PENNS WOODS BANCORP INC [PWOD] Filings

10-K 1 pwod-20221231.htm 10-K pwod-20221231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from to

Commission file number 0-17077

PENNS WOODS BANCORP, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania	300 Market Street, P.O. Box 967	23-2226454
(State or other jurisdiction of	Williamsport,	(I.R.S. Employer Identification No.)
incorporation or organization)	Pennsylvania	17703-0967
	(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (570) 322-1111

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $5.55 par value

PWOD

The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if 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 and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or 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 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 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

State the aggregate market value of the voting stock held by non-affiliates of the registrant $162,760,000 at June 30, 2022.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding at March 1, 2023
Common Stock, $5.55 Par Value						7,059,457 Shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of shareholders to be held on May 16, 2023 are incorporated by reference in Part III hereof.

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INDEX


ITEM		PAGE
PART I

Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	12
Item 3.	Legal Proceedings	13
Item 4.	Mine Safety Disclosures	13

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	15
Item 7.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	75
Item 9A.	Controls and Procedures	76
Item 9B.	Other Information	79

PART III

Item 10.	Directors, Executive Officers, and Corporate Governance	79
Item 11.	Executive Compensation	79
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	79
Item 13.	Certain Relationships and Related Transactions, and Director Independence	79
Item 14.	Principal Accounting Fees and Services	79

PART IV

Item 15.	Exhibits and Financial Statement Schedules	80
Index to Exhibits		82
Signatures		83

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PART I

ITEM 1 BUSINESS

A. General Development of Business and History

On January 7, 1983, Penns Woods Bancorp, Inc. (the “Corporation”) was incorporated under the laws of the Commonwealth of Pennsylvania as a bank holding company. In connection with the organization of the Corporation, Jersey Shore State Bank ("JSSB"), a Pennsylvania state-chartered bank, became a wholly owned subsidiary of the Corporation. On June 1, 2013, the Corporation acquired Luzerne Bank ("Luzerne") with Luzerne operating as a subsidiary of the Corporation (JSSB and Luzerne are collectively referred to as the "Banks"). The Corporation’s three other wholly-owned subsidiaries are Woods Real Estate Development Company, Inc., Woods Investment Company, Inc., and United Insurance Solutions, LLC. The Corporation’s business has consisted primarily of managing and supervising the Banks, and its principal source of income has been dividends paid by the Banks and Woods Investment Company, Inc.

The Banks are engaged in commercial and retail banking which includes the acceptance of time, savings, and demand deposits, the funding of commercial, consumer, and mortgage loans, and safe deposit services. Utilizing a branch office network, ATMs, Internet, and telephone banking delivery channels, the Banks deliver their products and services to the communities they reside in.

In October 2000, JSSB acquired The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The M Group, which operates as a subsidiary of JSSB, offers insurance and securities brokerage services. Securities are offered by The M Group through Cetera Financial Group, a registered broker-dealer.

Neither the Corporation nor the Banks anticipate that compliance with environmental laws and regulations will have any material effect on capital expenditures, earnings, or their competitive position. The Banks are not dependent on a single customer or a few customers, the loss of whom would have a material effect on the business of the Banks.

As of December 31, 2022, JSSB employed 235 persons, Luzerne employed 63 persons, and The M Group employed 4 persons in either a full-time or part-time capacity. The Corporation does not have any employees. The principal officers of the Banks also serve as officers of the Corporation.

Woods Investment Company, Inc., a Delaware holding company, maintains an investment portfolio that is managed for total return and to fund dividend payments by the Corporation.

Woods Real Estate Development Company, Inc. serves the Corporation through its acquisition and ownership of certain properties utilized by the Banks.

United Insurance Solutions, LLC offers property and casualty and auto insurance products within the Corporation's market footprint. The Corporation became the sole owner of United Insurance Solutions, LLC when it purchased the outstanding 20% minority interest on October 1, 2021.

We post publicly available reports required to be filed with the SEC on our website, www.pwod.com, as soon as reasonably practicable after filing such reports with the SEC. The required reports are available free of charge through our website. Information available on our website is not part of or incorporated by reference into this Report or any other report filed by this Corporation with the SEC.

B. Regulation and Supervision

The Corporation is a registered bank holding company and, as such is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Banks are also subject to the supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”), as their primary federal regulator and as the insurer of the Banks' deposits. The Banks are also regulated and examined by the Pennsylvania Department of Banking and Securities (the “Department”).

The insurance activities of The M Group are subject to regulation by the insurance departments of the various states in which The M Group conducts business, including principally the Pennsylvania Department of Insurance. The securities brokerage activities of The M Group are subject to regulation by federal and state securities commissions.

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The insurance activities of United Insurance Solutions, LLC are subject to regulation by the Pennsylvania Department of Insurance.

The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the FRB, pursuant to such regulations, may require the Corporation to stand ready to use its resources to provide adequate capital funds to the Banks during periods of financial stress or adversity. The BHCA requires the Corporation to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of 5% or more of any voting shares of any bank. Such a transaction would also require approval of the Department.

A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5% of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The current minimum capital requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”), a tier 1 capital ratio of 6.0%; (8.0% to be considered “well capitalized”), and a total capital ratio of 8.0% (10.0% to be considered “well capitalized”). In order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), as of January 1, 2019, a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.

In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio, under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 4.0% (5.0% to be considered "well capitalized"). The Banks are subject to similar capital requirements adopted by the FDIC.

During 2018, the FRB raised the threshold of its "small bank holding company" exemption to the application of consolidated capital requirements for qualifying small bank holding companies from $1 billion to $3 billion of consolidated assets. Consequently, qualifying bank holding companies having less than $3 billion of consolidated assets are not subject to the consolidated capital requirements unless otherwise directed by the FRB.

Dividends

Federal and state laws impose limitations on the payment of dividends by the Banks. The Pennsylvania Banking Code and the policies of the FDIC and the Department generally encourage the Banks to pay dividends from current net income and retained earnings. The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by the Banks to their accumulated net earnings.

In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment of dividends by the Banks if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the Banks.

Under Pennsylvania law, the Corporation may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts as they become due in the usual course of business and, after giving effect to the dividend, the total assets of the Corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the Corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the dividend.

It is also the policy of the FRB that a bank holding company generally may only pay dividends on common stock out of net income available to common shareholders over the past twelve months and only if the prospective rate of earnings retention appears consistent with a bank holding company’s capital needs, asset quality, and overall financial condition. A bank holding company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.

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C. Regulation of the Banks

The Banks are highly regulated by the FDIC and the Department. The laws that such agencies enforce limit the specific types of businesses in which the Banks may engage, and the products and services that the Banks may offer to customers. Generally, these limitations are designed to protect the insurance fund of the FDIC and/or the customers of the Banks, and not the Banks or their shareholders. From time to time, various types of new federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Banks. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect business of the Banks. As a consequence of the extensive regulation of commercial banking activities in the United States, the Banks' business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Some of the major regulatory provisions that affect the business of the Banks are discussed briefly below.

Prompt Corrective Action

The FDIC has specified the levels at which an insured institution will be considered “well-capitalized,” “adequately capitalized,” “undercapitalized,” and “critically undercapitalized.” In the event an institution’s capital deteriorates to the “undercapitalized” category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations prescribe an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent institution and liability for civil money damages for failure to fulfill its commitment on that guarantee; and (2) the placement of a hold on increases in assets, number of branches, or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions, the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity.

Deposit Insurance

The FDIC maintains the Deposit Insurance Fund ("DIF") by assessing depository institutions an insurance premium. The FDIC insures deposit accounts up to $250,000 per depositor.

Under the FDIC's risk-based assessment system, deposit insurance assessments are based on each insured institution's total assets less tangible equity, thereby basing deposit insurance assessments on an institution’s total liabilities, not only insured deposits. Small banks (generally, those with less than $10 billion in assets) are assigned an individual rate based on a formula using financial data and CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity) ratings. A bank’s assessment is calculated by multiplying its individual assessment rate by its assessment base (average consolidated total assets less average tangible equity), determined quarterly.

Federal Home Loan Bank System

The Banks are members of the Federal Home Loan Bank of Pittsburgh (the “FHLB”), which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. At December 31, 2022, the Banks had $243,195,000 in FHLB advances.

As a member, the Banks are required to purchase and maintain stock in the FHLB. The amount of required stock varies based on the FHLB products utilized by the Banks and the amount of the products utilized. At December 31, 2022, the Banks had $18,666,000 in stock of the FHLB, which was in compliance with this requirement.

Other Legislation

The 2010 Dodd-Frank Act made significant changes to the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act, among other things: (i) expands the authority of the FRB to examine bank holding companies and their subsidiaries, including insured depository institutions; (ii) requires a bank holding company to be well capitalized and well managed to receive approval of an interstate bank acquisition; (iii) provides mortgage reform provisions regarding a customer’s ability to pay and making more loans subject to provisions for higher-cost loans and new disclosures; (iv) creates the Consumer Financial Protection Bureau

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(the “CFPB”) that has rule making authority for a wide range of consumer protection laws that apply to all banks and has broad powers to supervise and enforce consumer protection laws; (v) introduces additional corporate governance and executive compensation requirements on public companies subject to the Securities and Exchange Act of 1934, such as the Corporation; (vi) permits FDIC-insured banks to pay interest on business demand deposits; (vii) requires that holding companies and other companies that directly or indirectly control an insured depository institution serve as a source of financial strength to that institution; (viii) makes permanent the $250,000 limit for federal deposit insurance at all insured depository institutions; and (ix) permits national and state banks to establish interstate branches to the same extent as the branch host state allows establishment of in-state branches.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Banks will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

Under the Bank Secrecy Act, a financial institution is required to have systems in place to detect certain types of transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and that the financial institution knows, suspects or has reason to suspect, involves illegal funds, is designed to evade the requirements of the law, or has no lawful purpose.

Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the “USA PATRIOT Act,” financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to detect, and prevent, the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs, including employee training and independent audit requirements, meet minimum specified standards, follow minimum standards for customer identification and maintenance of customer identification records.

The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies, including the Corporation, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control, and ethics standards for accounting firms. In response to the legislation, the national securities exchanges and NASDAQ, adopted new rules relating to certain governance matters, including the independence of members of a company’s audit committee as a condition to listing or continued listing.

Congress is often considering financial industry legislation, and the federal banking agencies routinely propose new regulations. The Corporation cannot predict how any new legislation, or new rules adopted by federal or state banking agencies, may affect the business of the Corporation and its subsidiaries in the future.

Environmental Laws

Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs, and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. The Corporation is not aware of any borrower who is currently subject to any

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environmental investigation or clean up proceeding which is likely to have a material adverse effect on the financial condition or results of operations of the Corporation.

Effect of Government Monetary Policies

The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies. The monetary policies of the FRB have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments, and deposits through its open market operations in the United States Government securities and through its regulation of, among other things, the discount rate on borrowings by member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

DESCRIPTION OF THE BANKS

History and Business

JSSB was incorporated under the laws of the Commonwealth of Pennsylvania as a state bank in 1934 and became a wholly owned subsidiary of the Corporation on July 12, 1983. As of December 31, 2022, JSSB had total assets of $1,451,067,000; total shareholders’ equity of $109,758,000; and total deposits of $1,108,794,000. JSSB's deposits are insured by the FDIC for the maximum amount provided under current law.

Luzerne was acquired by the Corporation on June 1, 2013. As of December 31, 2022, Luzerne had total assets of $549,688,000; total shareholders’ equity of $55,708,000; and total deposits of $448,517,000. Luzerne's deposits are insured by the FDIC for the maximum amount provided under current law.

The Banks engage in business as commercial banks, doing business at locations in Lycoming, Clinton, Centre, Montour, Union, Blair, and Luzerne Counties, Pennsylvania. The Banks offer insurance, securities brokerage services, annuity and mutual fund investment products, and financial planning through the M Group.

Services offered by the Banks include accepting time, demand and savings deposits including Super NOW accounts, statement savings accounts, money market accounts, and fixed rate certificates of deposit. Their services also include making secured and unsecured business and consumer loans that include financing commercial transactions as well as construction and residential mortgage loans and revolving credit loans with overdraft protection.

The Banks' loan portfolio mix can be classified into three principal categories: commercial and agricultural, real estate, and consumer. Real estate loans can be further segmented into residential, commercial, and construction. Qualified borrowers are defined by our loan policy and our underwriting standards. Owner provided equity requirements range from 0% to 35%, depending on the collateral offered for the loan. Terms are generally restricted to 30 years or less with the exception of construction and land development, which are generally limited to one and five years, respectively. Real estate appraisals, property construction verifications, and site visitations comply with our loan policy and with industry regulatory standards.

Prospective residential mortgage customer’s repayment ability is determined from information contained in the application and recent income tax returns, or other verified income sources. Emphasis is on credit, employment, income, and residency verification. Broad hazard insurance is always required and flood insurance where applicable. In the case of construction mortgages, builders risk insurance is requested.

Agricultural loans for the purchase or improvement of real estate must meet the Banks' real estate underwriting criteria. Agricultural loans made for the purchase of equipment are usually payable in five years, but never more than ten, depending upon the useful life of the purchased asset. Minimum borrower equity ranges from 0% to 35% depending on the purpose. Livestock financing criteria depends upon the nature of the operation. Agricultural loans are also made for crop production purposes. Such loans are structured to repay within the production cycle and not carried over into a subsequent year.

Commercial loans are made for the acquisition and improvement of real estate, purchase of equipment, and for working capital purposes on a seasonal or revolving basis. General purpose working capital loans are also available with repayment expected within one year. Equipment loans are generally amortized over three to ten years. Insurance coverage with the Banks as loss payee is required, especially in the case where the equipment is rolling stock. It is also a general policy to collateralize non-real estate loans with the asset purchased and, depending upon loan terms, junior liens are filed on other available assets. Financial

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information required on all commercial mortgages includes the most current three years balance sheets and income statements and projections on income to be developed through the project. In the case of corporations and partnerships, the principals are often asked to personally guaranty the entity’s debt.

Seasonal and revolving lines of credit are offered for working capital purposes. Collateral for such a loan may vary but often includes the pledge of inventory and/or receivables. Drawing availability is usually 50% of inventory and 80% of eligible receivables. Eligible receivables are defined as invoices less than 90 days delinquent. Exclusive reliance is very seldom placed on such collateral; therefore, other lienable assets are also taken into the collateral pool. Where reliance is placed on inventory and accounts receivable, the applicant must provide financial information including agings on a specified basis. In addition, the guaranty of the principals is usually obtained.

Letter of credit availability is usually limited to standby or performance letters of credit where the customer is well known to the Banks. The credit criteria is the same as that utilized in making a direct loan. Collateral is obtained in most cases.

Consumer loan products include residential mortgages, home equity loans and lines, automobile financing, personal loans and lines of credit, overdraft and check lines. Our policy includes standards used in the industry on debt service ratios and terms are consistent with prudent underwriting standards and the use of proceeds. Verifications are made of employment and residency, along with credit history.

Second mortgages are confined to equity borrowing and home improvements. Terms are generally fifteen years or less. Loan to collateral value criteria is 90% or less and verifications are made to determine values. Automobile financing is generally restricted to five years and done on both an indirect and direct basis. The Banks, as a practice, do not floor plan and therefore do not discount dealer paper. Small loan requests are to accommodate personal needs such as debt consolidation or the purchase of small appliances. Overdraft check lines are usually limited to $5,000 or less.

The Banks' investment portfolios are analyzed and priced on a monthly basis. Investments are made in U.S. Treasuries, U.S. Agency issues, bank qualified tax-exempt municipal bonds, taxable municipal bonds, corporate bonds, and corporate stocks which consist of Pennsylvania bank stocks. Bonds with BBB or better ratings are used, unless a local issue is purchased that has a lesser or no rating. Factors taken into consideration when investments are purchased include liquidity, the Corporation’s tax position, tax equivalent yield, third party investment ratings, and the policies of the Asset/Liability Committee.

The banking environment in Lycoming, Clinton, Centre, Montour, Union, Blair, and Luzerne Counties, Pennsylvania is highly competitive. The Banks operate twenty-five full service offices in these markets and compete for loans and deposits with numerous commercial banks, savings and loan associations, and other financial institutions. The economic base of the region is developed around small business, health care, educational facilities (college and public schools), light manufacturing industries, and agriculture.

The Banks have a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors, excluding public entities that account for approximately 11% of total deposits. Although the Banks have regular opportunities to bid on pools of funds of $100,000 or more in the hands of municipalities, hospitals, and others, it does not rely on these monies to fund loans or intermediate or longer-term investments.

The Banks have not experienced any significant seasonal fluctuations in the amount of deposits.

Supervision and Regulation

As referenced elsewhere, the banking business is highly regulated, and the Banks are only able to engage in business activities, and to provide products and services, that are permitted by applicable law and regulation. In addition, the earnings of the Banks are affected by the policies of regulatory authorities including the FDIC and the FRB. An important function of the FRB is to regulate the money supply and interest rates. Among the instruments used to implement these objectives are open market operations in U.S. Government Securities, changes in reserve requirements against member bank deposits, and limitations on interest rates that member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, and their use may also affect interest rates charged on loans or paid for deposits.

The policies and regulations of the FRB have had and will probably continue to have a significant effect on the Banks' deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Banks' operation in the future. The effect of such policies and regulations upon the future business and earnings of the Banks cannot accurately be predicted.

ITEM 1A RISK FACTORS

The following sets forth several risk factors that may affect the Corporation's financial condition or results of operations.

Changes in interest rates could reduce our income, cash flows and asset values.

Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings but will also affect our ability to originate loans and obtain deposits and the value of our investment portfolio. If the rate of interest we pay on our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest income, and therefore our earnings, could be adversely affected. Our earnings also could be adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.

Economic conditions either nationally or locally in areas in which our operations are concentrated may adversely affect our business.

Deterioration in local, regional, national, or global economic conditions could cause us to experience a reduction in deposits and new loans, an increase in the number of borrowers who default on their loans, and a reduction in the value of the collateral securing their loans, all of which could adversely affect our performance and financial condition. Unlike larger banks that are more geographically diversified, we provide banking and financial services locally. Therefore, we are particularly vulnerable to adverse local economic conditions.

Many of our loans are secured, in whole or in part, with real estate collateral which is subject to declines in value.

In addition to considering the financial strength and cash flow characteristics of a borrower, we often secure our loans with real estate collateral. Real estate values and the real estate market are generally affected by, among other things, changes in local, regional or national economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and acts of nature. The real estate collateral provides an alternate source of repayment in the event of default by the borrower. If real estate prices in our markets decline, the value of the real estate collateral securing our loans could be reduced. If we are required to liquidate real estate collateral securing loans during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer-relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur; or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability; any of which could have a material adverse effect on our financial condition and results of operations.

We face the risk of cyber-attack to our computer systems.

Our computer systems, software and networks have been and will continue to be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events. These threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. If one or more of these events occurs, it could result in the disclosure of confidential client information, damage to our reputation with our clients and the market, additional costs to us (such as repairing systems or adding new personnel or protection technologies), regulatory penalties and financial losses, to both us and our clients and customers. Such events could also cause interruptions or malfunctions in our operations (such as the lack of availability of our online banking system), as well as the operations of our clients, customers or other third

parties. Although we maintain safeguards to protect against these risks, there can be no assurance that we will not suffer losses in the future that may be material in amount.

Competition may decrease our growth or profits.

We face substantial competition in all phases of our operations from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, leasing companies, insurance companies, and money market mutual funds. There is very strong competition among financial services providers in our principal service area. Our competitors may have greater resources, higher lending limits, or larger branch systems than we do. Accordingly, they may be able to offer a broader range of products and services as well as better pricing for those products and services than we can.

In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on federally insured financial institutions. As a result, those non-bank competitors may be able to access funding and provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.

The value of certain investment securities is volatile and future declines or other-than-temporary impairments could materially adversely affect our future earnings and regulatory capital.

Continued volatility in the market value for certain of our investment securities, whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities. This could have a material adverse impact on our accumulated other comprehensive income/loss and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades or defaults in these securities could result in future classifications of investment securities as other than temporarily impaired. This could have a material impact on our future earnings.

We may be adversely affected by government regulation.

The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Changes in the laws, regulations, and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition.

The potential exists for additional federal or state laws and regulations, or changes in policy, affecting many aspects of our operations, including capital levels, lending and funding practices, and liquidity standards. New laws and regulations may increase our costs of regulatory compliance and of doing business and otherwise affect our operations, and may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.

We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.

We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills, knowledge of our market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

Environmental liability associated with lending activities could result in losses.

In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

Failure to implement new technologies in our operations may adversely affect our growth or profits.

The market for financial services, including banking services and consumer finance services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking, and telebanking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely affect our business, financial condition, or operating results.

The Corporation is required to adopt the FASB's accounting standard which requires measurement of certain financial assets (including loans) using the current expected credit losses (CECL) beginning in calendar year 2023.

Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The FASB's amendment replaces the current incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. The Corporation has evaluated the impact of the adoption of this guidance on the Corporation's financial statements and recorded a reduction in the allowance for loan losses on January 1, 2023 in the amount of $2,291,000 and an increase in a liability for unfunded commitments of $2,222,000.

External events, including natural disasters, national or global health emergencies, and events of armed conflict in other countries, and terrorist threats could impact our ability to do business or otherwise adversely affect our business, operations or financial condition.

Financial institutions, like other businesses, are susceptible to the effects of external events that can compromise operating and communications systems and otherwise have adverse effects. Such events, should they occur, can cause significant damage, impact the stability of our operations or facilities, result in additional expense, or impair the ability of our borrowers to repay their loans. Although we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations, and financial condition. In addition, other external events, including natural disasters, health emergencies and epidemics or pandemics, such as the COVID-19 pandemic, and events of armed conflict in other parts of the world, such as the present armed conflict involving Ukraine and Russia, could adversely affect the global or regional economies resulting in unfavorable economic conditions in the United States. Any such development could have an adverse effect on our business, operations or financial condition.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.

ITEM 1B UNRESOLVED STAFF COMMENTS

None.

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ITEM 2 PROPERTIES

The Corporation owns or leases its properties. Listed herewith are the locations of properties owned or leased as of December 31, 2022, in which the banking offices are located; all properties are in good condition and adequate for the Corporation's purposes:

Jersey Shore State Bank & Subsidiaries

Office

Address

Ownership

Main Street

115 South Main Street, PO Box 5098

Owned

Jersey Shore, PA 17740

Bridge Street

112 Bridge Street

Owned

Jersey Shore, PA 17740

DuBoistown

2675 Euclid Avenue

Owned

Williamsport, PA 17702

Williamsport

300 Market Street

Owned

P.O. Box 967

Williamsport, PA 17703-0967

Montgomery

9094 Rt. 405 Highway

Owned

Montgomery, PA 17752

Lock Haven

4 West Main Street

Owned

Lock Haven, PA 17745

Mill Hall

(Inside Wal-Mart), 173 Hogan Boulevard

Under Lease

Mill Hall, PA 17751

Centre Hall

2842 Earlystown Road

Land Under Lease

Centre Hall, PA 16828

Zion

100 Cobblestone Road

Owned

Bellefonte, PA 16823

State College

2050 North Atherton Street

Land Under Lease

State College, PA 16803

Montoursville

820 Broad Street

Owned

Montoursville, PA 17754

Danville

150 Continental Boulevard

Under Lease

Danville, PA 17821

Loyalsock

1720 East Third Street

Owned

Williamsport, PA 17701

Lewisburg

550 North Derr Drive

Owned

Lewisburg, PA 17837

Muncy-Hughesville

3081 Route 405 Highway

Owned

Muncy, PA 17756

Altoona

503 East Plank Road

Under Lease

Altoona, PA 16602

Bellefonte

835 East Bishop Street

Under Lease

Bellefone, PA 16823

The M Group, Inc.

1720 East Third Street

Owned

D/B/A The Comprehensive Financial Group

Williamsport, PA 17701

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Luzerne Bank

Office

Address

Ownership

Dallas

509 Main Road

Owned

Memorial Highway

Dallas, PA 18612

Lake

Corners of Rt. 118 & 415

Owned

Dallas, PA 18612

Hazle Twp.

10 Dessen Drive

Owned

Hazle Twp., PA 18202

Luzerne

118 Main Street

Owned

Luzerne, PA 18709

Wilkes-Barre

67 Public Square

Under Lease

Wilkes-Barre, PA 18701

Conyngham Valley

669 State Route 93 STE 5

Under Lease

Sugarloaf, PA 18249

Pittston

285 South Main Street

Under Lease

Pittston, PA 18640

Forty Fort

1320 Wyoming Avenue

Under Lease

Forty Fort, PA 18704

ITEM 3 LEGAL PROCEEDINGS

The Corporation is subject to lawsuits and claims arising out of its business in the ordinary course. In the opinion of management, after review and consultation with counsel, there are no legal proceedings currently pending or threatened that are reasonably likely to have a material adverse effect on the consolidated financial position or results of operations of the Corporation.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5 MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The Corporation’s common stock is listed on the NASDAQ Global Select Market under the symbol “PWOD”. The following table sets forth (1) the quarterly high and low closing sale prices for a share of the Corporation’s common stock during the periods indicated, and (2) quarterly dividends on a share of the common stock with respect to each quarter since January 1, 2020.


	Price Range				Dividends
	High		Low		Declared
2022
First quarter	$	24.67	$	23.64	$	0.32
Second quarter	24.35		22.34		0.32
Third quarter	24.29		22.02		0.32
Fourth quarter	26.89		23.15		0.32
2021
First quarter	$	27.78	$	20.55	$	0.32
Second quarter	26.51		23.03		0.32
Third quarter	24.42		22.78		0.32
Fourth quarter	24.65		23.50		0.32
2020
First quarter	$	35.36	$	19.05	$	0.32
Second quarter	27.75		20.01		0.32
Third quarter	22.83		19.61		0.32
Fourth quarter	27.30		19.61		0.32

The Corporation has paid dividends since the effective date of its formation as a bank holding company. It is the present intention of the Corporation’s board of directors to continue the dividend payment policy; however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions, and other factors relevant at the time the board of directors of the Corporation considers dividend policy. Cash available for dividend distributions to shareholders of the Corporation primarily comes from dividends paid by JSSB and Luzerne to the Corporation. Therefore, the restrictions on the Banks' dividend payments are directly applicable to the Corporation. See also the information appearing in Note 19 to “Notes to Consolidated Financial Statements” for additional information related to dividend restrictions.

Under the Pennsylvania Business Corporation Law of 1988 a corporation may not pay a dividend, if after giving effect thereto, the corporation would be unable to pay its debts as they become due in the usual course of business and after giving effect thereto the total assets of the corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders whose preferential rights are superior to those receiving the dividend.

As of March 1, 2023, the Corporation had approximately 3,973 shareholders of record.

Following is a schedule of the shares of the Corporation’s common stock purchased by the Corporation during the fourth quarter of 2022.


Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Units) Purchased		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month #1 (October 1 - October 31, 2022)	—	$	—	—	324,000
Month #2 (November 1 - November 30, 2022)	—	—		—	324,000
Month #3 (December 1 - December 31, 2022)	—	—		—	324,000

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ITEM 6 SELECTED FINANCIAL DATA

The following table sets forth certain financial data for each of the years in the five-year period ended December 31, 2022:


(In Thousands, Except Per Share Data Amounts)	2022			2021			2020			2019			2018
Consolidated Statement of Income Data:
Interest income	$	64,928		$	58,414		$	62,638		$	66,774		$	58,746
Interest expense	7,148			8,696			14,415			15,959			10,936
Net interest income	57,780			49,718			48,223			50,815			47,810
Provision for loan losses	1,910			640			2,625			2,735			1,735
Net interest income after provision for loan losses	55,870			49,078			45,598			48,080			46,075
Non-interest income	8,713			11,669			12,168			10,452			9,461
Non-interest expense	42,998			40,905			39,068			39,708			38,007
Income before income tax provision	21,585			19,842			18,698			18,824			17,529
Income tax provision	4,163			3,794			3,474			3,138			2,819
Consolidated net income	17,422			16,048			15,224			15,686			14,710
Earnings attributable to noncontrolling interest	—			15			18			14			6
Net income attributable to Penns Woods Bancorp, Inc.	$	17,422		$	16,033		$	15,206		$	15,672		$	14,704

Consolidated Balance Sheet at End of Period:
Total assets	$	2,000,080		$	1,940,809		$	1,834,643		$	1,665,323		$	1,684,771
Loans	1,639,731			1,392,147			1,344,327			1,355,544			1,384,757
Allowance for loan losses	(15,637)			(14,176)			(13,803)			(11,894)			(13,837)
Deposits	1,556,460			1,621,315			1,494,443			1,324,005			1,219,903
Long-term debt	102,783			125,963			153,475			161,920			138,942
Shareholders’ equity	167,665			172,274			164,142			154,960			143,536

Per Share Data:
Earnings per share - basic	$	2.47		$	2.27		$	2.16		$	2.23		$	2.09
Earnings per share - diluted	2.47			2.27			2.16			2.20			2.09
Cash dividends declared	1.28			1.28			1.28			1.26			1.25
Book value	23.76			24.37			23.27			22.01			20.39
Number of shares outstanding, at end of period	7,056,585			7,070,047			7,052,351			7,040,515			7,037,322
Weighted average number of shares outstanding - basic	7,059,437			7,061,818			7,044,542			7,038,714			7,035,381
Weighted average number of shares outstanding - diluted	7,059,437			7,061,818			7,044,542			7,113,339			7,035,381

Selected Financial Ratios:
Return on average shareholders’ equity	10.73		%	9.93		%	9.66		%	10.54		%	10.72		%
Return on average total assets	0.90		%	0.85		%	0.85		%	0.94		%	0.94		%
Net interest margin	3.24		%	2.85		%	2.94		%	3.31		%	3.31		%
Dividend payout ratio	51.87		%	56.39		%	59.32		%	56.27		%	59.97		%
Average shareholders’ equity to average total assets	8.41		%	8.54		%	8.85		%	8.91		%	8.77		%
Loans to deposits, at end of period	105.35		%	85.87		%	89.96		%	102.38		%	113.51		%

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ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to taxable equivalents based on the marginal corporate federal tax rate of 21%. The tax equivalent adjustments to net interest income for 2022, 2021, and 2020 were $522,000, $449,000, and $476,000, respectively.

2022 vs. 2021

Reported net interest income increased $8,062,000 to $57,780,000 for the year ended December 31, 2022 compared to the year ended December 31, 2021, as the growth in the earning asset portfolio and decline in rate paid on interest-bearing liabilities more than offset a slight decrease in the yield on the loan portfolio to 3.95% from 3.98%. Total interest income increased $6,514,000 or $6,587,000 on a tax equivalent basis, primarily from growth in the loan portfolio. Tax equivalent interest income on the investment portfolio increased as legacy assets matured with the proceeds reinvested predominately into short and medium term municipal bonds carrying a higher yield than the legacy assets. The overall increase in the yield on the earning asset portfolio was driven by the impact of the rate increases enacted by the Federal Open Market Committee ("FOMC").

Interest expense decreased $1,548,000 to $7,148,000 for the year ended December 31, 2022 compared to 2021. The decrease in interest expense was driven by a 17 bp decrease in the average rate paid on interest-bearing deposits led by a 78 bp decrease in the average rate paid on time deposits coupled with a decrease of $82,359,000 in average time deposit balances. Interest expense on total borrowings increased $307,000 as utilization of short-term borrowings increased during the second half of 2022. The increase in average short-term borrowing balances was due to FHLB long-term borrowings totaling $23,000,000 maturing during the year ended December 31, 2022. In addition, short-term borrowings provided funding for the growth in the loan portfolio.

2021 vs. 2020

Reported net interest income increased $1,495,000 to $49,718,000 for the year ended December 31, 2021 compared to the year ended December 31, 2020, as the growth in the earning asset portfolio and decline in rate paid on interest-bearing liabilities more than offset a decrease in the yield on earning assets to 3.35% from 3.80%. Total interest income decreased $4,224,000 or $4,251,000 on a tax equivalent basis, primarily from a decrease in the tax equivalent yield on the loan portfolio decreasing 28 basis points ("bp"). Tax equivalent interest income on the investment portfolio decreased $541,000 as the yield on the investment portfolio decreased 54 bp. The decrease in the yield on the earning asset portfolio was driven by the impact of the continued low interest rate environment resulting from the COVID-19 pandemic.

Interest expense decreased $5,719,000 to $8,696,000 for the year ended December 31, 2021 compared to 2020. The decrease in interest expense was driven by a 51 bp decrease in the average rate paid on interest-bearing deposits led by a 61 bp decrease in the average rate paid on time deposits. The decrease in the average rate paid on interest-bearing deposits was offset by an increase in the balance of the average interest-bearing deposit portfolio of $51,034,000 while the average balance of the time deposit portfolio decreased $94,554,300. Interest expense on total borrowings decreased $699,000 as the balance of average total borrowings decreased $32,644,000 due to FHLB long-term borrowings totaling $30,000,000 maturing during the year ended December 31, 2021. The decrease in the overall rate paid on interest-bearing liabilities is the result of the continued low interest rate environment.

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AVERAGE BALANCES AND INTEREST RATES

The following tables set forth certain information relating to the Corporation’s average balance sheet and reflect the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.


	2022						2021						2020
(Dollars In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:
Tax-exempt loans (3)	$	55,364	$	1,441	2.60	%	$	46,312	$	1,308	2.82	%	$	45,650	$	1,441	3.16	%
All other loans (4)	1,439,550		57,544		4.00	%	1,299,321		52,199		4.02	%	1,304,209		56,079		4.30	%
Total loans (2)	1,494,914		58,985		3.95	%	1,345,633		53,507		3.98	%	1,349,859		57,520		4.26	%

Fed funds sold	32,863		465		1.41	%	28,395		202		0.71	%	—		—		—	%

Taxable securities	156,584		4,455		2.88	%	148,066		4,083		2.80	%	142,714		4,630		3.30	%
Tax-exempt securities (3)	44,301		1,042		2.38	%	36,993		829		2.27	%	28,973		823		2.89	%
Total securities	200,885		5,497		2.77	%	185,059		4,912		2.69	%	171,687		5,453		3.23	%

Interest-bearing deposits	74,401		503		0.68	%	201,273		242		0.12	%	140,022		141		0.10	%

Total interest-earning assets	1,803,063		65,450		3.63	%	1,760,360		58,863		3.35	%	1,661,568		63,114		3.80	%

Other assets	128,213						129,582						118,536

Total assets	$	1,931,276					$	1,889,942					$	1,780,104

Liabilities and shareholders’ equity:
Savings	$	247,003	138		0.06	%	$	225,637	116		0.05	%	$	193,568	256		0.13	%
Super Now deposits	387,370		1,344		0.35	%	307,446		900		0.29	%	254,177		1,755		0.69	%
Money market deposits	289,820		1,105		0.38	%	305,883		972		0.32	%	245,633		1,529		0.62	%
Time deposits	161,982		1,103		0.68	%	244,341		3,557		1.46	%	338,895		7,025		2.07	%
Total interest-bearing deposits	1,086,175		3,690		0.34	%	1,083,307		5,545		0.51	%	1,032,273		10,565		1.02	%

Short-term borrowings	29,315		1,007		3.44	%	7,178		9		0.13	%	12,660		43		0.34	%
Long-term borrowings	110,027		2,451		2.32	%	135,474		3,142		2.32	%	162,636		3,807		2.34	%
Total borrowings	139,342		3,458		2.48	%	142,652		3,151		2.21	%	175,296		3,850		2.20	%

Total interest-bearing liabilities	1,225,517		7,148		0.58	%	1,225,959		8,696		0.71	%	1,207,569		14,415		1.19	%

Demand deposits	519,189						478,984						394,210
Other liabilities	24,182						23,568						20,858
Shareholders’ equity	162,388						161,431						157,467

Total liabilities and shareholders’ equity	$	1,931,276					$	1,889,942					$	1,780,104
Interest rate spread					3.05	%					2.64	%					2.61	%
Net interest income/margin			$	58,302	3.24	%			$	50,167	2.85	%			$	48,699	2.94	%

1.Information on this table has been calculated using average daily balance sheets to obtain average balances.

2.Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.

3.Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% see reconciliation below.

4.Fees on loans are included with interest on loans as follows: 2022 - $529,000; 2021 - $852,000; 2020 - $695,000.

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Reconciliation of Taxable Equivalent Net Interest Income


(In Thousands)	2022		2021		2020
Total interest income	$	64,928	$	58,414	$	62,638
Total interest expense	7,148		8,696		14,415
Net interest income	57,780		49,718		48,223
Tax equivalent adjustment	522		449		476
Net interest income (fully taxable equivalent)	$	58,302	$	50,167	$	48,699

Rate/Volume Analysis

The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated. For interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average volume). Increases and decreases due to both interest rate and volume, which cannot be separated, have been allocated proportionally to the change due to volume and the change due to interest rate. Income and interest rates are on a taxable equivalent basis.


	Year Ended December 31,
	2022 vs. 2021						2021 vs. 2020
	Increase (Decrease) Due To						Increase (Decrease) Due To
(In Thousands)	Volume		Rate		Net		Volume		Rate		Net
Interest income:
Loans, tax-exempt	$	168	$	(35)	$	133	$	2	$	(135)	$	(133)
Loans	5,356		(11)		5,345		(211)		(3,669)		(3,880)
Fed funds sold	37		226		263		202		—		202
Taxable investment securities	248		124		372		32		(579)		(547)
Tax-exempt investment securities	171		42		213		104		(98)		6
Interest-bearing deposits	(74)		335		261		30		71		101
Total interest-earning assets	5,906		681		6,587		159		(4,410)		(4,251)

Interest expense:
Savings deposits	7		15		22		3		(143)		(140)
Super Now deposits	248		196		444		41		(896)		(855)
Money market deposits	(11)		144		133		58		(615)		(557)
Time deposits	(949)		(1,505)		(2,454)		(1,687)		(1,781)		(3,468)
Short-term borrowings	106		892		998		(14)		(20)		(34)
Long-term borrowings	(574)		(117)		(691)		(633)		(32)		(665)
Total interest-bearing liabilities	(1,173)		(375)		(1,548)		(2,232)		(3,487)		(5,719)
Change in net interest income	$	7,079	$	1,056	$	8,135	$	2,391	$	(923)	$	1,468

PROVISION FOR LOAN LOSSES

2022 vs. 2021

The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed semi-annually for the Corporation. Management remains committed to an aggressive program of problem loan identification and resolution.

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The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.

Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at December 31, 2022, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy or employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in interest income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance. The banking regulators could require additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

When determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.

The allowance for loan losses increased from $14,176,000 at December 31, 2021 to $15,637,000 at December 31, 2022. At December 31, 2022, the allowance for loan losses was 0.95% of total loans compared to 1.02% of total loans at December 31, 2021.

The provision for loan losses totaled $1,910,000 for the year ended December 31, 2022 compared to $640,000 for the year ended December 31, 2021. The increase in the provision was appropriate when considering gross loan growth of $247,584,000 and negative economic outlook offset by a reduction in non-performing loans and a low level of net charge-offs during 2022. Net charge-offs of $449,000 represented 0.03% of average loans for the year ended December 31, 2022 compared to net charge-offs of $267,000 or 0.02% of average loans for the year ended December 31, 2021. The provision related to the commercial real estate mortgage segment of the loan portfolio decreased as improvement in credit metrics offset the impact of portfolio growth. An increase occurred in the automobile segment of the loan portfolio due to portfolio growth and concerns regarding the impact of inflation on the customer base. Nonperforming loans decreased $1,360,000 due to a payoff of a nonperforming loan during 2022. The majority of the nonperforming loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within the allowance for loan losses. Significant loan portfolio growth, internal loan review and analysis, level of net charge-offs, and decreased level of nonperforming loans noted previously, dictated an increase in the provision for loan losses while the allowance for loan losses as a percentage of gross loans decreased. Utilizing both internal and external resources, as noted, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.

2021 vs. 2020

The allowance for loan losses increased from $13,803,000 at December 31, 2020 to $14,176,000 at December 31, 2021. At December 31, 2021, the allowance for loan losses was 1.02% of total loans compared to 1.03% of total loans at December 31, 2020.

The provision for loan losses totaled $640,000 for the year ended December 31, 2021 compared to $2,625,000 for the year ended December 31, 2020. The decrease in the provision was appropriate when considering the economic impact of the COVID-19 pandemic, reduction in non-performing loans, and level of net charge-offs during 2021. Net charge-offs of $267,000 represented 0.02% of average loans for the year ended December 31, 2021 compared to net charge-offs of $716,000 or 0.05% of average loans for the year ended December 31, 2020. The impact of the COVID-19 pandemic coupled with supply chain disruptions led to an increase in the provision related to the commercial real estate mortgage segment of the loan portfolio. A decrease occurred in the automobile segment of the loan portfolio which coupled with a lower level of unemployment led to a decreased allowance for loan losses for this segment. Nonperforming loans decreased $4,084,000 as the economic environment improved as COVID-19 restrictions lessened. The majority of the nonperforming loans are centered on several loans that are either in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within the allowance for loan losses. Internal loan review and analysis, level of net charge-offs, decreased level of nonperforming loans noted previously, and the economic impact of the COVID-19 pandemic, dictated an decrease in the provision for loan losses. Utilizing both internal and external resources, as noted, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.

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NON-INTEREST INCOME

2022 vs. 2021

Total non-interest income decreased $2,956,000 from the year ended December 31, 2021 to December 31, 2022. Excluding net security gains, non-interest income decreased $1,932,000 year over year. Bank owned life insurance decreased primarily due to gains recognized on the receipt of death benefits in 2021. Gain on sale of loans and loan broker income decreased significantly as mortgage volume decreased due to the increase in interest rates caused by the rate increases enacted by the FOMC during 2022. Brokerage commissions decreased primarily due to the downturn in the stock market which led to decreased portfolio values and associated fees.


	2022				2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	$	2,103	24.14	%	$	1,703	14.59	%	$	400	23.49	%
Net debt securities (losses) gains, available for sale	(219)		(2.51)		699		5.99		(918)		(131.33)
Net equity securities losses	(146)		(1.68)		(40)		(0.35)		(106)		(265.00)

Bank owned life insurance	664		7.62		916		7.85		(252)		(27.51)
Gain on sale of loans	1,131		12.98		2,474		21.20		(1,343)		(54.28)
Insurance commissions	491		5.64		553		4.74		(62)		(11.21)
Brokerage commissions	620		7.12		851		7.29		(231)		(27.14)
Loan broker income	1,674		19.21		2,164		18.55		(490)		(22.64)
Debit card income	1,464		16.80		1,511		12.95		(47)		(3.11)
Other	931		10.68		838		7.19		93		11.10
Total non-interest income	$	8,713	100.00	%	$	11,669	100.00	%	$	(2,956)	(25.33)	%

2021 vs. 2020

Total non-interest income decreased $499,000 from the year ended December 31, 2020 to December 31, 2021. Excluding net security gains, non-interest income increased $450,000 year over year. Bank owned life insurance increased primarily due to gains recognized on the receipt of death benefits. Debit card income increased $231,000 primarily due to an increase in debit card usage resulting from a lessening of COVID-19 restrictions and as consumers return to historical purchasing levels. Gain on sale of loans decreased as an increased proportion of secondary market loan originations were conducted in a broker capacity which resulted in other income increasing significantly.


	2021				2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	$	1,703	14.59	%	$	1,690	13.89	%	$	13	0.77	%
Net debt securities gains, available for sale	699		5.99		1,592		13.08		(893)		(56.09)
Net equity securities (losses) gains	(40)		(0.35)		16		0.13		(56)		(350.00)

Bank owned life insurance	916		7.85		653		5.37		263		40.28
Gain on sale of loans	2,474		21.20		4,148		34.09		(1,674)		(40.36)
Insurance commissions	553		4.74		416		3.42		137		32.93
Brokerage commissions	851		7.29		970		7.97		(119)		(12.27)
Loan broker income	2,164		18.55		673		5.53		1,491		221.55
Debit card income	1,511		12.95		1,280		10.52		231		18.05
Other	838		7.19		730		6.00		108		14.79
Total non-interest income	$	11,669	100.00	%	$	12,168	100.00	%	$	(499)	(4.10)	%

NON-INTEREST EXPENSE

2022 vs. 2021

Total non-interest expenses increased $2,093,000 from the year ended December 31, 2021 to December 31, 2022. The increase in salaries and employee benefits was attributable to routine wage and benefit increases coupled with the hiring of additional

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commercial lenders. Occupancy and furniture and equipment expense decreased primarily due to a branch closure that occurred during the first quarter of 2022. Marketing expenses increased as loan product advertising levels increased. Other expenses increased primarily due to the proxy solicitation efforts related to an update to the articles of incorporation. The goodwill impairment is related to the wealth management unit (The M Group) as a decline in stock market valuations during 2022 resulted in a decreased level of net income for this entity.


	2022				2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	$	24,267	56.44	%	$	23,014	56.26	%	$	1,253	5.44	%
Occupancy	3,080		7.16		3,209		7.85		(129)		(4.02)
Furniture and equipment	3,288		7.65		3,522		8.61		(234)		(6.64)
Software amortization	840		1.95		868		2.12		(28)		(3.23)
Pennsylvania shares tax	1,452		3.38		1,350		3.30		102		7.56
Professional fees	2,434		5.66		2,432		5.95		2		0.08
Federal Deposit Insurance Corporation deposit insurance	938		2.18		963		2.35		(25)		(2.60)


Marketing	690		1.60		545		1.33		145		26.61
Intangible amortization	154		0.36		191		0.47		(37)		(19.37)
Goodwill impairment	653		1.52		—		—		653		n/a
Other	5,202		12.10		4,811		11.76		391		8.13
Total non-interest expense	$	42,998	100.00	%	$	40,905	100.00	%	$	2,093	5.12	%

2021 vs. 2020

Total non-interest expenses increased $1,837,000 from the year ended December 31, 2020 to December 31, 2021. The increase in salaries and employee benefits was attributable to routine wage and benefit increases in addition to a return to full staffing levels as branch lobbies were temporarily closed during a period of 2020 due to the COVID-19 pandemic. Occupancy expense increased primarily due to increased depreciation and maintenance costs as certain projects were delayed due to the COVID-19 pandemic in 2020. Marketing expenses increased as advertising returned to normal levels after being reduced during 2020 due to the pandemic. Other expenses decreased as general office supply and miscellaneous expenses decreased year over year.


	2021				2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	$	23,014	56.26	%	$	21,632	55.37	%	$	1,382	6.39	%
Occupancy	3,209		7.85		2,650		6.78		559		21.09
Furniture and equipment	3,522		8.61		3,411		8.73		111		3.25
Software amortization	868		2.12		978		2.50		(110)		(11.25)
Pennsylvania shares tax	1,350		3.30		1,289		3.30		61		4.73
Professional fees	2,432		5.95		2,362		6.05		70		2.96
Federal Deposit Insurance Corporation deposit insurance	963		2.35		939		2.40		24		2.56


Marketing	545		1.33		261		0.67		284		108.81
Intangible amortization	191		0.47		227		0.58		(36)		(15.86)

Other	4,811		11.76		5,319		13.62		(508)		(9.55)
Total non-interest expense	$	40,905	100.00	%	$	39,068	100.00	%	$	1,837	4.70	%

INCOME TAXES

2022 vs. 2021

The provision for income taxes for the year ended December 31, 2022 resulted in an effective income tax rate of 19.29% compared to 19.12% for 2021.

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2021 vs. 2020

The provision for income taxes for the year ended December 31, 2021 resulted in an effective income tax rate of 19.12% compared to 18.58% for 2020.

FINANCIAL CONDITION

INVESTMENTS

2022

The fair value of the investment portfolio increased $27,117,000 from December 31, 2021 to December 31, 2022. The increase in value is the result of growth in the municipal segment of the portfolio as the investment portfolio continues to be actively managed in order to reduce interest rate and market risk. This strategy is being deployed through selective purchasing of bonds that mature within ten years. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 86% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

2021

The fair value of the investment portfolio increased $4,109,000 from December 31, 2020 to December 31, 2021. The increase in value is the result of growth in the municipal segment of the portfolio as the investment portfolio continues to be actively managed in order to reduce interest rate and market risk. This strategy is being deployed through selective purchasing of bonds that mature within ten years. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 85% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

The carrying amounts of investment securities are summarized as follows for the years ended December 31, 2022 and 2021:


	2022				2021
(In Thousands)	Balance		% Portfolio		Balance		% Portfolio
Available for sale (AFS):
U.S. Government agency securities	$	2,896	1.49	%	$	—	—	%
Mortgage-backed securities	1,282		0.66		1,747		1.04

State and political securities	142,809		73.30		116,658		69.56

Other debt securities	46,686		23.96		48,005		28.63
Total debt securities	193,673		99.41		166,410		99.23

Investment equity securities:
Other equity securities	1,142		0.59		1,288		0.77

Total equity securities	1,142		0.59		1,288		0.77





Total	$	194,815	100.00	%	$	167,698	100.00	%

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The following table shows the maturities and repricing of investment securities, at amortized cost and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 21% tax rate) at December 31, 2022:


(In Thousands)	One Year or Less			Over One Year Through Five Years			Over Five Years Through Ten Years			Over Ten Years			Amortized Cost Total
U.S. Government agency securities:
Amortized cost	$	—		$	3,002		$	—		$	—		$	3,002
Yield	—		%	3.00		%	—		%	—		%	3.00		%



Mortgage-backed securities:
Amortized cost	—			—			—			1,496			1,496
Yield	—		%	—		%	—		%	2.58		%	2.58		%
State and political securities:
Amortized cost	16,948			76,051			53,312			5,115			151,426
Yield	1.70		%	2.19		%	3.13		%	4.10		%	2.53		%



Other debt securities:

PENNS WOODS BANCORP INC [PWOD] Filings
10-K	[2023-03-15]
10-Q	[2022-11-09]
10-Q	[2022-08-09]
10-Q	[2022-05-10]
10-K	[2022-03-09]
10-Q	[2021-11-09]
10-Q	[2021-08-09]
10-Q	[2021-05-10]
10-K	[2021-03-11]
10-Q	[2020-11-09]
10-Q	[2020-08-10]
10-Q	[2020-05-08]
10-K	[2020-03-11]
10-Q	[2019-11-08]
10-Q	[2019-08-09]
10-Q	[2019-05-10]
10-K	[2019-03-12]
10-Q	[2018-11-08]
10-Q	[2018-08-08]
10-Q	[2018-05-10]
10-K	[2018-03-13]
10-Q	[2017-11-08]
10-Q	[2017-08-08]
10-Q	[2017-05-09]
10-K	[2017-03-10]
10-Q	[2016-11-09]
10-Q	[2016-08-09]
10-Q	[2016-05-10]
10-K	[2016-03-10]
10-Q	[2015-11-09]
10-Q	[2015-08-10]
10-Q	[2015-05-11]
10-K	[2015-03-12]
10-Q	[2014-11-10]
10-Q	[2014-08-11]
10-Q	[2014-05-12]
10-K	[2014-03-14]
10-Q	[2013-11-12]
10-Q	[2013-08-09]
10-Q	[2013-05-10]
10-K	[2013-03-13]
10-Q	[2012-11-09]
10-Q	[2012-08-09]
10-Q	[2012-05-09]
10-K	[2012-03-14]