Penns Woods Bancorp(PWOD) - 2023 Q4 - Annual Report

Part I Business Penns Woods Bancorp, Inc. operates as a bank holding company overseeing two bank subsidiaries and non-banking entities, providing diverse financial services under extensive regulatory oversight - The Corporation's primary business is managing its two wholly-owned bank subsidiaries, Jersey Shore State Bank (JSSB) and Luzerne Bank, which provide commercial and retail banking services[12] - Subsidiaries include Woods Real Estate Development, Woods Investment Company, United Insurance Solutions, and The M Group (offering insurance and securities brokerage)[12][14][17] - The Corporation and its subsidiaries are heavily regulated by the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Pennsylvania Department of Banking and Securities[19] - As of December 31, 2023, JSSB had total assets of $1.58 billion and Luzerne had total assets of $644.9 million[47][48] - The Banks operate twenty-four full-service offices across Lycoming, Clinton, Centre, Montour, Union, Blair, and Luzerne Counties in Pennsylvania, facing a highly competitive environment[61] Risk Factors The Corporation faces multiple risks including interest rate sensitivity, economic and credit vulnerabilities, operational and cybersecurity threats, and intense competition and regulation - Interest Rate Risk: Changes in interest rates could reduce income, cash flows, and asset values, as net interest income is sensitive to the spread between rates on assets and liabilities[67] - Economic and Credit Risk: The Corporation is vulnerable to adverse local economic conditions due to its geographic concentration, and declines in real estate values could reduce the value of collateral securing loans[68][69] - Operational and Cybersecurity Risk: The business relies heavily on information systems, which are vulnerable to failures, security breaches, and cyber-attacks, potentially leading to financial loss and reputational damage[70][71] - Competitive and Regulatory Risk: The Corporation faces substantial competition from various financial institutions, some with fewer regulatory constraints, and the heavily regulated banking industry is subject to changes that can increase costs[73][74][76] Unresolved Staff Comments The Corporation reports that there are no unresolved staff comments - None[83] Cybersecurity Risk Management, Strategy and Governance The Corporation manages cybersecurity risk through board and committee oversight, experienced personnel, and third-party vendors, with no material incidents reported to date - Cybersecurity oversight is handled by the entire board of directors, supported by a senior management Risk Management Committee and an Information Technology Steering Committee[84][85] - The IT Department is managed by a CIO with 28 years of experience and includes a separate Information Security Officer (ISO) who is a Certified Information Systems Security Professional[86] - The Corporation uses third-party vendors for services like penetration testing and vulnerability assessments and maintains an Incident Response Plan that is tested annually[88][89] - To date, the Corporation has not experienced any cybersecurity threats that have materially affected its business strategy, results of operations, or financial condition[90] Properties As of December 31, 2023, the Corporation owns or leases various banking offices across Pennsylvania, all deemed adequate and in good condition - The Corporation's properties, consisting of owned and leased banking offices for its subsidiaries Jersey Shore State Bank and Luzerne Bank, are all located in Pennsylvania[92][94] - All properties are reported to be in good condition and adequate for the Corporation's needs[92] Legal Proceedings Management believes no pending or threatened legal proceedings are likely to have a material adverse effect on the Corporation's financial position or results - Management states that there are no pending legal proceedings expected to have a material adverse effect on the Corporation's financial condition or results[95] Mine Safety Disclosures This section is not applicable to the Corporation - Not applicable[96] Part II Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The Corporation's common stock trades on NASDAQ under 'PWOD', consistently paid a $0.32 quarterly dividend, and had 3,632 shareholders as of March 1, 2024, with no Q4 2023 share repurchases - The Corporation's common stock is listed on the NASDAQ Global Select Market under the symbol "PWOD"[99] Common Stock Price and Dividend Information | Year | Quarter | High Price | Low Price | Dividend Declared | | :--- | :--- | :--- | :--- | :--- | | 2023 | Q1 | $27.77 | $21.90 | $0.32 | | | Q2 | $27.34 | $21.95 | $0.32 | | | Q3 | $27.17 | $20.70 | $0.32 | | | Q4 | $23.64 | $20.05 | $0.32 | | 2022 | All | $24.67 - $26.89 | $22.02 - $23.64 | $0.32 per quarter | | 2021 | All | $24.42 - $27.78 | $20.55 - $23.50 | $0.32 per quarter | - As of March 1, 2024, the Corporation had approximately 3,632 shareholders of record[102] - No shares of the Corporation's common stock were purchased by the Corporation during the fourth quarter of 2023, with a publicly announced plan allowing for the purchase of up to 353,000 shares[102][103] [Reserved]](index=20&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations The Corporation's 2023 performance saw decreased net interest income and increased expenses, while total assets grew to $2.2 billion and equity rose to $191.6 million Results of Operations For 2023, net interest income decreased, a credit loss recovery was recorded, and non-interest expenses increased, resulting in an 18.28% effective tax rate Consolidated Income Statement Summary (In Thousands) | (In Thousands) | 2023 | 2022 | 2021 | |---|---|---|---| | Net Interest Income | $54,964 | $57,780 | $49,718 | | (Recovery) Provision for Credit Losses | $(1,479) | $1,910 | $640 | | Total Non-Interest Income | $8,375 | $8,713 | $11,669 | | Total Non-Interest Expense | $44,496 | $42,998 | $40,905 | | Consolidated Net Income | $16,608 | $17,422 | $16,048 | Financial Condition As of December 31, 2023, total assets grew to $2.20 billion driven by loan growth, with shareholders' equity rising to $191.6 million Consolidated Balance Sheet Summary (In Thousands) | (In Thousands) | Dec 31, 2023 | Dec 31, 2022 | |---|---|---| | Total Assets | $2,204,809 | $2,000,080 | | Loans, net | $1,828,318 | $1,624,094 | | Total Deposits | $1,589,493 | $1,556,460 | | Total Liabilities | $2,013,253 | $1,832,415 | | Total Shareholders' Equity | $191,556 | $167,665 | Liquidity, Interest Rate Sensitivity, and Market Risk The Corporation manages liquidity and interest rate risk, maintaining adequate liquidity and an asset-sensitive position, with a 100 basis point rate increase projected to raise net interest income by 2.68% - The Corporation has a current borrowing capacity at the FHLB of $859,444,000, with $463,079,000 available as of December 31, 2023, and additional credit lines of $100,000,000 with correspondent banks[177] - The Corporation currently maintains an asset-sensitive gap position due to the short duration of its loan and investment portfolios[178] Net Interest Income Rate Shock Forecast (12-months ending Dec 31, 2024) | Parallel Rate Shock (bps) | Net Interest Income (in thousands) | % Change from Static | | :--- | :--- | :--- | | -300 | $59,827 | -9.55% | | -200 | $62,027 | -6.22% | | -100 | $64,174 | -2.98% | | Static | $66,144 | — | | +100 | $67,918 | 2.68% | | +200 | $69,354 | 4.85% | | +300 | $70,586 | 6.72% | | +400 | $71,763 | 8.50% | Critical Accounting Policies The Corporation's critical accounting policies, including Allowance for Credit Losses and Goodwill impairment, require significant management judgment and estimation - Allowance for Credit Losses (ACL): Determining the ACL involves a high degree of judgment regarding cash flow assumptions, probability of default, economic forecasts, and qualitative factors[185] - Goodwill and Other Intangible Assets: These assets are assessed annually for impairment by estimating future cash flows, with a write-down required if estimated future cash flows are less than the recorded asset balances[187] Quantitative and Qualitative Disclosures About Market Risk The Corporation's primary market risks are interest rate and liquidity risks, actively managed to respond to market changes - The Corporation's main market risks are interest rate risk and liquidity risk[191] - Management monitors interest rate sensitivity internally and believes it is well-positioned to respond to market changes[191] Financial Statements and Supplementary Data This section presents the Corporation's audited consolidated financial statements for 2023, 2022, and 2021, along with detailed explanatory notes Consolidated Financial Statements Presents the primary consolidated financial statements, including Balance Sheets, Income Statements, and Cash Flows for 2021-2023 Key Financial Statement Data (in thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $2,204,809 | $2,000,080 | | Loans, net | $1,828,318 | $1,624,094 | | Total Deposits | $1,589,493 | $1,556,460 | | Total Shareholders' Equity | $191,556 | $167,665 | | Income Statement (FY) | 2023 | 2022 | | Net Interest Income | $54,964 | $57,780 | | Net Income | $16,608 | $17,422 | Notes to Consolidated Financial Statements This section provides detailed notes supporting the consolidated financial statements, covering key accounting policies, loan quality, and regulatory capital - Note 1: The company adopted ASU 2016-13 (CECL) on January 1, 2023, which replaced the incurred loss methodology for measuring credit losses, resulting in a net decrease to the Allowance for Credit Losses (ACL) of $3,789,000[219][220] - Note 6: Details the loan portfolio's credit quality, aging, and the allowance for credit losses, with non-accrual loans decreasing to $998,000 in 2023 from $3,615,000 in 2022[291] - Note 8: An impairment charge of $653,000 was recognized on goodwill related to The M Group in 2022, with no impairment recognized in 2023[244][312] - Note 18: As of December 31, 2023, the Corporation and its subsidiary banks were categorized as "well capitalized" under all regulatory frameworks, exceeding minimum capital requirements[354][356] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Corporation reports that there have been no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[389] Controls and Procedures Management concluded the Corporation's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material weaknesses - Management concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2023[390] - Management assessed the effectiveness of internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2023, with no material weaknesses found[395][396] - No material changes were made to the Corporation's internal control over financial reporting during the fourth quarter of 2023[391] Other Information During the fourth quarter of 2023, none of the Corporation's directors or executive officers adopted or terminated a securities trading plan under Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement - No directors or executive officers adopted or terminated a Rule 10b5-1 trading plan or similar arrangement in Q4 2023[411] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section is not applicable to the Corporation - Not applicable[413] Part III Directors, Executive Officers, and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the Corporation's Proxy Statement for its 2024 annual meeting of shareholders - Information is incorporated by reference from the 2024 Proxy Statement[415] Executive Compensation Information regarding executive compensation, including Compensation Discussion and Analysis, compensation tables, and retirement plans, is incorporated by reference from the Corporation's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[416] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2024 Proxy Statement, detailing securities for issuance under approved equity compensation plans - Information on beneficial ownership is incorporated by reference from the 2024 Proxy Statement[417] Equity Compensation Plan Information as of December 31, 2023 | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 1,000,000 | $25.55 | 192,500 | | Not approved by security holders | — | — | — | | Total | 1,000,000 | $25.55 | 192,500 | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Corporation's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[419] Principal Accounting Fees and Services Information regarding principal accounting fees and services, including audit fees, audit-related fees, tax fees, and pre-approval policies, is incorporated by reference from the Corporation's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[420] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the annual report, including corporate governance documents and certifications - The consolidated financial statements are located in Item 8 of this report[422] - Financial statement schedules have been omitted because the required information is not applicable or is included within the financial statements or notes[422] - A detailed list of exhibits is provided, including corporate governance documents, material contracts, certifications by the CEO and CFO, and the XBRL interactive data file[424]