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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________________.
Commission file number: 0-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90-92 MAIN STREET, WELLSBORO, PA16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock Par Value $1.00 CZNC NASDAQ Capital Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻No⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻No⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,“ “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻Accelerated filer⌧ Non-accelerated filer ◻ Smaller reporting company ◻ Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ◻
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2022, the registrant’s most recently completed second fiscal quarter, was $358,448,836.
The number of shares of common stock outstanding at March 10, 2023 was 15,562,881.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 20, 2023 are incorporated by reference into Parts III and IV of this report.
Table of Contents
TABLE OF CONTENTS
Page(s)
Part I:
Item 1. Business 3-5
Item 1A. Risk Factors 5-8
Item 1B. Unresolved Staff Comments 8
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Mine Safety Disclosure 9
Part II.
Item 6. Reserved 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 39-41
Item 8. Financial Statements and Supplementary Data 42-97
Item 9A. Controls and Procedures 98
Item 9B. Other Information 99
Part III:
Item 10. Directors, Executive Officers and Corporate Governance 99
Item 11. Executive Compensation 99
Item 14. Principal Accountant Fees and Services 99
Part IV:
Item 15. Exhibits and Financial Statement Schedules 100-104
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PART I
ITEM 1. BUSINESS
Citizens & Northern Corporation (“Corporation”) is a holding company whose principal activity is community banking. The Corporation’s principal office is located in Wellsboro, Pennsylvania. The largest subsidiary is Citizens & Northern Bank (“C&N Bank” or the “Bank”). The Corporation’s other wholly-owned subsidiaries are Citizens & Northern Investment Corporation and Bucktail Life Insurance Company (“Bucktail”). Citizens & Northern Investment Corporation was formed in 1999 to engage in investment activities. Bucktail reinsures credit and mortgage life and accident and health insurance on behalf of C&N Bank.
Over the past few years, the Corporation has been employing a growth strategy. Prior to 2019, substantially all of the Corporation’s operations were conducted in its legacy markets in the Northern tier/Northcentral region of Pennsylvania and Southern tier of New York. Subsequently, the Corporation has expanded into Southeastern Pennsylvania by acquisitions and Southcentral Pennsylvania by opening new branches. The Corporation acquired Covenant Financial, Inc. (“Covenant”), effective July 1, 2020. Covenant was the parent company of Covenant Bank, a commercial bank which operated a community bank office in Bucks County, Pennsylvania and another in Chester County, Pennsylvania. The Covenant acquisition followed the 2019 acquisition of Monument Bancorp, Inc. (“Monument”), a commercial bank with offices in Bucks County. In Southcentral Pennsylvania, in 2021, the Corporation converted the lending office in York, Pennsylvania to a full-service branch and established a new branch in Lancaster, Pennsylvania. Mainly as a result of the acquisitions and subsequent growth in the newer markets, the Corporation’s consolidated total assets at December 31, 2022 of $2.5 billion were up 90% from the corresponding total at December 31, 2018. Similarly, gross loans of $1.7 billion at December 31, 2022 were up 110% from December 31, 2018 and total deposits of $2.0 billion were up 93% from December 31, 2018.
C&N Bank is a Pennsylvania banking institution that was formed by the consolidation of Northern National Bank of Wellsboro and Citizens National Bank of Towanda in 1971. C&N Bank has held its current name since May 6, 1975, at which time C&N Bank changed its charter from a national bank to a Pennsylvania bank. The Bank has expanded its presence over the past several decades through a series of mergers as well as by opening new branch and lending offices and providing access to banking services via the internet and through ATMs. At December 31, 2022, the Bank had 29 branch offices, including 22 in the Northern tier/Northcentral region of Pennsylvania, 1 in the Southern tier of New York State, 4 in Southeastern Pennsylvania (3 in Bucks County and 1 in Chester County) and 2 in Southcentral Pennsylvania (York and Lancaster). In addition to its branch locations, the Bank has a lending office in Elmira, New York.
C&N Bank provides an extensive range of banking services, including deposit and loan products for personal and commercial customers. The Bank also provides wealth management services through its trust department and C&N Financial Services, LLC (“CNFS”). The trust department offers a wide range of financial services, such as 401(k) plans, retirement planning, estate planning, estate settlements and asset management. CNFS, a wholly-owned subsidiary of the Bank, is a licensed insurance agency that provides insurance products to individuals and businesses and through its broker-dealer division, offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. CNFS’s operations are not significant in relation to the total operations of the Corporation.
Northern Tier Holding LLC, acquires, holds and disposes of real property acquired by the Bank. C&N Bank is the sole member of Northern Tier Holding LLC.
All phases of the Bank’s business are competitive. The Bank competes with online financial institutions, local commercial banks headquartered in our market areas and other commercial banks with branches in our market area. Many of the online financial institutions and some of the banks that have branches in our market areas are larger in overall size. With respect to lending activities and attracting deposits, the Bank also competes with savings banks, savings and loan associations, insurance companies, regulated small loan companies and credit unions. Also, the Bank competes with mutual funds, exchange-traded funds and other investment vehicles for deposits. C&N Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management, brokerage and insurance services. The Bank is generally competitive with all financial institutions in our service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The Bank serves a diverse customer base and is not economically dependent on any small group of customers or on any individual industry.
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At December 31, 2022, C&N Bank had total assets of $2,439,371,000, total deposits of $2,016,666,000 and net loans outstanding of $1,723,425,000.
Most activities of the Corporation and its subsidiaries are regulated by federal or state agencies. The primary regulatory relationships are described as follows:
A copy of the Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current events reports on Form 8-K, and amendments to these reports, will be furnished without charge upon written request to the Corporation’s Treasurer at P.O. Box 58, Wellsboro, PA 16901. Copies of these reports will be furnished as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission. The information is also available through the Corporation’s web site at www.cnbankpa.com
Human Capital
The Corporation’s Board of Directors and executive leadership team have established the following mission, vision and values:
Mission: Creating value through lifelong relationships with our customers, teammates, shareholders and communities.
Vision: Every customer says “C&N is the ONLY bank I need.”
Values: Teamwork, Respect, Responsibility and Accountability, Excellence, Integrity, Client Focus, Have Fun.
We recognize that our ability to create value on a consistent basis is highly dependent upon the effectiveness of our team.
The Corporation’s key human capital management objectives are to attract and retain diverse raw and seasoned talent that fits our values and culture. Our talent strategy focuses on acquiring new employees through branding and outreach programs, developing employees though a robust onboarding program, ongoing training, and performance management, and retaining employees through recognition, engagement, and an attractive total rewards package.
Diversity and Inclusion
At C&N Bank, we are committed to creating value through relationships. At the heart of this mission is a promise of excellence in service to all people, as demonstrated by our commitment to equity of opportunity, inclusion and our fostering of a spirit of belonging. We live our values of respect, integrity and excellence by creating access and providing support to help our diverse constituents of customers, teammates, shareholders and communities in achieving their financial goals. We embrace inclusion of all of our stakeholders as an important component of our vision to be the ONLY bank our customers need.
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Compensation and Benefits
The Corporation offers competitive compensation to attract and retain talent. Our generous total rewards package includes market-competitive salary, bonuses or sales commissions, short-term and long-term equity incentives, healthcare and retirement benefits, and paid time off. Employees have regular performance reviews and salary raises commensurate with performance. Employees have access to a holistic suite of items within our employee assistance program that caters to physical, emotional, and mental wellbeing for the employee and their family.
Training and Development
The Corporation provides a robust training and development program that supports our culture, prepares employees for their immediate role, develops them for long term success at the Bank and supports personal enrichment. We offer functional training, culture building exercises, personal development, C&N Bank history, C&N Bank integration and ongoing technical training throughout each year. Employees also have access to additional educational and development opportunities including tuition reimbursement and certification programs.
Communication and Engagement
At C&N, we believe in the importance of employee communication and engagement. We utilize several methods to foster engagement, including activities such as Employee Recognition programs, Service Anniversary Awards, Bank wide monthly calls, semi-annual Bank wide events, annual employee surveys, focus groups, daily huddles, and the Giving Back, Giving Together community service program. We believe keeping our team well informed, connected, and appreciated adds to the success of our organization.
ITEM 1A. RISK FACTORS
The Corporation is subject to the many risks and uncertainties applicable to all banking companies, as well as risks specific to the Corporation’s geographic locations. Although the Corporation seeks to effectively manage risks, and maintains a level of equity that exceeds the banking regulatory agencies’ thresholds for being considered “well capitalized” (see Note 18 to the consolidated financial statements), management cannot predict the future and cannot eliminate the possibility of credit, operational or other losses. Accordingly, actual results may differ materially from management’s expectations. Some of the Corporation’s significant risks and uncertainties are discussed below.
Risk Related to Acquisition Activity – As described in Item 1, the Corporation has completed acquisitions of banking companies in 2020 and 2019 (Covenant and Monument) and expanded its geographic footprint to Southeastern and Southcentral Pennsylvania. Further, management intends to continue to pursue additional acquisition opportunities. Potential acquisitions may disrupt the Corporation’s business and dilute shareholder value. We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial service companies. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including: potential exposure to unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, difficulty and expense of integrating the operations and personnel of the target company, potential disruption to the Corporation’s business, potential diversion of management’s time and attention, the possible loss of key employees and customers of the target company, difficulty in estimating the value of the target company and potential changes in banking or tax laws or regulations that may affect the target company. Acquisitions may involve the payment of a premium over book and market values, and, therefore, some dilution of the Corporation’s tangible book value and net income per share of common stock may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue projections, cost savings, increases in geographic or product presence, and/or other projected benefits from recent or future acquisitions could have a material adverse effect on the Corporation’s financial condition or results of operations.
Credit Risk from Lending Activities - A significant source of risk is the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most of the Corporation’s loans are secured, but some loans are unsecured. With respect to secured loans, the collateral securing the repayment of these loans may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events.
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In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when it is not. The Corporation has adopted underwriting and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss. Also, as discussed further in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis, the Corporation attempts to estimate the amount of losses that may be inherent in the portfolio through a quarterly evaluation process that includes several members of management and that addresses specifically identified problem loans, as well as other quantitative data and qualitative factors. Such risk management and accounting policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from deposits with no stated maturities, term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change.
Moreover, the Federal Reserve lowered the Federal Funds rate in 2020 and maintained a rate of 0% to 0.25% throughout 2021 while injecting massive amounts of liquidity into the nation’s monetary system. In 2022, the Federal Reserve changed course, raising the Federal Funds rate several times to a range of 4.25% to 4.50% at December 31, 2022 and then to 4.50% to 4.75% on February 1, 2023. The Federal Reserve’s rate increases, along with an accompanying tightening of the money supply, have been conducted in an effort to contain inflation.
Significant fluctuations in interest rates, including fluctuations in interest rates triggered by the Federal Reserve’s actions, could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Limited Geographic Diversification - The Corporation grants commercial, residential and personal loans to customers primarily in the Corporation’s legacy markets of the Northern tier/Northcentral regions of Pennsylvania and Southern tier of New York and in Southeastern and Southcentral Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within these regions. Deterioration in economic conditions could adversely affect the quality of the Corporation’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Competition - All phases of the Corporation’s business are competitive. Some competitors are much larger in total assets and capitalization than the Corporation, have greater access to capital markets and can offer a broader array of financial services. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Inability to Attract and Develop Qualified Personnel – The Corporation believes that our future success will depend in large part on our ability to attract, develop and retain highly qualified management, lending, financial, technological, marketing, sales, and support personnel. Competition for qualified personnel is intense and we cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time. Our ability to retain key officers and employees may be further impacted by legislation and regulation affecting the financial services industry. For example, legislation and bank regulatory action that places restrictions on executive compensation at, and the pay practices of, financial institutions may further impact our ability to compete for talent with other industries that are not subject to the same limitations as financial institutions. Any inability to attract, develop and retain significant numbers of qualified management and other personnel would have a material adverse effect on our business, results of operations and financial condition.
Cyber Security Risks and Technology Dependence – In the ordinary course of business, the Corporation collects and stores sensitive data, including proprietary business information and personally identifiable information of our customers and employees in systems and on networks. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf. The secure processing, maintenance and use of this information is critical to operations and our business strategy.
The Corporation has invested in accepted technologies, and continually reviews processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access, and maintains an information security risk insurance policy. On an
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on-going basis the Corporation assesses its cyber security procedures and controls and performs network penetration tests on at least an annual basis. All employees receive monthly information security awareness training.
Despite these security measures, the Corporation’s computer systems and infrastructure or those of third parties used by us to compile, process or store such information may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Corporation’s reputation, which could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Government Regulation and Monetary Policy - The Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the way the Corporation conducts its business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit the Corporation’s shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects short-term interest rates and credit conditions, and any unfavorable change in these conditions could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Bank Secrecy Act and Related Laws and Regulations - These laws and regulations have significant implications for all financial institutions. In recent years, they have increased due diligence requirements and reporting obligations for financial institutions, created new crimes and penalties, and required the federal banking agencies, in reviewing merger and other acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering activities. Even innocent noncompliance and inconsequential failure to follow the regulations could result in significant fines or other penalties, which could have a material adverse impact on the Corporation’s financial condition, results of operations or liquidity.
The Federal Home Loan Bank of Pittsburgh - Through its subsidiary (C&N Bank), the Corporation is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. The Corporation has a line of credit with the FHLB-Pittsburgh that is secured by a blanket lien on its loan portfolio. Access to this line of credit is critical if a funding need arises. However, there can be no assurance that the FHLB-Pittsburgh will be able to provide funding when needed, nor can there be assurance that the FHLB-Pittsburgh will provide funds specifically to the Corporation should its financial condition deteriorate and/or regulators prevent that access. The inability to access this source of funds could have a materially adverse effect on the Corporation’s financial flexibility if alternate financing is not available at acceptable interest rates. The failure of the FHLB-Pittsburgh or the FHLB system in general, may materially impair the Corporation’s ability to meet short- and long-term liquidity needs or to meet growth plans.
The Corporation owns common stock of the FHLB-Pittsburgh to qualify for membership in the FHLB system and access services from the FHLB-Pittsburgh. The FHLB-Pittsburgh faces a variety of risks in its operations including interest rate risk, counterparty credit risk, and adverse changes in its regulatory framework. In addition, the 11 Federal Home Loan Banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB cannot meet its obligations, other FHLBs can be called upon to make required payments. Such risks affecting the FHLB-Pittsburgh could adversely impact the value of the Corporation’s investment in the common stock of the FHLB-Pittsburgh and/or affect its access to credit.
Soundness of Other Financial Institutions - In addition to the FHLB-Pittsburgh, the Corporation maintains other credit facilities that provide it with additional liquidity. These facilities include secured and unsecured borrowings from the Federal Reserve Bank and third-party commercial banks. The Corporation believes that it maintains a strong liquidity position and that it is well positioned to withstand foreseeable market conditions. However, legal agreements with counterparties typically include provisions allowing them to restrict or terminate the Corporation’s access to these credit facilities with or without advance notice and at their sole discretion.
Financial institutions are interconnected because of trading, clearing, counterparty, and other relationships. Financial market conditions have been negatively impacted in the past and such disruptions or adverse changes in the Corporation’s results of operations or financial condition could, in the future, have a negative impact on available sources of liquidity. Such a situation may arise due to circumstances that are outside the Corporation’s control, such as general market disruptions or operational problems affecting the Corporation or third parties. The Corporation’s efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or
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unanticipated reductions in available liquidity. In such events, the Corporation’s cost of funds may increase, thereby reducing net interest income, or the Corporation may need to sell a portion of its securities and/or loan portfolio, which, depending upon market conditions, could necessitate realizing a loss.
Securities Markets – The fair value of the Corporation’s available-for-sale debt securities, as well as the revenues the Corporation earns from its wealth management services, are sensitive to price fluctuations and market events.
Declines in the values of the Corporation’s securities holdings, combined with adverse changes in the expected cash flows from these investments, would negatively impact their value for liquidity management purposes and could result in other-than-temporary impairment charges. At December 31, 2022, the fair value of the Corporation’s available-for-sale debt securities portfolio was $63.8 million, or 11.3%, less than the amortized cost basis. The unrealized decrease in fair value was consistent with the significant increases in market interest rates that occurred in 2022, and there were no credit-related declines in fair value and no other-than-temporary losses recorded at December 31, 2022. Further increases in interest rates would cause the fair value of the available-for-sale debt securities portfolio to decrease further. For additional information regarding debt securities, see the “Securities” section of Management’s Discussion and Analysis and Note 7 to the consolidated financial statements.
The Corporation’s trust revenue is determined, in part, from the value of the underlying investment portfolios. Accordingly, if the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in securities markets.
Mortgage Banking – Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program. Since 2014, the Corporation has also originated and sold residential mortgage loans to the secondary market through the MPF Original program. Both of these programs are administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, 2022, the total outstanding balance of residential mortgages sold and serviced through the two programs amounted to $325,677,000. The Corporation must strictly adhere to the MPF Xtra and MPF Original program guidelines for origination, underwriting and servicing loans, and failure to do so may result in the Corporation being forced to repurchase loans or being dropped from the program. As of December 31, 2022, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,515,000. If the volume of such forced repurchases of loans were to increase significantly, or if the Corporation were to be dropped from the programs, it could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Coronavirus Outbreak – The COVID-19 pandemic has caused significant disruptions in the international and U.S. economies as well as the Corporation’s local economy.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus outbreak, and there is no guarantee that the Corporation’s efforts to address any adverse impacts of the coronavirus will be effective. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of new variants of the coronavirus and actions taken to contain the coronavirus or its impact.
The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation’s business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation’s financial reporting and internal controls; and declines in the demand for loans and other banking services and products.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2. PROPERTIES
A summary of the Corporation’s operating properties is as follows:
Number Number of Number of
of Owned Leased
Locations Properties Properties
Limited Purpose Office-Lending 1 1 0
Administrative/Multi-purpose 2 1 1
Ancillary Facilities 2 1 1
ITEM 3. LEGAL PROCEEDINGS
The Corporation and the Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material adverse effect on the Corporation’s financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
QUARTERLY SHARE DATA
Trades of the Corporation’s stock are executed through various brokers who maintain a market in the Corporation’s stock. The Corporation’s stock is listed on the NASDAQ Capital Market with the trading symbol CZNC. As of December 31, 2022, there were 2,086 shareholders of record of the Corporation’s common stock.
The following table sets forth the high and low sales prices of the common stock and dividends declared per quarter during 2022 and 2021.
Dividend Dividend
Declared Declared
per per
High Low Quarter High Low Quarter
Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.
Effective February 18, 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of the Corporation’s common stock, or 6.25% of the Corporation’s issued
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and outstanding shares at February 18, 2021. As of December 31, 2022, 674,700 shares have been repurchased for a total cost of $16,587,000, at an average price of $24.58 per share under the repurchase program. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.
Consistent with the previously approved program, the Board of Directors' February 18, 2021 approval provides that: (1) the treasury stock repurchase program, as amended to increase the repurchase authorization to 1,000,000 shares, shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program.
The following table sets forth a summary of purchases by the Corporation, in the open market, of its equity securities during the fourth quarter 2022:
Total Number of Maximum
Shares Number of
Purchased Shares that May
as Part of Yet
Publicly be Purchased
Total Number Average Announced Under
of Shares Price Paid Plans the Plans or
Period Purchased per Share or Programs Programs
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PERFORMANCE GRAPH
Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the Russell 2000 Index and the Corporation’s peer group indices (the NASDAQ Bank Index and a Legacy Peer Group Index of similar banking organizations selected by the Corporation) for the five-year period commencing December 31, 2017 and ended December 31, 2022. The NASDAQ Bank Index has been selected to replace the existing Peer Group Index of similar-size banking organizations selected by the Corporation in this Annual Report on Form 10-K. Management believes the NASDAQ Bank Index is a more stable peer group that will not require changes in composition from year-to-year as the Corporation’s size and complexity of operations changes.
The index values are market-weighted dividend-reinvestment numbers, which measure the total return for investing $100.00 five years ago. This meets Securities & Exchange Commission requirements for showing dividend reinvestment share performance over a five-year period and measures the return to an investor for placing $100.00 into a group of bank stocks and reinvesting any and all dividends into the purchase of more of the same stock for which dividends were paid.
Period Ending
Legacy Peer Group includes all publicly traded SEC filing Commercial Banks & Thrifts within NJ, NY, OH, PA, MD, and WV with assets between 0.5 times and 2.0 times CZNC as of 9/30/2022.
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EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information concerning the Stock Incentive Plan and Independent Directors Stock Incentive Plan, both of which have been approved by the Corporation’s shareholders. The figures shown in the table below are as of December 31, 2022.
Number of
Number of Weighted- Securities
Securities to be average Remaining
Issued Upon Exercise for Future
Exercise of Price of Issuance Under
Outstanding Outstanding Equity Compen-
Options Options sation Plans
Equity compensation plans not approved by shareholders 0 N/A 0
More details related to the Corporation’s equity compensation plans are provided in Notes 1 and 13 to the consolidated financial statements.
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this Annual Report on Form 10-K are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
●changes in general economic conditions
●the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses
●legislative or regulatory changes
●downturn in demand for loan, deposit and other financial services in the Corporation’s market area
●increased competition from other banks and non-bank providers of financial services
● technological changes and increased technology-related costs
● information security breach or other technology difficulties or failures
●changes in accounting principles, or the application of generally accepted accounting principles
● the effect of the novel coronavirus (COVID-19) and related events
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
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EARNINGS OVERVIEW
2022 vs. 2021
Net income for the year ended December 31, 2022 was $26,618,000, or $1.71 per diluted share as compared to 2021 net income of $30,554,000 or $1.92 per share. Significant variances were as follows:
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2021 vs. 2020
Net income for the year ended December 31, 2021 was $30,554,000, or $1.92 per diluted share as compared to 2020 net income of $19,222,000 or $1.30 per share. Effective July 1, 2020, the Corporation acquired Covenant Financial, Inc. (“Covenant”). In 2020, the Corporation incurred pre-tax merger-related expenses related to the Covenant transaction of $7.7 million. In the fourth quarter 2020, the Corporation incurred a pre-tax loss of $1.6 million on prepayment of long-term borrowings (Federal Home Loan Bank of Pittsburgh advances) with outstanding balances totaling $48.0 million. The borrowings included several advances maturing in 2022 through 2024 with a weighted-average interest rate of 1.77% and a weighted-average duration of 2.3 years. Excluding the impact of merger-related expenses and loss on prepayment of borrowings, adjusted (non-U.S. GAAP) earnings for 2020 would be $26,648,000 or $1.80 per share.
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The following table provides a reconciliation of the Corporation’s 2021 and 2020 earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses and loss on prepayment of borrowings. Management believes disclosure of 2021 and 2020 earnings results, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes.
RECONCILIATION OF NET INCOME AND
DILUTED EARNINGS PER SHARE TO NON-U.S.
GAAP MEASURE
(Dollars In Thousands, Except Per Share Data)
Income Diluted Income Diluted
Before Earnings Before Earnings
Income Income per Income Income per
Tax Tax Net Common Tax Tax Net Common
(1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision is adjusted for the estimated nondeductible portion of the expenses.
Other significant variances were as follows:
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More detailed information concerning the Corporation’s earnings results are provided in other sections of Management’s Discussion and Analysis.
ACQUISITION OF COVENANT FINANCIAL, INC.
The Corporation’s acquisition of Covenant was completed July 1, 2020. Covenant was the parent company of Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into C&N Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. The acquisition of Covenant followed the acquisition of Monument Bancorp, Inc. (“Monument”) on April 1, 2019. Monument was the parent company of Monument Bank, with banking and lending offices in Bucks County, Pennsylvania. The total transaction value of the Monument acquisition was $42.7 million.
In connection with the Covenant acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing subject to adjustment for up to one year subsequent to the acquisition. There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition subsequent to December 31, 2020.
CRITICAL ACCOUNTING POLICIES
The presentation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
As described more fully in Note 2 to the consolidated financial statements, effective January 1, 2023, the Corporation is adopting Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, the required change in accounting for credit losses on loans receivable from an incurred loss methodology to an expected credit loss methodology commonly referred to as “CECL.” Upon adoption of CECL, the allowance for credit losses will be based on the Corporation’s historical loan loss experience, borrower characteristics, forecasts of future economic conditions and other relevant
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factors. The Corporation will also apply qualitative factors to account for information that may not be reflected in quantitatively derived results or other relevant factors to ensure the allowance reflects management’s best estimate of current expected credit losses.
Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables I, II and III include information regarding the Corporation’s net interest income in 2022, 2021 and 2020. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.
2022 vs. 2021
Fully taxable equivalent net interest income was $84,354,000 in 2022, $5,280,000 (6.7%) higher than in 2021. Interest income was $8,237,000 higher in 2022 as compared to 2021; interest expense was higher by $2,957,000 in comparing the same periods. As presented in Table II, the Net Interest Margin was 3.77% in 2022, as compared to 3.69% in 2021, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased slightly to 3.57% in 2022 from 3.55% in 2021. The average yield on earning assets of 4.19% was 0.20% higher in 2022 as compared to 2021, and the average rate on interest bearing liabilities of 0.62% was 0.18% higher in 2022 as compared to 2021. Table III shows that, in the aggregate, rising interest rates in 2022 had a positive impact on net interest income as the portion of the increase attributable to changes in rate was $4,976,000.
Income from purchase accounting-related adjustments in 2022 had a positive effect on net interest income of $1,621,000, including an increase in income on loans of $1,216,000 and a net reduction in interest expense on time deposits and borrowed funds totaling $405,000. The positive impact of purchase accounting-related adjustments to the net interest margin was 0.07% in 2022. In comparison, the net positive impact of purchase accounting-related adjustments was $2,659,000, with a positive impact on the net interest margin of 0.13% in 2021.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $93,873,000 in 2022, an increase of $8,237,000, or 9.6% from 2021.
Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $3,610,000 in 2022 as compared to 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $168.2 million as indicated in Table II. The average yield on available-for-sale debt securities was 2.16% for 2022, down slightly from 2.17% in 2021.
Interest and fees from loans receivable increased $4,289,000 in 2022 as compared to 2021. Total interest and fees from loans excluding PPP loans increased $9,861,000 in 2022 as compared to 2021. Interest and fees on PPP loans totaled $958,000 in 2022, a decrease of $5,572,000 from 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers. In 2022, total interest and fees on loans included $1,852,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts as compared to income from similar repayments of $231,000 in 2021.
Average outstanding loans receivable increased $31,338,000 (2.0%) to $1,628,094,000 in 2022 from $1,596,756,000 in 2021, despite a reduction in average PPP loans of $89,246,000. Average total loans outstanding, excluding PPP loans, increased $120,584,000 (8.0%).
The fully taxable equivalent yield on loans in 2022 was 4.98% compared to 4.81% in 2021. The average yield on loans included the positive impact of the income on PCI loans in 2022. The comparatively high yield on PPP loans provided a benefit to the margin in both
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periods through the higher volume resulted in a larger benefit in 2021. Excluding PPP loans and income from excess repayments on purchased credit impaired loans, the adjusted yield on loans was 4.83% in 2022, up from the similarly adjusted yield of 4.67% in 2021.
Income from interest-bearing due from banks totaled $645,000 in 2022, an increase of $327,000 from the total for 2021. The average yield on interest-bearing due from banks was 1.25% in 2022 and 0.20% in 2021. The average balance of interest-bearing due from banks was $51,407,000 in 2022 as compared to $156,152,000 in 2021. The average balance of interest-bearing due from banks fell to 2.3% of average earning assets in 2022 from 7.3% in 2021 as excess funds were invested in securities and loans. Within this category, the largest asset balance in 2022 and 2021 has been interest-bearing deposits held with the Federal Reserve.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $2,957,000, or 45.1%, to $9,519,000 in 2022 from $6,562,000 in 2021. Interest expense on deposits increased $2,100,000. Table II shows the average rate on interest-bearing deposits increased to 0.46% in 2022 from 0.33% in 2021 reflecting the impact of increases in market rates in 2022.
Average total deposits (interest-bearing and noninterest-bearing) increased $75,012,000 (3.9%) to $1,980,412,000 in 2022 from $1,905,400 in 2021. Average time deposits decreased $42,552,000, while the average total balance of other categories increased $117,564,000, or 7.5%. The increase in average deposits includes the impact of growth in commercial deposits, reflecting higher average balances maintained and new business.
Interest expense on short-term borrowings in 2022 was $429,000 as compared to $23,000 in 2021. The average balance of short-term borrowings increased to $21,766,000 in 2022 from $6,269,000 in 2021. The average rate on short-term borrowings was 1.97% in 2022 compared to 0.37% in 2021.
Interest expense on long-term borrowings (FHLB advances) increased $497,000 to $896,000 in 2022 from $399,000 in 2021. The average balance of long-term borrowings was $40,194,000 in 2022, down from an average balance of $44,026,000 in 2021. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 2.23% in 2022 compared to 0.91% in 2021.
Interest expense on senior notes issued in May 2021 totaled $477,000 in 2022 as compared to $293,000 in 2021. The average balance of the senior notes increased to $14,733,000 in 2022 from $9,129,000 in 2021. The average rate on senior notes was 3.24% in 2022 and 3.21% in 2021.
Interest expense on subordinated debt decreased $230,000 to $1,079,000 in 2022 from $1,309,000 in 2021. The average balance of subordinated debt decreased slightly to $27,116,000 in 2022 from $27,399,000 in 2021. The average rate on subordinated debt decreased to 3.98% in 2022 from 4.78% in 2021 including the net impact of a new issue of subordinated debt of $24,437,000, net, at an effective rate of 3.74% in May 2021 and the redemption of subordinated notes totaling $8,000,000 in the second quarter 2021 and $8,500,000 in the second quarter 2022.
2021 vs. 2020
Fully taxable equivalent net interest income was $79,074,000 in 2021, $10,529,000 (15.4%) higher than in 2020. Interest income was $7,496,000 higher in 2021 as compared to 2020; interest expense was lower by $3,033,000 in comparing the same periods. As presented in Table II, the Net Interest Margin was 3.69% in 2021, unchanged from 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.55% in 2021 from 3.49% in 2020. The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and income from the PPP loan program.
Income from purchase accounting adjustments in 2021 had a positive effect on net interest income in 2021 of $2,659,000, including an increase in income on loans of $1,289,000 and net reductions in interest expense on time deposits and borrowed funds totaling $1,370,000. In comparison, the net positive impact on net interest income of purchase accounting adjustments was $3,272,000 in 2020. The net positive impact to the net interest margin from purchase accounting adjustments was 0.13% in 2021 and 0.18% in 2020.
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INTEREST INCOME AND EARNING ASSETS
Interest income totaled $85,636,000 in 2021, an increase of 9.6% from 2020. Interest and fees on loans receivable increased $7,175,000, or 10.3%, to $76,781,000 in 2021 from $69,606,000 in 2020. Interest and fees on PPP loans totaled $6,530,000 in 2021, an increase of $3,606,000 over the total in 2020. Table III shows the increase in interest on loans including $8,016,000 attributable to an increase in volume and a decrease of $841,000 related to a decrease in average yield.
The average balance of loans receivable increased $151,658,000 (10.5%) to $1,596,756,000 in 2021 from $1,445,098,000 in 2020. The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020.
The fully taxable equivalent yield on loans in 2021 was 4.81% compared to 4.82% in 2020. In 2021, rates on variable rate loans and rates on most new loan originations decreased, and prepayments of loans increased, consistent with falling market interest rates throughout most of 2020 and 2021. Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before the acquisition. The overall yield on loans in 2021 included a benefit from the acceleration of fees recognized on PPP loans as repayments have been received from the SBA. As shown in Table II, in 2021, the average balance of 1st Draw PPP loans was $44,735,000 with an average yield of 7.77% and the average balance of 2nd Draw PPP loans was $52,917,000 with an average yield of 5.77%.
Interest income on available-for-sale debt securities totaled $8,471,000 in 2021, an increase of $268,000 from the total for 2020. As indicated in Table II, average available-for-sale debt securities (at amortized cost) totaled $390,163,000 in 2021, an increase of $61,718,000 (18.8%) from 2020. The average yield on available-for-sale debt securities decreased to 2.17% in 2021 from 2.50% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent, lower market rates.
Interest income from interest-bearing deposits in banks totaled $318,000 in 2021, an increase of $67,000 from the total for 2020. The most significant categories of assets within this category include interest-bearing balances held with the Federal Reserve and investments in certificates of deposit issued by other banks. The average balance increased $75,565,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. The average balance of interest-bearing due from banks was 7.3% of average earning assets in 2021 as compared to 4.3% in 2020. The average yield on interest-bearing due from banks fell to 0.20% in 2021 from 0.31% in 2020, due to a decrease in market rates.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense decreased $3,033,000, or 31.6%, to $6,562,000 in 2021 from $9,595,000 in 2020. Table II shows that the overall cost of funds on interest-bearing liabilities decreased to 0.44% in 2021 from 0.72% in 2020.
Total average deposit balances (interest-bearing and noninterest-bearing) increased $318,991,000 to $1,905,400,000 in 2021 from $1,586,409,000 in 2020. The increase in average deposits includes the impact of the Covenant acquisition. The average rate on interest-bearing deposits decreased to 0.33% in 2021 from 0.60% in 2020. The decrease in average rate on deposits includes a decrease of 0.54% on time deposits. The average balance of time deposits fell to 17.2% of average total deposits in 2021 from 25.1% in 2020, further contributing to the reduction in average rate on deposits.
Interest expense on short-term borrowings decreased $344,000 to $23,000 in 2021 from $367,000 in 2020. The average balance of short-term borrowings decreased to $6,269,000 in 2021 from $34,212,000 in 2020. The average rate on short-term borrowings decreased to 0.37% in 2021 from 1.07% in 2020.
Interest expense on long-term borrowings (FHLB advances) decreased $892,000 to $399,000 in 2021 from $1,291,000 in 2020. The average balance of long-term borrowings was $44,026,000 in 2021, down from an average balance of $83,500,000 in 2020. The average rate on long-term borrowings was 0.91% in 2021 compared to 1.55% in 2020. The reduction in both average balance and rate reflects the prepayment of borrowings of $48,036,000 in December 2020.
Interest expense on senior notes issued in May 2021 totaled $293,000 in 2021. The average balance of the senior notes was $9,129,000 in 2021 with an average rate of 3.21%.
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Interest expense on subordinated debt increased $603,000 to $1,309,000 in 2021 from $706,000 in 2020. The average balance of subordinated debt increased to $27,399,000 in 2021 from $11,553,000 in 2020 reflecting the net impact of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020, the new issue of subordinated debt of $24,437,000, net, in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 4.78% in 2021 from 6.11% in 2020.
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TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
Year Ended
December 31, Increase/(Decrease)
INTEREST INCOME
Available-for-sale debt securities:
Loans receivable:
INTEREST EXPENSE
Interest-bearing deposits:
Borrowed funds:
(In Thousands) Year Ended
December 31, Increase/(Decrease)
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TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(Dollars In Thousands) Year Year Year
Ended Rate of Ended Rate of Ended Rate of
Average Cost of Average Cost of Average Cost of
Balance Funds% Balance Funds% Balance Funds%
EARNING ASSETS
Loans receivable:
Bank-owned life insurance 30,925 30,373 24,415
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Borrowed funds:
Interest Rate Spread 3.57 % 3.55 % 3.49 %
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TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES
Change in Change in Total Change in Change in Total
Volume Rate Change Volume Rate Change
EARNING ASSETS
Available-for-sale debt securities:
Loans receivable:
Other earning assets (2) 13 11 2 (16) (14)
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Borrowed funds:
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NONINTEREST INCOME
TABLE IV - COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands) Year Ended
December 31, $ %
Service charges on deposit accounts 5,019 4,633 386 8.3 %
(Dollars in Thousands) Year Ended
December 31, $ %
Service charges on deposit accounts 4,633 4,231 402 9.5 %
Loan servicing fees, net 694 (61) 755 N/M
Increase in cash surrender value of life insurance 573 515 58 11.3 %
NONINTEREST EXPENSE
TABLE V - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands) Year Ended
December 31, $ %
Data processing and telecommunications expense 6,806 5,903 903 15.3 %
Automated teller machine and interchange expense 1,601 1,433 168 11.7 %
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(Dollars in Thousands) Year Ended
December 31, $ %
Data processing and telecommunications expense 5,903 5,316 587 11.0 %
Automated teller machine and interchange expense 1,433 1,231 202 16.4 %
Loss on prepayment of borrowings 0 1,636 (1,636) (100.0) %
Additional detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis.
INCOME TAXES
The effective income tax rate was 17.7% of pre-tax income in 2022, down from 18.9% in 2021 and up from 17.2% in 2020. The Corporation’s effective tax rates differed from the federal statutory rate of 21% mainly because of the effects of tax-exempt interest income. The lower effective income tax rate in 2022 as compared to 2021 includes the impact of higher tax-exempt interest as a percentage of pre-tax income, a larger permanent difference (deduction) related to restricted stock compensation and the benefit of a $340,000 reduction in expense from the reversal of tax penalties being non-deductible. The higher effective income tax rate in 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income.
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At December 31, 2022, the net deferred tax asset was $20,884,000, up from the balance at December 31, 2021 of $5,887,000. The most significant change in temporary difference components was an increase of $14,669,000 in the net deferred tax asset related to the unrealized loss on available-for-sale debt securities resulting from increases in interest rates.
The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. Further, the value of the benefit from realization of deferred tax assets would be impacted if income tax rates were changed from currently enacted levels.
Management believes the recorded net deferred tax asset at December 31, 2022 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.
Additional information related to income taxes is presented in Note 14 to the consolidated financial statements.
SECURITIES
Management continually evaluates several objectives in determining the size, securities mix and other characteristics of the available-for-sale debt securities (investment) portfolio. Key objectives include supporting liquidity needs, maximizing return on earning assets within reasonable risk parameters and providing a means to hedge the Corporation’s overall asset-sensitive interest rate risk exposure, while maintaining high credit quality.
Table VI shows the composition of the available-for-sale debt securities portfolio at December 31, 2022, 2021 and 2020. The total amortized cost of available-for-sale debt securities increased $50,202,000 to $561,794,000 at December 31, 2022 from $511,592,000 at December 31, 2021. The increase in 2022 followed an increase of $177,040,000 at December 31, 2021 as compared to December 31,
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2020. The increase in the amortized cost basis of the securities portfolio resulted from management’s decision to invest excess funds available from the growth in deposits and net loan repayments throughout most of 2020, 2021 and the first quarter 2022.
At December 31, 2022, the largest categories of securities held as a percentage of total amortized cost, were as follows: (1) tax-exempt and taxable municipal bonds, 38.2%; (2) residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies, including pass-through securities and collateralized mortgage obligations, 28.1%; and (3) commercial mortgage-backed securities issued or guaranteed by U.S. Government sponsored agencies, 16.3%.
The composition of the available-for-sale debt securities portfolio at December 31, 2022, December 31, 2021 and December 31, 2020 is as follows:
TABLE VI - INVESTMENT SECURITIES
Amortized Fair Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value Cost Value
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of states and political subdivisions:
(a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates)
As reflected in the table above, the fair value of available-for-sale securities as of December 31, 2022 was lower than the amortized cost basis by $63,761,000, or 11.3%. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021 and $14,780,000 (4.4%) at December 31, 2020. The unrealized decrease in fair value of the portfolio in 2022 and in 2021 resulted from an increase in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 2.73% higher at December 31, 2022 in comparison to December 31, 2021, and 3.63% higher than at December 31, 2020.
Management reviewed the Corporation’s holdings as of December 31, 2022 and concluded there were no credit-related declines in fair value and that the unrealized losses on all of the securities in an unrealized loss position are considered temporary. In assessing whether there were other-than-temporary impairment losses, management considered (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis.
Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
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The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2022. Yields on tax-exempt securities are presented on a fully taxable-equivalent basis. For callable securities, yields on securities purchased at a discount are based on yield-to-maturity, while yields on securities purchased at a premium are based on yield to the first call date. Yields on mortgage-backed securities are estimated and include the effects of prepayment assumptions. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
Within One- Five- After
One Five Ten Ten
Residential pass-through securities 112,782 1.89 %
Residential collateralized mortgage obligations 44,868 2.18 %
Commercial mortgage-backed securities 91,388 2.09 %
Private label commercial mortgage-backed securities 8,070 5.51 %
The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period.
FINANCIAL CONDITION
This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at December 31, 2022, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2023.
Table VII shows the composition of the loan portfolio at year-end from 2018 through 2022. The significant loan growth in 2019 and 2020 reflects the impact of acquisitions. After a reduction in outstanding loans at December 31, 2021 as compared to a year earlier, loan growth was robust in 2022 as the recorded investment in commercial loans was up $133,127,000 (13.6%), and residential mortgage loans were up $39,760,000 (7.0%), from year-end 2021. The volume of residential mortgage loans originated and sold into the secondary market fell significantly in 2022 as higher interest rates dampened market activity. In 2022, a substantial portion of new mortgage loans the Corporation originated were 5/1, 7/1 and 10/1 adjustable rate loans that were retained for investment on the balance sheet. At December 31, 2022, commercial loans represented approximately 64% of the portfolio while residential mortgage loans totaled 35% of the portfolio.
While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other
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institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to $44,723,000 at December 31, 2022, down from $54,372,000 at December 31, 2021. As described in more detail in the Provision and Allowance for Loan Losses section of Management’s Discussion and Analysis, the Corporation recorded partial charge-offs totaling $3,942,000 on a commercial real estate secured participation loan with a recorded investment of $2,654,000 at December 31, 2022. At December 31, 2022, the balance of participation loans outstanding includes a total of $13,563,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $2,370,000 at December 31, 2022 and $7,469,000 at December 31, 2021.
The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. The Corporation also may originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through December 31, 2022, the Corporation’s activity under the MPF Direct Program has been minimal.
For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At December 31, 2022, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,515,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2021 was $1,571,000.
At December 31, 2022, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $325,677,000, including loans sold through the MPF Xtra program of $155,506,000 and loans sold through the Original program of $170,171,000. At December 31, 2021, outstanding balances of loans sold and serviced through the two programs totaled $334,741,000, including loans sold through the MPF Xtra program of $165,668,000 and loans sold through the Original Program of $169,073,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 2022 and December 31, 2021.
For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At December 31, 2022, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,392,000, and the Corporation has recorded a related allowance for credit losses in the amount of $425,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the related allowance for credit losses was $635,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $292,000 in 2022, $348,000 in 2021 and $227,000 in 2020. A credit for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $172,000 was recorded in 2022 as compared to a provision for losses of $135,000 in 2021 and $167,000 in 2020. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.
The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Pursuant to an acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the purchased loans originated through the
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various SBA loan programs as of July 1, 2020 and recorded an allowance for SBA claim adjustments. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on purchased loans was $4,847,000 at December 31, 2022 and $12,856,000 at December 31, 2021 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $90,000 at December 31, 2022 and $457,000 at December 31, 2021. In 2022, the Corporation recorded a reduction in other noninterest expense of $367,000 representing amounts realized on SBA claims in excess of prior estimates, as compared to reductions of $236,000 in 2021 and $70,000 in 2020.
TABLE VII – Five-year Summary of Loans by Type
Commercial:
Residential mortgage:
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TABLE VIII – LOAN MATURITY DISTRIBUTION
Fixed-Rate Loans Variable- or Adjustable-Rate Loans All Loans
1 Year 1-5 >5 1 Year 1-5 >5
(In Thousands) or Less Years Years Total or Less Years Years Total Total
Commercial:
Residential mortgage:
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses.
While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
The allowance for loan losses was $16,615,000 at December 31, 2022, up from $13,537,000 at December 31, 2021. Table X shows total specific allowances on impaired loans of $453,000 at December 31, 2022, down from $740,000 at December 31, 2021. Table X also shows the increase in the allowance in 2022 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $10,845,000 at December 31, 2022 from $7,553,000 at December 31, 2021. Table X also shows that the allowance has increased at each year-end from 2018 through 2022, reflecting the impact of loan growth and other factors, though the total specific allowance on individually impaired loans has decreased each year.
Table XI shows the allowance for loan losses totaled 0.95% of gross loans outstanding at December 31, 2022, up from 0.87% at December 31, 2021. This ratio declined in 2019 and again in 2020 when loans acquired in business combinations were recorded at their initial fair values, including an estimated adjustment for credit losses, with no allowance initially recorded on those loans. Accordingly, the allowance as a percentage of loans dipped from 1.12% at December 31, 2018 to 0.83% at December 31, 2019 following the Monument acquisition and then to 0.69% at December 31, 2020 following the Covenant acquisition. Table XI also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.06% at December 31, 2022, in line with ratios from the previous years.
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The provision (credit) for loan losses by segment for 2022, 2021 and 2020 is as follows:
Residential mortgage (284) 90 27
The provision for loan losses is further detailed as follows:
Commercial segment
Changes in historical loss experience factors 1,341 129 831
Changes in qualitative factors (1,229) 0 369
Residential mortgage segment
Changes in historical loss experience factors (59) (56) (88)
Changes in qualitative factors (965) (45) 413
Consumer segment
Changes in loan volume 35 14 (30)
Changes in historical loss experience factors (13) (23) (15)
Changes in qualitative factors (13) 5 3
Total provision for loan losses - Consumer segment $ 113 $ 58 $ 39
Total – All segments
Changes in historical loss experience factors 1,269 50 728
Changes in qualitative factors (2,207) (40) 785
Total provision for loan losses - All segments $ 7,255 $ 3,661 $ 3,913
In 2022, the provision includes the impact of partial charge-offs totaling $3,942,000 on a commercial real estate secured participation loan to a borrower in the health care industry. The charge-offs resulted from the borrower’s default due to deterioration in financial performance. The recorded investment in the loan at December 31, 2022 (principal balance, net of partial charge-offs) was $2,654,000
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based on a settlement agreement reached with the borrower. At March 7, 2023, after the impact of payments received pursuant to the settlement agreement, the recorded investment in the loan was $474,000. The 2022 provision also includes $1,269,000 related to a net increase in historical loss factors, most of which resulted from the partial charge-offs just described. Further, the 2022 provision includes $3,974,000 attributable to increases in loan volume resulting from significant loan growth, particularly for the commercial segment, as well as an increase in the collectively determined portion of the allowance related to management’s updated assessment of purchased performing loans. In 2022, changes in qualitative factors resulted in a reduction in the provision of $2,207,000, including reductions of $1,229,000 related to the commercial segment and $965,000 related to the residential mortgage segment. The reduction in the provision from changes in qualitative factors reflects management’s assessment that despite concerns that have arisen related to a limited number of commercial loans, the overall credit quality of the portfolio has been improving over the past several quarters.
In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase or reduction in loans outstanding (excluding loans specifically evaluated for impairment) for the period.
The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment).
In 2022, net charge-offs were $4,177,000, including recoveries of $68,000 and charge-offs of $4,245,000. Table XII shows the average rate of net charge-offs as a percentage of loans was 0.26% in 2022, up from the annual average rates for the previous 4 years ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018 and the 5-year average of 0.13%.
Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. At December 31, 2022, impaired loans totaled $19,358,000, up from $15,734,000 at December 31, 2021. Similarly, total nonperforming loans of $25,322,000 at December 31, 2022 was up from $21,218,000 at December 31, 2021. At December 31, 2022, advances to a commercial borrower under lines of credit totaling $10,799,000 were classified as impaired and nonaccrual. Based on an estimate of the liquidation value of business assets that collateralize the lines of credit, there was no specific allowance recorded on these advances at December 31, 2022. Total nonperforming loans as a percentage of outstanding loans was 1.46% at December 31, 2022, up from 1.36% at December 31, 2021, and nonperforming assets as a percentage of total assets was 1.04% at December 31, 2022, up from 0.94% at December 31, 2021. Table XI presents data at the end of each of the years ended December 31, 2018 through 2022. Table XI shows that the year-end ratio of total nonperforming loans as a percentage of loans ranged from a low of 0.88% in 2019 to a high of 1.94% in 2018 and the ratio of total nonperforming assets as a percentage of assets ranged from a low of 0.80% in 2019 to a high of 1.37% in 2018.
Over the period 2018-2022, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the provision for loan losses and the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of December 31, 2022.
Tables IX through XII present historical data related to loans and the allowance for loan losses.
As described in Note 2 to the consolidated financial statements, effective January 1, 2023, the Corporation is adopting the required change in accounting for credit losses on loans receivable from an incurred loss methodology to an expected credit loss methodology commonly referred to as CECL. The allowance for credit losses will be based on the Corporation’s historical loss experience, borrower characteristics, forecasts of future economic conditions and other relevant factors. The Corporation will also apply qualitative factors to account for information that may not be reflected in quantitatively derived results or other relevant factors to ensure the allowance reflects management’s best estimate of current expected credit losses.
The Corporation is adopting CECL on January 1, 2023 using the modified retrospective approach. Based on implementation efforts to date, management estimates CECL adoption will result in a reduction in retained earnings estimated at $1,000,000 to $3,000,000, net of
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tax. Management estimates CECL adoption will result in an increase in the allowance for credit losses of $2,000,000 to $4,000,000 over the balance in the allowance for loan losses of $16,615,000 at December 31, 2022.
The Corporation is in the process of finalizing its expected credit loss estimates and the operational and control structure supporting the process.
TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars In Thousands) Years Ended December 31,
Charge-offs:
Residential mortgage 0 (11) 0 (190) (158)
Recoveries:
Residential mortgage 19 6 44 12 8
Net charge-offs as a % of average loans 0.26 % 0.09 % 0.16 % 0.03 % 0.02 %
TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands) As of December 31,
ASC 450 - Collectively evaluated:
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TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(Dollars In Thousands) As of December 31,
Nonperforming assets:
Loans subject to troubled debt restructurings (TDRs):
Total nonperforming loans as a % of loans 1.46 % 1.36 % 1.42 % 0.88 % 1.94 %
Total nonperforming assets as a % of assets 1.04 % 0.94 % 1.10 % 0.80 % 1.37 %