. The following tables summarize financial assets and financial liabilities measured at fair value as of March 31, 2023 and December 31, 2022 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no assets measured at fair value on a non-recurring basis as of March 31, 2023 or December 31, 2022. | | | | | | | | | | | | | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | Quoted Prices in | | Significant | | Significant | | | | (Dollars in thousands) | | Active Markets | | Other | | Other | | | | | | for Identical | | Observable | | Unobservable | | | March 31, 2023 | | Assets | | Inputs | | Inputs | | Total | Assets measured at fair value on a recurring basis: | | | | | | | | | | | | | Debt securities available for sale: | | | | | | | | | | | | | Obligations of U.S. Government agencies and corporations | | $ | — | | $ | 13,927 | | $ | — | | $ | 13,927 | Obligations of state and political subdivisions | | | — | | | 7,753 | | | — | | | 7,753 | Corporate debt securities | | | — | | | 7,799 | | | 6,649 | | | 14,448 | Mortgage-backed securities | | | — | | | 36,357 | | | — | | | 36,357 | Total debt securities available for sale | | $ | — | | $ | 65,836 | | $ | 6,649 | | $ | 72,485 | Equity securities | | $ | 1,033 | | $ | — | | $ | — | | $ | 1,033 | Mortgage servicing rights | | $ | — | | $ | — | | $ | 90 | | $ | 90 | Interest rate swaps | | $ | — | | $ | 55 | | $ | — | | $ | 55 |
The following tables summarize financial assets and financial liabilities measured at fair value as of September 30, 2022 and December 31, 2021 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no assets measured at fair value on a non-recurring basis as of September 30, 2022 or December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | Quoted Prices in | | Significant | | Significant | | | | | Quoted Prices in | | Significant | | Significant | | | | (Dollars in thousands) | | Active Markets | | Other | | Other | | | | | Active Markets | | Other | | Other | | | | | | for Identical | | Observable | | Unobservable | | | | for Identical | | Observable | | Unobservable | | | September 30, 2022 | | Assets | | Inputs | | Inputs | | Total | | December 31, 2022 | | | Assets | | Inputs | | Inputs | | Total | Assets measured at fair value on a recurring basis: | | | | | | | | | | | | | | | | | | | | | | | | | Debt securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | Obligations of U.S. Government agencies and corporations | | $ | — | | $ | 41,950 | | $ | — | | $ | 41,950 | | $ | — | | $ | 13,705 | | $ | — | | $ | 13,705 | Obligations of state and political subdivisions | | | — | | | 7,681 | | | — | | | 7,681 | | | — | | | 7,679 | | | — | | | 7,679 | Corporate debt securities | | | — | | | 8,228 | | | 7,348 | | | 15,576 | | | — | | | 8,196 | | | 7,145 | | | 15,341 | Mortgage-backed securities | | | — | | | 222,044 | | | — | | | 222,044 | | | — | | | 36,811 | | | — | | | 36,811 | Total debt securities available for sale | | $ | — | | $ | 279,903 | | $ | 7,348 | | $ | 287,251 | | $ | — | | $ | 66,391 | | $ | 7,145 | | $ | 73,536 | Equity securities | | $ | 1,014 | | $ | — | | $ | — | | $ | 1,014 | | $ | 1,056 | | $ | — | | $ | — | | $ | 1,056 | Mortgage servicing rights | | $ | — | | $ | — | | $ | 96 | | $ | 96 | | $ | — | | $ | — | | $ | 92 | | $ | 92 | Interest rate swaps | | $ | — | | $ | 419 | | $ | — | | $ | 419 | | $ | — | | $ | 268 | | $ | — | | $ | 268 |
| | | | | | | | | | | | | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | Quoted Prices in | | Significant | | Significant | | | | (Dollars in thousands) | | Active Markets | | Other | | Other | | | | | | for Identical | | Observable | | Unobservable | | | December 31, 2021 | | Assets | | Inputs | | Inputs | | Total | Assets measured at fair value on a recurring basis: | | | | | | | | | | | | | Debt securities available for sale: | | | | | | | | | | | | | Obligations of U.S. Government agencies and corporations | | $ | — | | $ | 40,526 | | $ | — | | $ | 40,526 | Obligations of state and political subdivisions | | | — | | | 9,220 | | | — | | | 9,220 | Corporate debt securities | | | — | | | 30,476 | | | 4,520 | | | 34,996 | Mortgage-backed securities | | | — | | | 250,682 | | | — | | | 250,682 | Total debt securities available for sale | | $ | — | | $ | 330,904 | | $ | 4,520 | | $ | 335,424 | Equity securities | | $ | 1,124 | | $ | — | | $ | — | | $ | 1,124 | Mortgage servicing rights | | $ | — | | $ | — | | $ | 120 | | $ | 120 | Interest rate swaps | | $ | — | | $ | 541 | | $ | — | | $ | 541 |
The table below presents a reconciliation of the beginning and ending balances of investment securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine month periods ended September 30, 2022March 31, 2023 and 2021.2022. | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | (Dollars in thousands) | | September 30, | | September 30, | | March 31, | | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | Investment Securities: | | | | | | | | | | | | | | | | | | | Beginning balance | | $ | 7,788 | | $ | 4,500 | | $ | 4,520 | | $ | 2,000 | | $ | 7,145 | | $ | 4,520 | Total gains (loss) included in OCI | | | (440) | | | 20 | | | (1,172) | | | 20 | | | (496) | | | (250) | Purchases | | | — | | | — | | | 4,000 | | | 2,500 | | | — | | | — | Principal payments and other | | | — | | | — | | | — | | | — | | | — | | | — | Sales | | | — | | | — | | | — | | | — | | | — | | | — | Balance, end of period | | $ | 7,348 | | $ | 4,520 | | $ | 7,348 | | $ | 4,520 | | $ | 6,649 | | $ | 4,270 |
Mortgage servicing rights and assets measured at fair value on a nonrecurring basis for which Level 3 inputs have been used to determine fair value are immaterial to the Company’s consolidated financial statements. Fair Value of Financial Instruments Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, the fair value estimates reported herein are not necessarily indicative of the amounts the Company could have realized in sales transactions on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments after the respective reporting dates may be different from the amounts reported at each quarter end. The information presented below should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is provided only for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The carrying amounts and estimated fair values of the Company’s financial instruments are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial Instruments | | Financial Instruments | (Dollars in thousands) | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 | | | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair | | | Value | | Value | | Value | | Value | | Value | | Value | | Value | | Value | Financial assets: | | | | | | ��� | | | | | | | | | | | | | | | | | | | Cash and due from banks | | $ | 13,325 | | $ | 13,325 | | $ | 12,928 | | $ | 12,928 | | $ | 11,681 | | $ | 11,681 | | $ | 10,856 | | $ | 10,856 | Interest bearing deposits with banks | | | 102 | | | 102 | | | 598 | | | 598 | | | 222 | | | 222 | | | 143 | | | 143 | Interest bearing time deposits with banks | | | — | | | — | | | 735 | | | 735 | | Securities | | | 288,265 | | | 288,265 | | | 336,548 | | | 336,548 | | Debt securities available for sale | | | | 72,485 | | | 72,485 | | | 73,536 | | | 73,536 | Debt securities held to maturity | | | | 207,637 | | | 209,376 | | | 209,565 | | | 209,887 | Restricted investment in bank stock | | | 3,104 | | | N/A | | | 2,116 | | | N/A | | | 3,318 | | | N/A | | | 3,666 | | | N/A | Loans, net of allowance for loan losses | | | 458,525 | | | 458,754 | | | 414,795 | | | 414,984 | | Loans, net of allowance for credit losses | | | | 483,123 | | | 470,079 | | | 480,485 | | | 467,667 | Interest rate swaps | | | 419 | | | 419 | | | 541 | | | 541 | | | 55 | | | 55 | | | 268 | | | 268 | Accrued interest receivable | | | 1,907 | | | 1,907 | | | 1,814 | | | 1,814 | | | 2,209 | | | 2,209 | | | 2,124 | | | 2,124 | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest bearing deposits | | $ | 202,493 | | $ | 202,493 | | $ | 182,022 | | $ | 182,022 | | Interest bearing deposits | | | 515,341 | | | 512,082 | | | 526,425 | | | 528,952 | | Time deposits | | | $ | 179,214 | | $ | 171,537 | | $ | 142,271 | | $ | 134,417 | Securities sold under agreements to repurchase | | | 6,869 | | | N/A | | | 4,227 | | | N/A | | | 8,822 | | | N/A | | | 7,585 | | | N/A | Short-term borrowings | | | 20,000 | | | 19,995 | | | — | | | — | | | 34,000 | | | 34,000 | | | 48,125 | | | 48,122 | Long-term debt | | | 20,000 | | | 19,133 | | | 20,000 | | | 20,520 | | | 20,000 | | | 19,244 | | | 20,000 | | | 19,156 | Other interest bearing liabilities | | | 995 | | | 990 | | | 1,568 | | | 1,568 | | | 986 | | | 983 | | | 1,011 | | | 1,009 | Accrued interest payable | | | 215 | | | 215 | | | 252 | | | 252 | | | 626 | | | 626 | | | 333 | | | 333 | | | | | | | | | | | | | | | | | | | | | | | | | | Off-balance sheet financial instruments: | | | | | | | | | | | | | | | | | | | | | | | | | Commitments to extend credit | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | Letters of credit | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
The following tables present the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments not previously disclosed as of September 30, 2022March 31, 2023 and December 31, 2021.2022. The tables exclude financial instruments for which the carrying amount approximates fair value. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | Quoted Prices in | | Significant | | Significant | | | | | | | | Quoted Prices in | | Significant | | Significant | (Dollars in thousands) | | | | | | | | Active Markets | | Other | | Other | | | | | | | | Active Markets | | Other | | Other | | | Carrying | | | | | for Identical | | Observable | | Unobservable | | Carrying | | | | | for Identical | | Observable | | Unobservable | | | Amount | | Fair Value | | Assets or Liabilities | | Inputs | | Inputs | | Amount | | Fair Value | | Assets or Liabilities | | Inputs | | Inputs | September 30, 2022 | | | | | | | | | | | | | | | | | March 31, 2023 | | | | | | | | | | | | | | | | | Financial instruments - Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans, net of allowance for loan losses | | $ | 458,525 | | $ | 458,754 | | $ | — | | $ | — | | $ | 458,754 | | Debt securities held to maturity | | | $ | 207,637 | | $ | 209,376 | | $ | — | | $ | 209,376 | | $ | — | Loans, net of allowance for credit losses | | | | 483,123 | | | 470,079 | | | — | | | — | | | 470,079 | Financial instruments - Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing deposits | | $ | 515,341 | | $ | 512,082 | | $ | — | | $ | 512,082 | | $ | — | | Time deposits | | | $ | 179,214 | | $ | 171,537 | | $ | — | | $ | 171,537 | | $ | — | Long-term debt | | | 20,000 | | | 19,133 | | | — | | | 19,133 | | | — | | | 20,000 | | | 19,244 | | | — | | | 19,244 | | | — | Other interest bearing liabilities | | | 995 | | | 990 | | | — | | | 990 | | | — | | | 986 | | | 983 | | | — | | | 983 | | | — |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | Quoted Prices in | | Significant | | Significant | | | | | | | | Quoted Prices in | | Significant | | Significant | (Dollars in thousands) | | | | | | | | Active Markets | | Other | | Other | | | | | | | | Active Markets | | Other | | Other | | | Carrying | | | | | for Identical | | Observable | | Unobservable | | Carrying | | | | | for Identical | | Observable | | Unobservable | | | Amount | | Fair Value | | Assets or Liabilities | | Inputs | | Inputs | | Amount | | Fair Value | | Assets or Liabilities | | Inputs | | Inputs | December 31, 2021 | | | | | | | | | | | | | | | | | December 31, 2022 | | | | | | | | | | | | | | | | | Financial instruments - Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing time deposits with banks | | $ | 735 | | $ | 735 | | $ | — | | $ | 735 | | $ | — | | Loans, net of allowance for loan losses | | | 414,795 | | | 414,984 | | | — | | | — | | | 414,984 | | Debt securities held to maturity | | | $ | 209,565 | | $ | 209,887 | | $ | — | | $ | 209,887 | | $ | — | Loans, net of allowance for credit losses | | | | 480,485 | | | 467,667 | | | — | | | — | | | 467,667 | Financial instruments - Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing deposits | | $ | 526,425 | | $ | 528,952 | | $ | — | | $ | 528,952 | | $ | — | | Time deposits | | | $ | 142,271 | | $ | 134,417 | | $ | — | | $ | 134,417 | | $ | — | Long-term debt | | | 20,000 | | | 20,520 | | | — | | | 20,520 | | | — | | | 20,000 | | | 19,156 | | | — | | | 19,156 | | | — | Other interest bearing liabilities | | | 1,568 | | | 1,568 | | | — | | | 1,568 | | | — | | | 1,011 | | | 1,009 | | | — | | | 1,009 | | | — |
11.12. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
In the ordinary course of business, the Company makes commitments to extend credit to its customers through letters of credit, loan commitments and lines of credit. At September 30, 2022,March 31, 2023, the Company had $118.8$117.8 million outstanding in loan commitments and other unused lines of credit extended to its customers as compared to $107.1$116.1 million at December 31, 2021.2022. The Company does not issue any guarantees that would require liability recognition or disclosure, other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had outstanding $3.7$2.5 million and $5.7$2.6 million of financial and performance letters of credit commitments as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Commercial letters of credit as of September 30, 2022March 31, 2023 and December 31, 20212022 totaled $9.9$9.7 million and $9.5$9.8 million, respectively. Management believes the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential number of future payments required under the corresponding guarantees. The amount of the liability as of September 30, 2022March 31, 2023 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk. Additionally, the Company has sold qualifying residential mortgage loans to the FHLB as part of its Mortgage Partnership Finance Program (“Program”). Under the terms of the Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan sold under the Program is “credit enhanced” such that the individual loan’s rating is raised to “BBB”, as determined by the FHLB. The Program can be terminated by either the FHLB or the Company, without cause. The FHLB has no obligation to commit to purchase any mortgage loans through, or from, the Company. 12.13. DERIVATIVES
The Company uses interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. As of March 31, 2023 and December 31, 2021, interest rate swaps with a notional amount totaling $40.0 million, were designated as cash flow hedges, of which $20.0 million were hedges of brokered deposits, and the other $20.0 million were hedges of certain forecasted FHLB long-term advances. Based on updated funding need projections, including the proceeds from the sale of investment securities and continued core deposit growth, Juniata unwound two forward starting swaps at a gain of $1.2 million during the second quarter of 2022. The amounts previously recognized in accumulated other comprehensive income were reclassified to other non-interest income because it became probable that the forecasted hedged transactions would not occur. Also in the second quarter,2022, an interest rate swap with a notional amount totalingof $20.0 million was de-designateddesignated as a cash flow hedge on brokered deposits and designated instead, as a cash flow hedge onof a short-term FHLB advance. The remaining interest rate swap was determined to be fully effective during the periods presented, and as such, no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in either other assets or other liabilities on the Consolidated Statements of Condition, with changes in fair value recorded in other comprehensive income. The Company expects the hedge to remain fully effective during the remaining terms of the swap. The following table reflects the notional amounts and fair values of derivatives recorded on the Consolidated Statements of Condition as of September 30, 2022March 31, 2023 and December 31, 2021.2022. | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 | | | | | Fair | | | | Fair | | | | Fair | | | | Fair | | | | | Value | | | | Value | | Notional | | Value | | Notional | | Value | | | Notional | | Asset | | Notional | | Asset | | Derivatives designated as hedges: | | Amount | | (Liability) | | Amount | | (Liability) | | Amount | | Asset | | Amount | | Asset | Interest rate swap - pay fixed / receive floating on 3-month brokered deposit | | $ | — | | $ | — | | $ | 20,000 | | $ | 52 | | Interest rate swap - pay fixed / receive floating on 3-month FHLB advance | | | 20,000 | | | 419 | | | — | | | — | | $ | 20,000 | | $ | 55 | | $ | 20,000 | | $ | 268 | Interest rate swaps - forward-starting on long-term FHLB advances | | | — | | | — | | | 20,000 | | | 489 | |
The effect of cash flow hedge accounting on accumulated other comprehensive income for the periods ended September 30, 2022March 31, 2023 and December 31, 20212022 are as follows: | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | September 30, 2022 | | March 31, 2023 | | | Amount of Gain | | Location of (Gain) | | Amount of (Gain) | | Amount of Gain | | Location of Gain | | Amount of Gain | | | (Loss) Recognized in | | Loss Reclassified | | Loss Reclassified | | Recognized in | | Reclassified | | Reclassified from | | | OCI on Derivatives | | from OCI into Income | | from OCI into Income | | OCI on Derivatives | | from OCI into Income | | OCI into Income | Interest rate contract | | $ | (7) | | Interest expense on short-term borrowings and repurchase agreements | | $ | (115) | | $ | 1 | | Interest expense on short-term borrowings and repurchase agreements | | $ | (214) | Swap termination gain | | | 1,202 | | Other non-interest income | | | (1,202) | | Total | | $ | 1,195 | | | | | $ | (1,317) | | $ | 1 | | | | | $ | (214) |
| | | | | | | | | | (Dollars in thousands) | | December 31, 2022 | | | Amount of Gain | | Location of Gain | | Amount of Gain | | | Recognized in | | Reclassified | | Reclassified from | | | OCI on Derivatives | | from OCI into Income | | OCI into Income | Interest rate contract | | $ | 18 | | Interest expense on short-term borrowings and repurchase agreements | | $ | (291) | Swap termination gain | | | 1,202 | | Other non-interest income | | | (1,202) | Total | | $ | 1,220 | | | | | $ | (1,493) |
| | | | | | | | | | (Dollars in thousands) | | December 31, 2021 | | | Amount of Gain | | Location of (Gain) | | Amount of (Gain) | | | (Loss) Recognized in | | Loss Reclassified | | Loss Reclassified | | | OCI on Derivatives | | from OCI into Income | | from OCI into Income | Interest rate contracts | | $ | 538 | | Interest expense on short-term borrowings and repurchase agreements | | $ | 60 | Total | | $ | 538 | | | | | $ | 60 |
The effect of cash flow hedge accounting on the Consolidated Statements of Income for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 is as follows: Amount of Gain or Loss Recognized in Income on Cash Flow Hedging Relationships | | | | | | | | | | | | | | | | | | | | | Income (Expense) | | Income (Expense) | | Income (Expense) | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | (Dollars in thousands) | | September 30, | | September 30, | | March 31, | | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | Effects of cash flow hedging: | | | | | | | | | | | | | | | | | | | Loss on cash flow hedging relationships: | | | | | | | | | | | | | | Gain (loss) on cash flow hedging relationships: | | | | | | | | Amount reclassified from AOCI into income | | $ | 99 | | $ | (17) | | $ | 115 | | $ | (43) | | $ | 214 | | $ | (11) | Amount reclassified from AOCI into income for swap termination | | | (13) | | | — | | | 1,202 | | | — | | Total | | $ | 86 | | $ | (17) | | $ | 1,317 | | $ | (43) | | $ | 214 | | $ | (11) |
13.14. SUBSEQUENT EVENTS
On OctoberApril 18, 2022,2023, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on November 15, 2022,May 17, 2023, payable on DecemberJune 1, 2022.2023. On April 14, 2023, Fitch Ratings downgraded PACW’s subordinated debt to BB from BB+ with a negative ratings outlook. In May 2023, the price of PACW common shares sharply decreased amid concerns about the liquidity of the subsidiary bank. If the credit quality of PACW continues to deteriorate or does not improve, the Company will establish an ACL for the subordinated debt with a corresponding charge to the provision for credit losses. Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements: The information contained in this Quarterly Report on Form 10-Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder). These forward-looking statements may include projections of, or guidance on, the Company’s future financial performance, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Company’s business or financial results. When words such as "may”, "should”, "will”, "could”, "estimates”, "predicts”, "potential”, "continue”, "anticipates”, "believes”, "plans”, "expects”, "future”, "intends”, “projects”, the negative of these terms and other comparable terminology are used in this report, Juniata is making forward-looking statements. Any forward-looking statement made by the Company in this document is based only on Juniata’s current expectations, estimates and projections about future events and financial trends affecting the financial condition of its business based on information currently available to the Company and speaks only as of the date when made. Juniata undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new or updated information, future events, or otherwise. Forward-looking statements are not historical facts or guarantees of future performance. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company’s control, and actual results may differ materially from this forward-looking information and therefore, should not be unduly relied upon. Many factors could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, including, but not limited to: (i) the factors set forth in the sections of Juniata’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and factors set forth in other current and periodic reports which Juniata has or will file with the Securities and Exchange Commission, and (ii) the following factors: | ● | short- and long-term effects of inflation and rising costs; |
| ● | the impact of labor shortages and supply chain disruptions; |
| ● | the impact of rising interest rates; |
| ● | changes in general economic, business and political conditions, including those resulting from COVID-19 or other pandemics,inflation, a recession or intensified international hostilities; |
| ● | the impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand; |
| ● | the effect of market interest rates and uncertainties, and relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income; |
| ● | the effect of competition on rates of deposit and loan growth and net interest margin; |
| ● | increases in non-performing assets, which may result in increases in the allowance for credit losses, loan charge-offs and elevated collection and carrying costs related to such non-performing assets; |
| ● | other income growth, including the impact of regulatory changes which have reduced debit card interchange revenue; |
| ● | investment securities gains and losses, including other than temporary declines in the value of securities which may result in charges to earnings; |
| ● | the effects of changes in the applicable federal income tax rate; |
| ● | the level of other expenses, including salaries and employee benefit expenses; |
| ● | the impact of increased regulatory scrutiny of the banking industry; |
| ● | the impact of governmental monetary and fiscal policies, as well as legislative and regulatory changes; |
| ● | the results of regulatory examination and supervision processes; |
| ● | the failure of assumptions underlying the establishment of reserves for loan and lease losses, and estimations of collateral values and various financial assets and liabilities; |
| ● | the increasing time and expense associated with regulatory compliance and risk management; |
| ● | the ability to implement business strategies, including business acquisition activities and organic branch, product and service expansion strategies; |
| ● | capital and liquidity strategies, including the impact of the capital and liquidity requirements modified by the Basel III standards; |
| ● | the effects of changes in accounting policies, standards, and interpretations on the presentation in the Company’s consolidated balance sheets and consolidated statements of income; |
| ● | the Company’s failure to identify and to address cyber-security risks; |
| ● | the Company’s ability to keep pace with technological changes; |
| ● | the Company’s ability to attract and retain talented personnel; |
| ● | the Company’s reliance on its subsidiary for substantially all its revenues and its ability to pay dividends; |
| ● | acts of war or terrorism; |
| ● | disruptions due to flooding, climate change, severe weather, or other natural disasters; |
| ● | failure of third-party service providers to perform their contractual obligations; |
| ● | the impact of any increased unrealized losses on debt securities on accumulated other comprehensive income and stockholders’ equity; and |
| ● | the possibility of a new COVID-19 variantcontagion in the banking industry because of the recent bank failures and resulting emphasis on liquidity and customer and industry concentrations in the related actions taken by governmental authorities and the direct and indirect impacts on the Company, its customers and third parties.deposit base. |
Critical Accounting Policies: Disclosure of the Company’s significant accounting policies is included in the Company’s critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2021.2022 and in Note 2 of this document. Some of these policies require significant judgments, estimates, and assumptions to be made by management, most particularly in connection with determining the provision for loancredit losses and the appropriate level of the allowance for loancredit losses. General: The following discussion relates to the consolidated financial condition of the Company as of September 30, 2022,March 31, 2023, compared to December 31, 2021,2022, and the consolidated results of operations for the three and nine months ended September 30, 2022,March 31, 2023, compared to the same periodsperiod in 2021.2022. This discussion should be read in conjunction with the interim consolidated financial statements and related notes included herein. Overview: Juniata Valley Financial Corp. is a Pennsylvania corporation organized in 1983 to be the holding company of The Juniata Valley Bank. The Bank is a state-chartered bank headquartered in Mifflintown, Pennsylvania. Juniata Valley Financial Corp. and its subsidiary bank derive substantially all their income from banking and bank-related services, including interest earned on residential real estate, commercial mortgage, commercial and consumer loans, interest earned on investment securities and fee income from deposit services and other financial services provided to its customers. Financial Condition: Total assets as of September 30, 2022,March 31, 2023, were $815.2$831.6 million, an increase of $4.7 million,$762,000, or 0.6%0.1%, compared to December 31, 2021.2022. Comparing asset balances as of September 30, 2022March 31, 2023 and December 31, 2021,2022, total interest bearing time deposits with other banks decreasedcash and cash equivalents increased by $735,000,$904,000, or 100.0%8.2%, as all remaining time deposits with banks matured in 2022.which is reflective of the Company’s overall funding position. Over the same period, total loans increased by $44.1$4.0 million, or 10.5%0.8%, while debt securities available for sale decreased by $48.2$3.0 million, or 14.4%, primarily due to a decline in fair value caused by an increase in market interest rates, as well as1.1%. As of March 31, 2023 the sales of debt securities. Cash flows, as well as the proceeds from the sales of debt securities, were used to repay a $10.0 million brokered demand deposit and to fund loan growth in 2022. Bank owned life insurance and annuities decreased by $1.7allowance for credit losses increased $1.3 million, or 10.2%, as of September 30, 2022 compared to year-end 2021 due to the passing of one active and two former directors in 2022. Additionally, accrued interest receivable and other assets increased $11.7 million, or 200.0% over the same period, primarily due to an increase in the deferred tax asset for unrealized losses on available for sale debt securities. As of September 30, 2022, total deposits increased by $9.4 million, or 1.3%33.4%, compared to December 31, 2021, and2022 primarily due to recording the CECL Day 1 entry of $1.1 million upon the adoption of ASU 326 on January 1, 2023. Total deposits increased by $12.7 million, or 1.8%, as of March 31, 2023 compared to December 31, 2022, which allowed the Company to repay a portion of its overnight FHLB borrowings, resulting in a decrease in short-term borrowings and repurchase agreements increased by $31.6of $12.9 million, or 748.6%23.1%, over the same period primarilyperiod. because Juniata reverted to using $20.0 million in FHLB short-term advances to supplement core deposits to satisfy its funding needs in lieu of brokered demand deposits.
The table below shows changes in deposit volumes by type of deposit between December 31, 20212022 and September 30, 2022.March 31, 2023. | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | September 30, | | December 31, | | Change | | | March 31, | | December 31, | | Change | | | | 2022 | | 2021 | | $ | | % | | | 2023 | | 2022 | | $ | | % | | Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | Demand, non-interest bearing | | $ | 202,493 | | $ | 182,022 | | $ | 20,471 | | 11.2 | % | | $ | 200,044 | | $ | 199,131 | | $ | 913 | | 0.5 | % | Interest bearing demand and money market | | | 231,786 | | | 240,974 | | | (9,188) | | (3.8) | | | | 205,720 | | | 227,028 | | | (21,308) | | (9.4) | | Savings | | | 150,671 | | | 142,187 | | | 8,484 | | 6.0 | | | | 139,280 | | | 143,082 | | | (3,802) | | (2.7) | | Time deposits, $250,000 and more | | | 11,923 | | | 13,547 | | | (1,624) | | (12.0) | | | | 28,020 | | | 13,238 | | | 14,782 | | 111.7 | | Other time deposits | | | 120,961 | | | 129,717 | | | (8,756) | | (6.8) | | | | 151,194 | | | 129,033 | | | 22,161 | | 17.2 | | Total deposits | | $ | 717,834 | | $ | 708,447 | | $ | 9,387 | | 1.3 | % | | $ | 724,258 | | $ | 711,512 | | $ | 12,746 | | 1.8 | % |
As shown in the table below, total loans increased $44.1$4.0 million, or 10.5%0.8%, between December 31, 20212022 and September 30, 2022.March 31, 2023. Juniata experienced loan growth in most of its loan classes, except for personalother construction loans and thereal estate – mortgage loans as well as in obligations of states and political subdivisions. These increases were partially offset by declines in commercial, financial and agricultural, class, which declined primarily due to PPP loan forgiveness payments exceeding commercial loan originations. The largest increases were in the real estate – commercial and mortgage classes.1-4 family residential construction loans. | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | September 30, | | December 31, | | Change | | | March 31, | | December 31, | | Change | | | | 2022 | | 2021 | | $ | | % | | | 2023 | | 2022 | | $ | | % | | Loans: | | | | | | | | | | | | | | | | | | | | | | | | | Commercial, financial and agricultural | | $ | 58,585 | | $ | 62,639 | | $ | (4,054) | | (6.5) | % | | $ | 59,090 | | $ | 61,458 | | $ | (2,368) | | (3.9) | % | Real estate - commercial | | | 189,860 | | | 159,806 | | | 30,054 | | 18.8 | | | Real estate - construction | | | 48,108 | | | 43,281 | | | 4,827 | | 11.2 | | | Real estate - mortgage | | | 142,149 | | | 131,754 | | | 10,395 | | 7.9 | | | Real estate – commercial | | | | 198,558 | | | 199,206 | | | (648) | | (0.3) | | Real estate – construction: | | | | | | | | | | | | | | 1-4 family residential construction | | | | 6,957 | | | 7,995 | | | (1,038) | | (13.0) | | Other construction loans | | | | 46,096 | | | 42,753 | | | 3,343 | | 7.8 | | Real estate – mortgage | | | | 152,746 | | | 150,290 | | | 2,456 | | 1.6 | | Obligations of states and political subdivisions | | | 19,761 | | | 16,323 | | | 3,438 | | 21.1 | | | | 21,012 | | | 18,770 | | | 2,242 | | 11.9 | | Personal | | | 3,967 | | | 4,500 | | | (533) | | (11.8) | | | | 4,038 | | | 4,040 | | | (2) | | (0.0) | | Total loans | | $ | 462,430 | | $ | 418,303 | | $ | 44,127 | | 10.5 | % | | $ | 488,497 | | $ | 484,512 | | $ | 3,985 | | 0.8 | % |
A summary of the activity in the allowance for loancredit losses for the ninethree month periods ended September 30,March 31, 2023 and 2022, and 2021, respectively, is presented below. | | | | | | | | | | | | | | | (Dollars in thousands) | | Nine months ended September 30, | | | Three months ended March 31, | | | | 2022 | | 2021 | | | 2023 | | 2022 | | Balance of allowance - January 1 | | $ | 3,508 | | $ | 4,094 | | | January 1, beginning balance, prior to ASC 326 adoption | | | $ | 4,027 | | $ | 3,508 | | Impact of adopting ASC 326 | | | | 1,111 | | | — | | Loans charged off | | | (32) | | | (10) | | | | (26) | | | (3) | | Recoveries of loans previously charged off | | | 79 | | | 177 | | | | 19 | | | 43 | | Net recoveries | | | 47 | | | 167 | | | | (7) | | | 40 | | Provision for loan losses | | | 350 | | | (536) | | | Balance of allowance - end of period | | $ | 3,905 | | $ | 3,725 | | | Provision for credit losses | | | | 243 | | | 28 | | Balance of allowance – end of period | | | $ | 5,374 | | $ | 3,576 | | | | | | | | | | | | | | | | | Ratio of net recoveries during period to average loans outstanding | | | (0.01) | % | | (0.04) | % | | | 0.00 | % | | (0.01) | % |
Juniata adopted ASU 326 as of January 1, 2023, resulting in the recording of a $1.1 million increase to the allowance for credit losses. While Juniata continued to experience favorable asset quality trends, and net recoveries during the nine months ended September 30, 2022,elevated qualitative risk factors including continuedwere considered due to the uncertainty in the economic outlook caused by inflation, labor shortageseconomy and supply chain disruptions, were consideredthe potential effects of the increasing interest rate environment. A credit loss expense of $243,000 was recorded in its allowancethe three months ended March 31, 2023, compared to a provision expense of $28,000 for loan loss analysis for certain loan segments. Due to these factors, including loan growth of 10.5% during the period, the analysis resulted in a loan lossthree months ended March 31, 2022. provision expense of $350,000 in the nine months ended September 30, 2022. In contrast, a provision credit of $536,000 was recorded for the nine months ended September 30, 2021 resulting from the removal of the additional level of risk on loans previously placed in COVID deferment as those borrowers showed the ability to continue making payments under contractual debt service.
As of September 30, 2022, fifteen loans (excluding loans acquired with existing credit deterioration) with aggregate outstanding balances of $2.4 million were individually evaluated for impairment. A collateral analysis was performed on each of the loans individually evaluated for impairment to evaluate whether a reserve was required based upon the fair value of the collateral securing such loans. Following the analysis, no specific reserve was determined to be required because there were no loans determined to have insufficient collateral at September 30, 2022.
As of September 30, 2022,March 31, 2023, there were $13.7$15.2 million of loans classified as special mention compared to $17.3$11.2 million at December 31, 2021, $3.32022, $1.0 million classified as substandard loans at September 30, 2022March 31, 2023 compared to $8.2$3.2 million at December 31, 2021,2022, and no loans classified as doubtful at either September 30, 2022March 31, 2023 or December 31, 2021. 2022. The increase in special mention loans as of March 31, 2023 compared to December 31, 2022 was primarily due to the downgrade of a commercial real estate construction loan. The decline in substandard loans was primarily due to the partial pay-off of a real estate-commercial loan during the first quarter of 2023, as well as the upgrade of former troubled debt restructured and PCI (now PCD) loans upon the adoptions of ASU 2022-02 and ASU 2016-13, respectively, as these performing loans were only considered substandard at December 31, 2023 because of their PCI and TDR impaired loan classifications. Management believes that the reserves carried are adequate to cover probable incurredforecasted expected credit losses related to these relationships as of September 30, 2022.March 31, 2023. Management also believes the Company has sufficient liquidity and capital and an adequate allowance for loancredit losses to withstand losses that may occur but continues to closely monitor the financial strength of borrowers whoseand their ability to comply with repayment terms mayterms. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when the contractual payment of principal or interest has become permanently impaired.90 days past due or reasonable doubt exists as to the full, timely collection of principal or interest. However, it is the Company’s policy to continue to accrue interest on loans over 90 days past due if (1) they are guaranteed or well secured and (2) there is an effective means of timely collection in process. The following table summarizes the Bank’s non-performing loans excluding loans acquired with credit deterioration, on September 30, 2022March 31, 2023 compared to December 31, 2021.2022. | | | | | | | | | | | | | | | (Dollar amounts in thousands) | | September 30, 2022 | | December 31, 2021 | | | (Dollars in thousands) | | 2022 | | 2021 | | | March 31, 2023 | | December 31, 2022 | | Non-performing loans | | | | | | | | | | | | | | | Non-accrual loans | | $ | 142 | | $ | 141 | | | $ | 51 | | $ | 139 | | Accruing loans past due 90 days or more | | | 8 | | | 85 | | | | — | | | 39 | | Total | | $ | 150 | | $ | 226 | | | $ | 51 | | $ | 226 | | | | | | | | | | | | | | | | | Loans outstanding | | $ | 462,430 | | $ | 418,303 | | | $ | 488,497 | | $ | 484,512 | | | | | | | | | | | | | | | | | Ratio of non-performing loans to loans outstanding | | | 0.03 | % | | 0.05 | % | | | 0.01 | % | | 0.04 | % | Ratio of non-accrual loans to loans outstanding | | | 0.03 | % | | 0.03 | % | | | 0.01 | % | | 0.03 | % | Allowance for loan losses to non-accrual loans | | | 2,750.00 | % | | 2,487.94 | % | | Allowance for credit losses to non-accrual loans | | | | 10,537.25 | % | | 2,897.12 | % |
Total non-performing loans as of September 30, 2022March 31, 2023 decreased $76,000 over$175,000 compared to total non-performing loans as of December 31, 2021,2022, primarily due to a decline in non-accrual loans when performing PCD (formerly PCI) real estate – mortgage loans were returned to accruing status following the adoption of ASC 326, as these loans past due 90 days or more.were only on nonaccrual at December 31, 2023 because of their PCI classifications. Stockholders’ equity decreasedincreased by $36.4 million,$580,000, or 51.0%1.6%, from December 31, 20212022 to September 30, 2022March 31, 2023, primarily due to an increasea decline in unrealized losses on the debt securities available for sale portfolio caused by a decline in market values resulting from changes in market interest rates.portfolio. Subsequent to September 30, 2022,March 31, 2023, the following event took place: On OctoberApril 18, 2022,2023, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on November 15, 2022,May 17, 2023, payable on DecemberJune 1, 2022.2023. Comparison of the Three Months Ended September 30,March 31, 2023 and 2022 and 2021 Operations Overview: Net income for the three months ended September 30, 2022March 31, 2023 was $2.1$1.7 million, an increasea decrease of $223,000,$382,000, or 11.8%18.1%, compared to the three months ended September 30, 2021.March 31, 2022. Basic and diluted earnings per share increased 10.5%, to $0.42,was $0.35 for the three months ended September 30, 2022March 31, 2023 compared to basic and diluted earnings per share of $0.38$0.42 for the comparable 20212022 period. Annualized return on average assets for the three months ended September 30, 2022March 31, 2023 was 1.03%0.83%, compared to the annualized return on average assets of 0.91%1.04% for the same period in 2021.2022. For the three months ended September 30,March 31, annualized return on average equity was 17.90%18.80% in 20222023 compared to 10.19%12.55% in 2021.2022. Presented below are selected key ratios for the two periods: | | | | | | | | | | | | | Three Months Ended | | | Three Months Ended | | | | September 30, | | | March 31, | | | | 2022 | | | 2021 | | | 2023 | | | 2022 | | Return on average assets (annualized) | | 1.03 | % | | 0.91 | % | | 0.83 | % | | 1.04 | % | Return on average equity (annualized) | | 17.90 | % | | 10.19 | % | | 18.80 | % | | 12.55 | % | Average equity to average assets | | 5.74 | % | | 8.94 | % | | 4.44 | % | | 8.30 | % | Non-interest income, as a percentage of average assets (annualized) | | 0.63 | % | | 0.63 | % | | 0.58 | % | | 0.63 | % | Non-interest expense, as a percentage of average assets (annualized) | | 2.42 | % | | 2.37 | % | | 2.29 | % | | 2.39 | % |
The discussion that follows further explains changes in the components of net income when comparing the three months ended September 30, 2022March 31, 2023 with the three months ended September 30, 2021.March 31, 2022. Net Interest Income: Net interest income was $6.0$5.8 million during the three months ended September 30, 2022, an increaseMarch 31, 2023, a decrease of $595,000, or 11.0%2.9%, compared to $5.4$5.9 million during the three months ended September 30, 2021.March 31, 2022. Average earning assets increased $26.5 million, or 3.4%7.9%, to $805.1$829.4 million, during the three months ended September 30, 2022,March 31, 2023 compared to the same period in 2021. The increase in average earning assets between periods was primarily2022, due to an increase of $34.4$68.7 million or 8.2%, in average loans, net of a $21.0 million, or 96.3%, decrease in average PPP loan balances between periods.loans. The increase in average loans was partially offset by a $1.3declines of $6.0 million or 0.4%, decreasein average interest earning deposits and $1.7 million in average investment securities and a $6.6 million, or 51.2%, decrease in average interest bearing deposits and federal funds sold. securities. The yield on earning assets increased 2334 basis points, to 3.39%3.79%, duringin the three months ended September 30, 2022March 31, 2023 compared to same period last year as total loan and investment security yields increased by 14 basis points and 25 basis points, respectively. Average interest bearing liabilities increased by $35.5 million in 2021,the three months ended March 31, 2023 compared to the three months ended March 31, 2022, due to a $45.6 million increase in short-term borrowings, of which $25.6 million was attributed to an increase in average overnight borrowings, while the remaining $20.0 million was due to a shift in funding sources from a brokered interest-bearing demand deposit to a short-term advance. Average interest-bearing deposits decreased by $12.5 million in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to declines in average interest bearing demand and savings deposits, which were partially offset by an increase in average time deposits as customers pursued higher rate deposit products. The cost to fund interest earning assets with interest bearing liabilities increased 693 basis points, to 0.61%1.36%, over the same period, primarily due tocomparable three month periods as the increase in marketcosts of interest rates as both the prime ratebearing deposits and federal funds target rangeborrowings increased by 30078 basis points in the 2022 period.and 95 basis points, respectively. During the three months ended September 30, 2022, average interest bearing liabilities increased by $1.7 million, or 0.3%, compared to the comparable 2021 period, mainly due to growth in average short-term borrowings, as well as savings deposits, which was partially offset by declines in interest bearing demand and time deposits.
The net interest margin, on a fully tax equivalent basis, increaseddecreased from 2.79%3.17% during the three months ended September 30, 2021March 31, 2022 to 2.99%2.85% during the three months ended September 30, 2022.March 31, 2023. The table below shows the net interest margin on a fully tax-equivalent basis for the three months ended September 30, 2022March 31, 2023 and 2021.2022. Average Balance Sheets and Net Interest Income Analysis | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | Three Months Ended | | | | | | | | | | | Three Months Ended | | Three Months Ended | | | | | | | | | | (Dollars in thousands) | | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) Due To (6) | | March 31, 2023 | | March 31, 2022 | | Increase (Decrease) Due To (6) | | | Average | | | | | Yield/ | | Average | | | | | Yield/ | | | | | | | | | | | Average | | | | | Yield/ | | Average | | | | | Yield/ | | | | | | | | | | | | Balance(1) | | Interest | | Rate | | Balance(1) | | Interest | | Rate | | Volume | | Rate | | Total | | Balance(1) | | Interest | | Rate | | Balance(1) | | Interest | | Rate | | Volume | | Rate | | Total | ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable loans (5) | | $ | 426,166 | | $ | 5,075 | | 4.72 | % | $ | 391,359 | | $ | 4,587 | | 4.65 | % | $ | 405 | | $ | 83 | | $ | 488 | | $ | 457,895 | | $ | 5,910 | | 5.23 | % | $ | 389,356 | | $ | 4,914 | | 5.12 | % | $ | 877 | | $ | 119 | | $ | 996 | Tax-exempt loans | | | 28,849 | | | 211 | | 2.91 | | | 29,241 | | | 213 | | 2.89 | | | (3) | | | 1 | | | (2) | | | 28,382 | | | 210 | | 3.00 | | | 28,209 | | | 194 | | 2.78 | | | 1 | | | 15 | | | 16 | Total loans | | | 455,015 | | | 5,286 | | 4.61 | | | 420,600 | | | 4,800 | | 4.53 | | | 402 | | | 84 | | | 486 | | | 486,277 | | | 6,120 | | 5.10 | | | 417,565 | | | 5,108 | | 4.96 | | | 878 | | | 134 | | | 1,012 | Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable investment securities | | | 336,705 | | | 1,493 | | 1.77 | | | 339,222 | | | 1,350 | | 1.59 | | | (10) | | | 153 | | | 143 | | | 332,301 | | | 1,580 | | 1.90 | | | 333,421 | | | 1,377 | | 1.65 | | | (5) | | | 208 | | | 203 | Tax-exempt investment securities | | | 7,092 | | | 37 | | 2.09 | | | 5,899 | | | 36 | | 2.44 | | | 7 | | | (6) | | | 1 | | | 6,808 | | | 36 | | 2.12 | | | 7,427 | | | 40 | | 2.15 | | | (3) | | | (1) | | | (4) | Total investment securities | | | 343,797 | | | 1,530 | | 1.78 | | | 345,121 | | | 1,386 | | 1.61 | | | (3) | | | 147 | | | 144 | | | 339,109 | | | 1,616 | | 1.91 | | | 340,848 | | | 1,417 | | 1.66 | | | (8) | | | 207 | | | 199 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing deposits | | | 6,310 | | | 55 | | 3.43 | | | 8,364 | | | 8 | | 0.36 | | | (2) | | | 49 | | | 47 | | | 4,040 | | | 16 | | 1.59 | | | 10,058 | | | 7 | | 0.29 | | | (4) | | | 13 | | | 9 | Federal funds sold | | | — | | | — | | 0.01 | | | 4,571 | | | — | | 0.00 | | | — | | | — | | | — | | | — | | | — | | 0.01 | | | — | | | — | | 0.00 | | | — | | | — | | | — | Total interest earning assets | | | 805,122 | | | 6,871 | | 3.39 | | | 778,656 | | | 6,194 | | 3.16 | | | 397 | | | 280 | | | 677 | | | 829,426 | | | 7,752 | | 3.79 | | | 768,471 | | | 6,532 | | 3.45 | | | 866 | | | 354 | | | 1,220 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other assets (7) | | | 20,531 | | | | | | | | 54,697 | | | | | | | | | | | | | | | | | 963 | | | | | | | | 44,179 | | | | | | | | | | | | | | | Total assets | | $ | 825,653 | | | | | | | $ | 833,353 | | | | | | | | | | | | | | | | $ | 830,389 | | | | | | | $ | 812,650 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing demand deposits (2) | | $ | 235,203 | | | 317 | | 0.53 | | $ | 237,366 | | | 73 | | 0.12 | | $ | (1) | | $ | 245 | | $ | 244 | | $ | 211,934 | | | 475 | | 0.91 | | $ | 240,974 | | | 85 | | 0.14 | | $ | (10) | | $ | 400 | | $ | 390 | Savings deposits | | | 153,443 | | | 20 | | 0.05 | | | 142,294 | | | 18 | | 0.05 | | | 2 | | | — | | | 2 | | | 139,990 | | | 17 | | 0.05 | | | 146,748 | | | 18 | | 0.05 | | | (1) | | | — | | | (1) | Time deposits | | | 133,824 | | | 343 | | 1.02 | | | 148,666 | | | 464 | | 1.24 | | | (46) | | | (75) | | | (121) | | | 164,045 | | | 951 | | 2.35 | | | 140,728 | | | 359 | | 1.03 | | | 60 | | | 532 | | | 592 | Short-term and long-term borrowings and other interest bearing liabilities | | | 48,508 | | | 192 | | 1.57 | | | 40,905 | | | 235 | | 2.28 | | | 43 | | | (86) | | | (43) | | | 74,413 | | | 541 | | 2.95 | | | 26,474 | | | 130 | | 2.00 | | | 239 | | | 172 | | | 411 | Total interest bearing liabilities | | | 570,978 | | | 872 | | 0.61 | | | 569,231 | | | 790 | | 0.55 | | | (2) | | | 84 | | | 82 | | | 590,382 | | | 1,984 | | 1.36 | | | 554,924 | | | 592 | | 0.43 | | | 288 | | | 1,104 | | | 1,392 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Demand deposits | | | 201,615 | | | | | | | | 184,318 | | | | | | | | | | | | | | | | | 196,843 | | | | | | | | 185,338 | | | | | | | | | | | | | | | Other | | | 5,689 | | | | | | | | 5,334 | | | | | | | | | | | | | | | | | 6,289 | | | | | | | | 4,977 | | | | | | | | | | | | | | | Stockholders’ equity | | | 47,371 | | | | | | | | 74,470 | | | | | | | | | | | | | | | | | 36,875 | | | | | | | | 67,411 | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 825,653 | | | | | | | $ | 833,353 | | | | | | | | | | | | | | | | $ | 830,389 | | | | | | | $ | 812,650 | | | | | | | | | | | | | | | Net interest income and net interest rate spread | | | | | $ | 5,999 | | 2.78 | % | | | | $ | 5,404 | | 2.61 | % | $ | 399 | | $ | 196 | | $ | 595 | | | | | $ | 5,768 | | 2.43 | % | | | | $ | 5,940 | | 3.02 | % | $ | 578 | | $ | (750) | | $ | (172) | Net interest margin on interest earning assets (3) | | | | | | | | 2.96 | % | | | | | | | 2.75 | % | | | | | | | | | | | | | | | | 2.82 | % | | | | | | | 3.13 | % | | | | | | | | | Net interest income and net interest margin - Tax equivalent basis (4) | | | | | $ | 6,065 | | 2.99 | % | | | | $ | 5,470 | | 2.79 | % | | | | | | | | | | | | | $ | 5,833 | | 2.85 | % | | | | $ | 6,002 | | 3.17 | % | | | | | | | | |
Notes: | 1) | Average balances were calculated using a daily average. |
| 2) | Includes interest-bearing demand and money market accounts. |
| 3) | Net margin on interest earning assets is net interest income divided by average interest earning assets. |
| 4) | Interest on obligations of states and municipalities is not subject to federal income tax. To make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 21%. |
| 5) | Non-accruing loans are included in the above table until they are charged off. |
| 6) | The change in interest due to rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. |
| 7) | Includes gross unrealized gains (losses) on securities available for sale. |
44Allowance for Credit Losses (“ACL”):
Provision for Loan Losses:
During the three months ended September 30, 2022, a $100,000 loan loss provision expense was recorded, compared to a provision creditCredit Losses on Financial Instruments as of $257,000 during the three months ended September 30, 2021. Loan growth, coupled with the continued uncertaintyJanuary 1, 2023, resulting in the recording of a $1.1 million increase to the allowance for credit losses. The new current expected credit loss (CECL) model is based on forecasted economic outlook duescenarios as well as qualitative factors specific to inflation, labor shortages and supply chain disruptions, resulted in an increased loan loss provision, despite favorable asset quality trends duringJuniata. The ACL represents management’s assessment of the three months ended September 30, 2022.estimated credit losses the Company will receive over the life of the loan. ACL requires a projection of credit losses over the contract lifetime of the credit adjusted for prepayment tendencies.
Management regularly reviewsanalyzes the adequacy of the allowance forACL regularly through reviews of the loan losses and makes assessments asportfolio. Consideration is given to specific loan impairment, charge-off expectations, general economic conditions, changes in interest rates and the effect of such changes on collateral values and borrowers’ ability to pay, changes in the Bank’s market area, specificcomposition of the loan qualityportfolio and other factors. Seetrends in past due and non-performing loan balances. The ACL is a material estimate that is susceptible to significant fluctuation and is established through a provision for credit losses based on management’s evaluation of the earlier discussioninherent risk in the Financial Condition section explainingloan portfolio. In addition to extensive in-house loan monitoring procedures, the information usedCompany utilizes an outside party to determineconduct an independent loan review of commercial loan and commercial real estate loan relationships. Management utilizes the provision. Non-interest Income:
Non-interest income duringresults of this outside loan review to assess the three months ended September 30, 2022 was $1.3 million in both three month periods ended September 30, 2022 and 2021. Most significantly impacting non-interest income in the comparative three month periods was a $378,000 loss on sales and callseffectiveness of securities due to the execution of a balance sheet and regulatory capital management strategy,its internal loan grading system as well as a $68,000 declineto assist in the assessment of the overall adequacy of the ACL associated with these types of loans.
The ACL is made up of two basic components. The first component of the allowance for credit loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual analyzed credits. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans monthly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of equity securities duringany collateral and the three months ended September 30,financial strength of any guarantors. If the loan is individually analyzed and cash flow dependent, then a specific reserve is established for the discount on the net present value of expected future cash flows. If the loan is individually analyzed and collateral dependent, then any shortfall is either charged off or a specific reserve is established. The Company also considers the impacts of any Small Business Administration guarantees. The specific reserve portion of the ACL was $5,000 at March 31, 2023, while there was no specific reserve at December 31, 2022. These declines were partially offset by receipt The second component is a general reserve, which is used to record loan loss reserves for groups of $329,000homogenous loans for which the Company estimates the expected losses over the contractual lifetime of the loan, adjusted for prepayment tendencies. In addition, the future economic environment is incorporated into the projection with selected macro-economic variables to revert to the long-run historical mean after such time as management can no longer make or obtain a reasonable and supportable forecast. Discounted cash flows (“DCF”) was selected as the appropriate method to analyze most of the Company’s loan segments, particularly loan segments with longer average lives and regular payment structures, because DCF allows for the effective incorporation of a reasonable and supportable forecast in life insurance proceedsa directionally consistent and objective manner. DCF generates cash flow projections at the instrument level where payment expectations are adjusted for prepayment and curtailment to produce an $83,000 increase in fees derived from loan activity during the three months ended September 30, 2022expected cash flow stream. This expected cash flow stream is compared to the three months ended September 30, 2021.contractual cash flows to establish a valuation account for these loans. As a percentage ofThe personal loan portfolio contains loans with many different payment structures, payment streams and collateral. The Weighted Average Remaining Life (“WARM”) method was deemed most appropriate for these loans. WARM uses an annual charge-off rate over several vintages to estimate credit losses. The average assets, annualized non-interest income was 0.63% in each of the three months ended September 30, 2022 and 2021. Excluding the gain/loss on sales and calls of securities, change in fair value of equity securities and life insurance proceeds, annualized non-interest income as a percentage of average assets was 0.67% for the three months ended September 30, 2022 compared to 0.61% for the three months ended September 30, 2021.
Non-interest Expense:
Non-interest expense was $5.0 million for the three months ended September 30, 2022, compared to $4.9 million for the same period in 2021, an increase of $59,000, or 1.2%. Most significantly impacting non-interest expense in the comparative three month periods was a $63,000 increase in FDIC insurance premiums, which was partially offset by a decline of $44,000 in data processing expense primarily from a reduction in core processing expenses for the three months ended September 30, 2022 comparedannual charge-off rate is applied to the three months ended September 30, 2021.
As a percentage of average assets, annualized non-interest expense was 2.42% during the three months ended September 30, 2022 compared to 2.37% during the three months ended September 30, 2021.
Provisioncontractual term adjusted for income taxes:
An income tax provision of $102,000 was recorded in the three months ended September 30, 2022, compared to an income tax provision of $142,000 recorded during the three months ended September 30, 2021 as taxable income was lower for the 2022 period primarily due to the receipt of non-taxable life insurance proceeds during the 2022 period.
The Company qualifies for a federal tax credit for low-income housing project investments, and the tax provisions for each period reflect the application of the tax credit. For the three months ended September 30, 2022 and 2021, the tax credit was $225,000, offsetting $327,000 and $367,000 in tax expense in the 2022 and 2021 periods, respectively. For the three months ended September 30, 2022, the tax credit lowered the effective tax rate from 14.7% to 4.6% compared to the same period in 2021, when the tax credit lowered the effective tax rate from 18.0% to 7.0%.
prepayments.
ComparisonAdditionally, the Company is using reasonable credit risk assumptions, based on an annual report produced by Moody’s for the obligations of states and political subdivisions segment.
CECL requires a reasonable and supportable economic forecast when establishing the ACL. The Company estimates losses over a four quarter forecast period and has elected to revert historical loss experience over four quarters. The economic factors considered as part of the Nine Months Ended September 30, 2022ACL were selected after a rigorous regression analysis and 2021model selection process. Operations Overview:The quantitative general allowance increased to $2.6 million at March 31, 2023, up from $2.5 million at January 1, 2023.
Net incomeIn addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide additional general reserves on loan portfolios that are not individually analyzed for various factors. The overall qualitative factors are based on the following risk factors:
| 1) | Lending Policy, Procedures, & Strategies - Changes in policy and/or underwriting standards as well as anticipated changes are considered, and a qualitative factor is applied in accordance with the magnitude and direction (loosening/tightening) of the change. In addition, any new loan programs will also be taken into consideration when evaluating this factor. |
| 2) | Changes in Nature and Volume of the Portfolio - The composition of the Bank’s loan portfolio is assessed to evaluate possible risk changes arising from new or increasing types of loans, industries or collateral. |
| 3) | Credit & Lending Staff/Administration - The knowledge and experience of the lending and credit personnel will be assessed. |
| 4) | Problem Loan Trends - The level of delinquency, modifications, and extensions is used to measure the trends of the risk changes within the portfolio. |
| 5) | Concentrations - As an extension of the portfolio composition review, lending concentrations will be monitored regularly. Concentrations maybe measured by collateral, type, industry, and geographical location. |
| 6) | Loan Review Results - Loan reviews conducted internally as well as by outside auditors or examiners are studied for indications of possible risk changes. |
| 7) | Collateral Values - Changes in market values of the underlying collateral are monitored on select loan types and pools. Examples could include housing, CRE or cattle prices. These variations may indicate the need for risk adjustment as future loss levels could change if liquidation becomes necessary. |
| 8) | Regulatory and Business Environment - The impact of government fiscal and business policy as well as the regulatory environment are monitored and may result in possible adjustments to the risk factors. |
In determining how to apply the weightings for the nine months ended September 30, 2022 was $6.2 million,various qualitative factors, management considered which factors were not entirely considered within the base model and assessed which factors would have the highest impact on potential loan losses. Weights and risks are consistent across various segments except for instances where the risk factor is not applicable, or the segment is more or less exposed than other segments. Risk weighting is adjusted directionally based on relevancy and the ability to quantify an increaseimpact. For example, the economy and external factors were determined to have the most significant effect on the estimated losses largely because there is mathematical/documented evidence that economic conditions are largely correlated and can explain a significant portion of $947,000, or 18.0%, compared tohistorical changes in loss. Likewise, risks that are well-controlled throughout the nine months ended September 30, 2021, while basicorganization such as managerial contingencies and diluted earnings per share increased by 18.1%, to $1.24, during the first nine months of 2022 compared to basic and diluted earnings per share of $1.05 during the comparable 2021 period.loan review controls require less allocation. Annualized return on average assets for the nine months ended September 30, 2022 was 1.01%, compared to 0.86% for the same period in 2021. For the nine months ended September 30, annualized return on average equity was 15.02% in 2022, compared to 9.47% in 2021.
Presented below are selected key ratios for the two periods:
| | | | | | | | | Nine Months Ended | | | | September 30, | | | | 2022 | | | 2021 | | Return on average assets (annualized) | | 1.01 | % | | 0.86 | % | Return on average equity (annualized) | | 15.02 | % | | 9.47 | % | Average equity to average assets | | 6.74 | % | | 9.10 | % | Non-interest income, as a percentage of average assets (annualized) | | 0.65 | % | | 0.63 | % | Non-interest expense, as a percentage of average assets (annualized) | | 2.42 | % | | 2.35 | % |
The discussion that follows further explains changes in the components of net income when comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021.
Net Interest Income:
Net interest income was $18.0 million during the nine months ended September 30, 2022, an increase of $2.5 million, or 15.6%, compared to $15.5 million recorded during the nine months ended September 30, 2021.
Average earning assets increased $26.6 million, or 3.5%, to $788.8 million, during the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to an increase of $28.5 million, or 8.9%, in average investment securities, as well as a $5.1 million, or 1.2%, increase in average loans, net of a $22.2 million, or 85.8%, decrease in average PPP loan balances between periods.
The yield on earning assets during the nine months ended September 30, 2022 increased by 24 basis points, to 3.41%, compared to same period in 2021 due to several factors, including the increase in market interest rates, driven by an increase of 300 basis points in the federal funds target range and prime rate during the current 2022 period, as well as the growth in taxable investment securities and the collection of $645,000 in interest on a previously charged off nonaccrual loan during the nine months ended September 30, 2022. Over the same periods, the cost to fund interest earning assets with interest bearing liabilities decreased nine basis points, to 0.51%, primarily due to the decline in higher cost average time deposits and long-term borrowings during the period. During the nine months ended September 30, 2022, average interest bearing liabilities increased by $7.1 million, or 1.3%, compared to the comparable 2021 period, due to growth in average interest-bearing demand and savings deposits, which was partially offset by decreases in average time deposits, long-term debt and FRB advances.
The net interest margin, on a fully tax equivalent basis, increased from 2.76% during the nine months ended September 30, 2021 to 3.08% during the nine months ended September 30, 2022.
The table below shows the net interest margin onqualitative analysis resulted in a fully tax-equivalent basis for the nine months ended September 30, 2022 and 2021.general reserve of $2.7 million at March 31, 2023, compared to $2.6 million at January 1, 2023. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended | | Nine Months Ended | | | (Dollars in thousands) | | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) Due To (6) | | | Average | | | | | Yield/ | | Average | | | | | Yield/ | | | | | | | | | | | | Balance(1) | | Interest | | Rate | | Balance(1) | | Interest | | Rate | | Volume | | Rate | | Total | ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | Interest earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable loans (5) | | $ | 404,863 | | $ | 14,853 | | 4.90 | % | $ | 396,684 | | $ | 13,680 | | 4.61 | % | $ | 283 | | $ | 890 | | $ | 1,173 | Tax-exempt loans | | | 27,669 | | | 593 | | 2.87 | | | 30,763 | | | 691 | | 3.00 | | | (70) | | | (28) | | | (98) | Total loans | | | 432,532 | | | 15,446 | | 4.77 | | | 427,447 | | | 14,371 | | 4.50 | | | 213 | | | 862 | | | 1,075 | Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable investment securities | | | 341,864 | | | 4,479 | | 1.75 | | | 314,501 | | | 3,543 | | 1.50 | | | 308 | | | 628 | | | 936 | Tax-exempt investment securities | | | 7,313 | | | 117 | | 2.13 | | | 6,165 | | | 112 | | 2.42 | | | 21 | | | (16) | | | 5 | Total investment securities | | | 349,177 | | | 4,596 | | 1.75 | | | 320,666 | | | 3,655 | | 1.52 | | | 329 | | | 612 | | | 941 | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing deposits | | | 7,122 | | | 80 | | 1.50 | | | 8,439 | | | 18 | | 0.29 | | | (2) | | | 64 | | | 62 | Federal funds sold | | | — | | | — | | — | | | 5,680 | | | 1 | | 0.01 | | | (1) | | | — | | | (1) | Total interest earning assets | | | 788,831 | | | 20,122 | | 3.41 | | | 762,232 | | | 18,045 | | 3.17 | | | 539 | | | 1,538 | | | 2,077 | | | | | | | | | | | | | | | | | | | | | | | | | | | Other assets (7) | | | 30,702 | | | | | | | | 54,007 | | | | | | | | | | | | | | | Total assets | | $ | 819,533 | | | | | | | $ | 816,239 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing demand deposits (2) | | $ | 239,399 | | | 593 | | 0.33 | | $ | 215,489 | | | 227 | | 0.14 | | $ | 25 | | $ | 341 | | $ | 366 | Savings deposits | | | 150,739 | | | 57 | | 0.05 | | | 136,906 | | | 51 | | 0.05 | | | 5 | | | 1 | | | 6 | Time deposits | | | 137,341 | | | 1,042 | | 1.01 | | | 151,123 | | | 1,493 | | 1.32 | | | (136) | | | (315) | | | (451) | Short-term and long-term borrowings and other interest bearing liabilities | | | 38,892 | | | 463 | | 1.59 | | | 55,798 | | | 734 | | 1.76 | | | (223) | | | (48) | | | (271) | Total interest bearing liabilities | | | 566,371 | | | 2,155 | | 0.51 | | | 559,316 | | | 2,505 | | 0.60 | | | (329) | | | (21) | | | (350) | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | Demand deposits | | | 192,661 | | | | | | | | 177,646 | | | | | | | | | | | | | | | Other | | | 5,291 | | | | | | | | 5,028 | | | | | | | | | | | | | | | Stockholders’ equity | | | 55,210 | | | | | | | | 74,249 | | | | | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 819,533 | | | | | | | $ | 816,239 | | | | | | | | | | | | | | | Net interest income and net interest rate spread | | | | | $ | 17,967 | | 2.90 | % | | | | $ | 15,540 | | 2.57 | % | $ | 868 | | $ | 1,559 | | $ | 2,427 | Net interest margin on interest earning assets (3) | | | | | | | | 3.05 | % | | | | | | | 2.73 | % | | | | | | | | | Net interest income and net interest margin - Tax equivalent basis (4) | | | | | $ | 18,155 | | 3.08 | % | | | | $ | 15,753 | | 2.76 | % | | | | | | | | |
Notes:
1) | Average balances were calculated using a daily average. |
2) | Includes interest-bearing demand and money market accounts. |
3) | Net margin on interest earning assets is net interest income divided by average interest earning assets. |
4) | Interest on obligations of states and municipalities is not subject to federal income tax. To make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 21%. |
5) | Non-accruing loans are included in the above table until they are charged off. |
6) | The change in interest due to rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. |
7) | Includes gross unrealized gains (losses) on securities available for sale. |
TableThe determination of Contentsthe ACL is complex, and the Company makes decisions on the effects of matter that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgements as to the facts and circumstances related to particular situations or credits. There may be significant changes in the ACL in future periods determined by factors prevailing at that point in time along with future forecasts.
Provision for Loan Losses:
A loan loss provision expense of $350,000 was recorded during the nine months ended September 30, 2022, compared to a provision credit of $536,000 in the nine months ended September 30, 2021. While Juniata continued to experience favorable asset quality trends and net recoveries during the nine months ended September 30, 2022, elevated qualitative risk factors were considered in its allowance for loan loss analysis for certain loan segments due to the uncertainty in the economy and the potential for a recession as inflation, labor shortages and supply chain disruptions remain prevalent. Additionally, loan growth of 10.5% as of September 30, 2022 compared to December 31, 2021 was also a factor in the increase in Juniata’s loan loss provision for the nine months ended September 30, 2022.
Management regularly reviews the adequacy of the allowance for loan losses and makes assessments as to specific loan impairment, charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. See the earlier discussion in the Financial Condition section explaining the information used to determine the provision.
Non-interest Income: Non-interest income was $4.0$1.2 million duringfor the ninethree months ended September 30, 2022March 31, 2023, compared to $3.9$1.3 million duringfor the ninethree months ended September 30, 2021, an increaseMarch 31, 2022, a decrease of $88,000, or 2.3%4.9%. Most significantly impacting non-interest income for the comparative ninethree month periods was a $1.5 million loss on sales and calls of securities in the 2022 period due to the execution of a balance sheet and regulatory capital management strategy in which the security losses were partially offset by $1.2 million in gains from the termination of two derivatives contracts, recorded in other non-interest income. See Notes 5 and 12 in the Notes to Consolidated Financial Statements. Additionally, the change in value of equity securities during the nine months ended September 30, 2022 decreased by $249,000 compared to the nine months ended September 30, 2021 due to declines in bank stock market values, which was partially offset by increases of $119,000decreases in fees derived from loan activity of $37,000, as well as customer service and $380,000 in life insurance proceeds intrust fees of $34,000 and $23,000, respectively, during the 2022 period.three months ended March 31, 2023 compared to the three months ended March 31, 2022. As a percentage of average assets, annualized non-interest income was 0.65%0.58% for the ninethree months ended September 30, 2022March 31, 2023 compared to 0.63% for the comparable 2021 period. Excluding the gain/loss on sales and calls of securities, change in fair value of equity securities and life insurance proceeds, annualized non-interest income as a percentage of average assets was 0.84% for the ninethree months ended September 30, 2022 compared to 0.60% for the nine months ended September 30, 2021.March 31, 2022. Non-interest Expense: Non-interest expense was $14.9decreased by 2.2%, to $4.8 million, duringin the ninethree months ended September 30, 2022March 31, 2023, compared to $14.4$4.9 million duringfor the ninethree months ended September 30, 2021, an increase of $496,000, or 3.4%.March 31, 2022. Most significantly impacting non-interest expense infor the comparative ninethree month periods was a $307,000 increasean $89,000 decrease in employee compensation and benefits expenseamortization of investment in low-income housing partnerships due to temporary duplicationthe completion of compensation and benefits expense becausethe amortization period for one of employee transitions, as well as increased medical claims expenses.two of Juniata’s partnership investments in January 2023. Also contributing to the increasedecline in non-interest expense wasfor the three months ended March 31, 2023 compared to the same period in 2022 were declines in occupancy and PA Bank Shares tax expenses of $27,000 and $22,000, respectively, as well as a $76,000 increasedecrease of $21,000 in FDIC insurance premiumspremiums. Partially offsetting these decreases was an increase of $34,000 in employee benefits expense, primarily due to an increase in medical claims and a $42,000 decline in the gain on other real estate ownedinsurance expenses, for the ninethree months ended September 30, 2022 versusMarch 31, 2023 compared to the comparable 2021 period. These increases were partially offset by a $71,000 decline in data processing expense.three months ended March 31, 2022. As a percentage of average assets, annualized non-interest expense was 2.42% during2.29% for the ninethree months ended September 30, 2022March 31, 2023 compared to 2.35% during2.39% for the ninethree months ended September 30, 2021.March 31, 2022. Provision for income taxes: An income tax provision of $488,000$247,000 was recorded duringfor the ninethree months ended September 30, 2022March 31, 2023 compared to an income tax expenseprovision of $302,000$209,000 recorded duringfor the ninethree months ended September 30, 2021, primarily due to higher taxable income earned in the 2022 period. The CompanyMarch 31, 2023. Juniata qualifies for a federal tax credit for ainvestments in low-income housing project investment, andpartnerships. The tax credit decreased from $225,000 for the tax provisionsthree months ended March 31, 2022 to $119,000 for each period reflected the applicationthree months ended March 31, 2023 due to the completion of the amortization period for one of Juniata’s investments in low-income housing partnerships resulting in an increase in the income tax credit. provision between periods.
For the first nine months of 2022 and 2021, the tax credits were $676,000 in both periods, offsetting $1.2 million in tax expense recorded during the ninethree months ended September 30, 2022 and $978,000 in tax expense recorded inMarch 31, 2023, the comparable 2021 period. The tax credit lowered the effective tax rate from 17.4%18.5% to 7.3% during the first nine months of 202212.5% compared to the same period in 2021,2022, when the tax credit lowered the effective tax rate from 17.5%18.7% to 5.4%9.0%. Liquidity: The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Company and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is a primary goal of the Company to maintain an adequate level of liquidity in all economic environments. Principal sources of asset liquidity are provided by loans and securities maturing in one year or less, and other short-term investments, such as federal funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Company is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity to supplement other sources of liquidity liability.liability liquidity. During the ninethree months ended September 30, 2022,March 31, 2023, overnight borrowings from the Federal Home Loan BankFHLB averaged $739,000.$25.8 million. As of September 30, 2022,March 31, 2023, the Company had $29.0$34.0 million in short-term borrowings and $20.0 million in long-term debt with the Federal Home Loan Bank, with a remaining unused borrowing capacity of $148.9$171.7 million with the FHLB. The Company may use brokered deposits as an additional funding alternative. Brokered depositsAs of $30.0 million were included in total interest-bearing deposits as of DecemberMarch 31, 2021. The2023, the Company had no brokered depositsborrowings from either the Federal Reserve’s Discount Window or the new Bank Term Funding Program (“BTFP”). While the Company is eligible to participate in the BTFP as a potential contingent liquidity source with the ability to borrow approximately $20.0 million, it has not borrowed from the BTFP to date due to the general stability in the Company’s deposit funding. Additionally, the Company has two unsecured lines of September 30, 2022.credit with correspondent banks totaling $16.0 million, of which no funds were drawn at March 31, 2023.
Funding derived from securities sold under agreements to repurchase (accounted for as collateralized financing transactions) is available through corporate cash management accounts for business customers. This product provides the Company with the ability to pay interest on corporate checking accounts. During the first quarter of 2023, the Company increased its internal policy limit for brokered deposits to $175.0 million from $100.0 million. As of March 31, 2023, the company had no brokered deposits. At March 31, 2023, uninsured deposits represented 21.6% of the Company’s total deposits. This amount excludes deposits of state and political subdivisions because the Company pledges debt securities for deposits in excess of the $250,000 FDIC insurance limit. In view of the sources previously mentioned and the steps taken by the Company during the first quarter of 2023, management believes that the Company’s liquidity can provide the funds needed to meet operational cash needs. Off-Balance Sheet Arrangements: The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk and interest rate risk. These commitments consist mainly of loans approved but not yet funded, unused lines of credit and outstanding letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company had $3.7$2.5 million and $5.7$2.6 million, respectively, of financial and performance letters of credit commitments outstanding. Commercial letters of credit as of September 30, 2022March 31, 2023 and December 31, 20212022 totaled $9.9$9.7 million and $9.5$9.8 million, respectively. Management believes the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding letters of credit. The current amount of the liability as of September 30, 2022March 31, 2023 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk. Additionally, the Company has sold qualifying residential mortgage loans to the FHLB as part of its Mortgage Partnership Finance Program (“Program”). Under the terms of the Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan sold under the Program is “credit enhanced” such that the individual loan’s rating is raised to “BBB”, as determined by the FHLB. The Program can be terminated by either the FHLB or the Company, without cause. The FHLB has no obligation to commit to purchase any mortgage through, or from, the Company. Interest Rate Sensitivity: Interest rate sensitivity management is overseen by the Asset/Liability Management Committee. This process involves the development and implementation of strategies to maximize net interest margin, while minimizing the earnings risk associated with changing interest rates. Traditional gap analysis identifies the maturity and re-pricing terms of all assets and liabilities. A simulation analysis is used to assess earnings and capital at risk from movements in interest rates. Capital Adequacy: Bank regulatory authorities in the United States issue risk-based capital standards. These capital standards relate a banking company’s capital to the risk profile of its assets and provide the basis by which all banking companies and banks are evaluated in terms of capital adequacy. The Basel III risk-based capital standards require financial institutions to maintain: (a) a minimum ratio of common equity tier 1 (“CET1”) to risk-weighted assets of at least 4.5%, (b) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%; (c) a minimum ratio of total (that is, tier 1 plus tier 2) capital to risk-weighted assets of at least 8.0%); and (d) a minimum leverage ratio of 4.0%, calculated as the ratio of tier 1 capital balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). In addition, the rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5% above the minimum risk-based standards stated in (a) - (c) above. At September 30, 2022,March 31, 2023, the Bank exceeded the regulatory requirements to be considered a "well capitalized" financial institution under Basel III. The Company’s principal source of funds for dividend payments is dividends received from the Bank. Certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. At September 30, 2022, $33.9March 31, 2023, $36.6 million in undistributed earnings of the Bank, included in the consolidated stockholders’ equity, was available for distribution to the Company as dividends without prior regulatory approval, subject to regulatory capital requirements. Item 4. Controls and Procedures Disclosure Controls and Procedures As of September 30, 2022,March 31, 2023, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined by the Securities Exchange Act of 1934 (“Exchange Act”), Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluations,evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective because of a material weakness in our internal control over financial reporting, specifically the Company did not maintain controls over the computation of Tier 1 regulatory capital deductions related to the Bank’s investments in subordinated debt issued by other financial institutions. In the second quarter of 2022, management determined the Bank’s call reports for the quarters ended September 30, 2021, December 31, 2021, and March 31, 2022, included an error in the computation of Tier 1 regulatory capital in connection with the Bank’s investments in subordinated debt issued by other financial institutions, which was a resultas of the material weakness discussed above. While the impactend of the error was immaterial, and the Bank was well capitalized during these periods, the material weakness could result in a misstatement of the Tier I regulatory capital that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. As a result, management concluded a material weakness in internal control over financial reporting was present during those periods and has not been remediated as of September 30, 2022. Management's Plan to Remediate Material Weakness
We developed a detailed plan for remediation of the material weakness, including enhancing management's review of controls over the preparation of Call Report schedule RC-R Part I regarding the limitation on subordinated debt issuedperiod covered by other financial institutions. We intend to remediate this material weakness as soon as possible, and we will continue to assess the effectiveness of our remediation efforts in connection with our future assessment of the effectiveness of internal control over financial reporting and disclosure controls and procedures. We estimate that we will remediate this material weakness by December 31, 2022. Until this material weakness is remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with GAAP.quarterly report.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote. Attached as Exhibits 31 and 32 to this quarterly report are certifications of the Chief Executive Officer and the Chief Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act. This portion of the Company’s quarterly report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented. Changes in Internal Control Over Financial Reporting There were no significant changes in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2022,March 31, 2023, that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In the opinion of management of the Company, there are no legal or governmental proceedings pending to which the Company or its subsidiary is a party or to which its property is subject, which, if determined adversely to the Company or its subsidiary, would be material in relation to the Company’s or its subsidiary’s financial condition. There are no proceedings pending other than ordinary routine litigation incident to the business of the Company or its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company or its subsidiary by government authorities. Item 1A. RISK FACTORS There have been no other material changes toManagement has reviewed the risk factors that were previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. There are no material changes in risk factors as previously disclosed in the Form 10-K except as described below.
Resent adverse developments affecting the financial services industry, such as bank failures or concerns involving liquidity of banks, may have a material adverse effect on the Company’s operations. Recent events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, March 12, 2023 and May 1, 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank (“SVB”), Signature Bank and First Republic Bank (“First Republic”), respectively, after each bank was unable to continue their operations largely due to concerns about each bank’s liquidity position. These events exposed potential vulnerabilities in the banking sector, including liquidity concerns, debt securities in bank investment portfolios yielding lower interest rates than current market rates (when the carrying value of these securities are “marked to market”, a corresponding decrease in the bank’s capital is recorded), deposit concentrations, a decline in customer confidence in individual banks and in the banking industry in general, significant deposit outflows, difficulty in raising additional capital, market volatility and contagion risk. These factors have also caused market prices of regional bank stocks to decline. To date, the Company has not experienced any adverse impact to current and projected business operations, financial condition and results of operations as a result of the SVB, Signature Bank, Republic Bank or other recent bank failures. However, we are unable to predict the extent or nature of the impacts of these evolving circumstances at this time. If, for example, other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, the Company’s ability to access existing cash, cash equivalents and investments may be threatened. Therefore, while it is not currently possible to predict the potential impact that the failure of SVB, Signature Bank, First Republic or other bank failures could have on economic activity or the Company’s business in particular, the failure of other banks and financial institutions and the measures taken by governments, businesses and other organizations in response to these events could adversely impact the Company’s business, financial condition and results of operations. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Company periodically repurchases shares of its common stock under a share repurchase program approved by the Board of Directors. In November of 2021, the Board of Directors authorized the repurchase of an additional 200,000 shares of its common stock through the Company’s share repurchase program for a total of 209,307 shares authorized to be repurchased at that time. The program will remain authorized until all approved shares are repurchased, unless terminated by the Board of Directors. As of September 30, 2022, 208,312March 31, 2023, 207,743 shares remained available to purchase under that program. Transactions pursuant to the repurchase program in the three month period ended September 30, 2022March 31, 2023 are shown below. | | | | | | | | | |
|
|
|
|
|
| Total Number of
|
|
|
|
| Total Number
|
|
|
| Shares Purchased as
|
| Maximum Number of
|
|
| of Shares
|
| Average
|
| Part of Publicly
|
| Shares that May Yet Be
|
|
| Purchased or Restricted
|
| Price Paid
|
| Announced Plans or
|
| Purchased Under the
| Period
|
| Shares Forfeited
|
| per Share
|
| Programs
|
| Plans or Programs (1)
| July 1-31, 2022
| | —
|
| $
| —
| | —
|
| 208,312
| August 1-31, 2022
| | —
|
|
| —
|
| —
|
| 208,312
| September 1-30, 2022
| | —
|
|
|
|
| —
|
| 208,312
|
|
|
|
|
|
|
|
|
|
| Totals
| | —
|
| | | | —
| | 208,312
|
| | | | | | | | | | | | | | | | Total Number of | | | | | Total Number | | | | Shares Purchased as | | Maximum Number of | | | of Shares | | Average | | Part of Publicly | | Shares that May Yet Be | | | Purchased or Restricted | | Price Paid | | Announced Plans or | | Purchased Under the | Period | | Shares Forfeited | | per Share | | Programs | | Plans or Programs (1) | January 1-31, 2023 | | — | | $ | — | | — | | 208,312 | February 1-28, 2023 | | 569 | | | 16.25 | | 569 | | 207,743 | March 1-31, 2023 | | — | | | | | — | | 207,743 | | | | | | | | | | | Totals | | 569 | | | | | 569 | | 207,743 |
No repurchase plan or program expired during the quarter. The Company has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases. Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable Item 4. MINE SAFETY DISCLOSURES Not applicable Item 5. OTHER INFORMATION None Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | Juniata Valley Financial Corp. | | | (Registrant) | | | | | Date: | NOVEMBER 14, 2022MAY 12, 2023
| By: | /s/ Marcie A. Barber | | | | Marcie A. Barber, President | | | | Chief Executive Officer | | | | (Principal Executive Officer) | | | | | Date: | November 14, 2022May 12, 2023
| By: | /s/ Michael W. Wolf | | | | Michael W. Wolf | | | | Chief Financial Officer | | | | (Principal Accounting Officer and | | | | Principal Financial Officer) |
|