PENNS WOODS BANCORP INC - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☑			Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2022.


☐			Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from to .

No. 0-17077

(Commission File Number)

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)

(570) 322-1111

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Exchange 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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):


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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

On November 1, 2022 there were 7,056,199 shares of the Registrant’s common stock outstanding.

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PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q


		Page
		Number

Part I	Financial Information

Item 1.	Financial Statements	3

Consolidated Balance Sheet (Unaudited) as of September 30, 2022 and December 31, 2021		3

Consolidated Statement of Income (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021		4

Consolidated Statement of Comprehensive (Loss) Income (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021		5

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021		6

Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021		8

Notes to Consolidated Financial Statements (Unaudited)		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47

Part II	Other Information

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Mine Safety Disclosures	48

Item 5.	Other Information	48

Item 6.	Exhibits	49

Signatures		50

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


	September 30,		December 31,
(In Thousands, Except Share And Per Share Data)	2022		2021
ASSETS:
Noninterest-bearing balances	$	24,418	$	19,233
Interest-bearing balances in other financial institutions	12,444		194,629
Federal funds sold	—		50,000
Total cash and cash equivalents	36,862		263,862

Investment debt securities, available for sale, at fair value	188,196		166,410
Investment equity securities, at fair value	1,130		1,288

Restricted investment in bank stock	14,539		14,531
Loans held for sale	2,485		3,725
Loans	1,560,700		1,392,147
Allowance for loan losses	(15,211)		(14,176)
Loans, net	1,545,489		1,377,971
Premises and equipment, net	32,227		34,025
Accrued interest receivable	8,647		8,048
Bank-owned life insurance	34,288		33,768
Investment in limited partnerships	4,771		4,607
Goodwill	17,104		17,104
Intangibles	361		480
Operating lease right-of-use asset	2,699		2,851
Deferred tax asset	7,187		2,946
Other assets	9,131		9,193
TOTAL ASSETS	$	1,905,116	$	1,940,809

LIABILITIES:
Interest-bearing deposits	$	1,053,012	$	1,126,955
Noninterest-bearing deposits	537,403		494,360
Total deposits	1,590,415		1,621,315

Short-term borrowings	30,901		5,747
Long-term borrowings	102,829		125,963
Accrued interest payable	427		651
Operating lease liability	2,753		2,898
Other liabilities	13,302		11,961
TOTAL LIABILITIES	1,740,627		1,768,535

SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued	—		—
Common stock, par value $5.55, 22,500,000 shares authorized; 7,563,200 and 7,550,272 shares issued; 7,052,975 and 7,070,047 outstanding	42,019		41,945
Additional paid-in capital	53,958		53,795
Retained earnings	95,896		89,761
Accumulated other comprehensive loss:
Net unrealized (loss) gain on available for sale securities	(11,125)		2,373
Defined benefit plan	(3,444)		(3,485)
Treasury stock at cost, 510,225 and 480,225	(12,815)		(12,115)


TOTAL SHAREHOLDERS' EQUITY	164,489		172,274
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,905,116	$	1,940,809

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Share And Per Share Data)	2022		2021		2022		2021
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	15,051	$	13,382	$	41,709	$	39,826
Investment securities:
Taxable	949		834		2,550		2,491
Tax-exempt	236		160		594		495
Dividend and other interest income	628		338		1,470		903
TOTAL INTEREST AND DIVIDEND INCOME	16,864		14,714		46,323		43,715
INTEREST EXPENSE:
Deposits	693		1,308		2,191		4,481
Short-term borrowings	26		3		29		7
Long-term borrowings	613		771		1,871		2,430
TOTAL INTEREST EXPENSE	1,332		2,082		4,091		6,918
NET INTEREST INCOME	15,532		12,632		42,232		36,797
PROVISION FOR LOAN LOSSES	855		75		1,335		940
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	14,677		12,557		40,897		35,857
NON-INTEREST INCOME:
Service charges	559		456		1,563		1,218
Net debt securities (losses) gains, available for sale	(156)		48		(168)		323
Net equity securities losses	(55)		(8)		(158)		(24)

Bank-owned life insurance	170		279		501		614
Gain on sale of loans	294		456		905		2,034
Insurance commissions	109		129		386		436
Brokerage commissions	142		237		500		663
Loan broker commissions	438		772		1,350		1,449
Debit card income	344		388		1,080		1,166
Other	238		194		673		595
TOTAL NON-INTEREST INCOME	2,083		2,951		6,632		8,474
NON-INTEREST EXPENSE:
Salaries and employee benefits	6,016		5,837		18,421		17,107
Occupancy	730		745		2,380		2,438
Furniture and equipment	816		883		2,454		2,663
Software amortization	188		226		660		632
Pennsylvania shares tax	334		373		1,119		1,097
Professional fees	626		615		1,746		1,882
Federal Deposit Insurance Corporation deposit insurance	260		220		690		705

Marketing	151		231		435		434
Intangible amortization	34		44		119		147
Other	1,165		1,273		3,723		3,541
TOTAL NON-INTEREST EXPENSE	10,320		10,447		31,747		30,646
INCOME BEFORE INCOME TAX PROVISION	6,440		5,061		15,782		13,685
INCOME TAX PROVISION	1,190		932		2,869		2,516
CONSOLIDATED NET INCOME	$	5,250	$	4,129	$	12,913	$	11,169
Less: Net income attributable to noncontrolling interest	—		4		—		15
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.	$	5,250	$	4,125	$	12,913	$	11,154
EARNINGS PER SHARE - BASIC	$	0.74	$	0.58	$	1.83	$	1.58
EARNINGS PER SHARE - DILUTED	$	0.74	$	0.58	$	1.83	$	1.58
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	7,051,228		7,063,994		7,060,871		7,059,625
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	7,051,228		7,063,994		7,060,871		7,059,625

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2022		2021		2022		2021
Net Income	$	5,250	$	4,125	$	12,913	$	11,154
Other comprehensive loss:
Unrealized loss on available for sale securities	(6,362)		(687)		(17,254)		(1,208)
Tax effect	1,336		145		3,623		254
Net realized loss (gain) on available for sale securities included in net income	156		(48)		168		(323)
Tax effect	(33)		9		(35)		67
Amortization of unrecognized pension loss	17		45		52		138
Tax effect	(3)		(8)		(11)		(28)
Total other comprehensive loss	(4,889)		(544)		(13,457)		(1,100)
Comprehensive income (loss)	$	361	$	3,581	$	(544)	$	10,054

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

Three months ended:


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS		TREASURY STOCK		NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)	SHARES	AMOUNT
Balance, June 30, 2022	7,559,165	$	41,995	$	53,651	$	92,903	$	(9,680)	$	(12,815)	$	—	$	166,054
Net income						5,250								5,250

Other comprehensive loss								(4,889)						(4,889)
Stock-based compensation				236										236

Dividends declared ($0.32 per share)						(2,257)								(2,257)
Common shares issued for employee stock purchase plan	1,057	6		17										23
Director Compensation Plan	2,978	18		54										72

Balance, September 30, 2022	7,563,200	$	42,019	$	53,958	$	95,896	$	(14,569)	$	(12,815)	$	—	$	164,489


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS		TREASURY STOCK		NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)	SHARES	AMOUNT
Balance, June 30, 2021	7,541,627	$	41,897	$	53,205	$	85,281	$	(1,438)	$	(12,115)	$	5	$	166,835
Net income						4,125						4		4,129

Other comprehensive loss								(544)						(544)
Stock-based compensation				227										227
Dividends declared ($0.32 per share)						(2,260)								(2,260)
Common shares issued for employee stock purchase plan	889	5		15										20
Director Compensation Plan	3,406	19		61										80
Distributions to noncontrolling interest												(6)		(6)

Balance, September 30, 2021	7,545,922	$	41,921	$	53,508	$	87,146	$	(1,982)	$	(12,115)	$	3	$	168,481

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

Nine months ended:


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS		TREASURY STOCK		NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)	SHARES	AMOUNT
Balance, December 31, 2021	7,550,272	$	41,945	$	53,795	$	89,761	$	(1,112)	$	(12,115)	$	—	$	172,274
Net income						12,913								12,913

Other comprehensive loss								(13,457)						(13,457)
Stock-based compensation				1,004										1,004
Cash settlement of options				(1,074)										(1,074)
Dividends declared ($0.96 per share)						(6,778)								(6,778)
Common shares issued for employee stock purchase plan	2,960	17		50										67
Director Compensation Plan	9,968	57		183										240
Purchase of treasury stock (30,000 shares)										(700)				(700)
Balance, September 30, 2022	7,563,200	$	42,019	$	53,958	$	95,896	$	(14,569)	$	(12,815)	$	—	$	164,489


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS		TREASURY STOCK		NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)	SHARES	AMOUNT
Balance, December 31, 2020	7,532,576	$	41,847	$	52,523	$	82,769	$	(882)	$	(12,115)	$	4	$	164,146
Net income						11,154						15		11,169

Other comprehensive loss								(1,100)						(1,100)
Stock-based compensation				754										754
Dividends declared ($0.96 per share)						(6,777)								(6,777)
Common shares issued for employee stock purchase plan	2,873	16		49										65
Director Compensation Plan	10,473	58		182										240

Distributions to noncontrolling interest												(16)		(16)
Balance, September 30, 2021	7,545,922	$	41,921	$	53,508	$	87,146	$	(1,982)	$	(12,115)	$	3	$	168,481

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,
(In Thousands)	2022		2021
OPERATING ACTIVITIES:
Net Income	$	12,913	$	11,169
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,660		2,235
Loss (gain) on sale of premises and equipment	275		(18)
Amortization of intangible assets	119		147
Provision for loan losses	1,335		940
Stock based compensation	1,004		754
Accretion and amortization of investment security discounts and premiums	932		829
Net securities losses (gains), available for sale	168		(323)
Originations of loans held for sale	(30,644)		(68,328)
Proceeds of loans held for sale	32,789		72,355
Gain on sale of loans	(905)		(2,034)
Net equity securities losses	158		24


Security trades payable	(111)		—
Earnings on bank-owned life insurance	(501)		(614)
Increase in deferred tax asset	(653)		(1,201)

Other, net	(905)		(3,548)
Net cash provided by operating activities	18,634		12,387
INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities	4,151		13,689
Proceeds from calls and maturities of available for sale securities	13,116		15,898
Purchases of available for sale securities	(57,239)		(36,124)
Net increase in loans	(168,950)		(3,167)
Acquisition of premises and equipment	(263)		(939)
Proceeds from the sale of premises and equipment	137		2
Proceeds from the sale of foreclosed assets	46		335
Purchase of bank-owned life insurance	(21)		(30)
Proceeds from bank-owned life insurance death benefit	2		453
Investment in limited partnership	(554)		(1,070)
Proceeds from redemption of regulatory stock	6,692		2,167
Purchases of regulatory stock	(6,700)		(1,439)
Net cash used for investing activities	(209,583)		(10,225)
FINANCING ACTIVITIES:
Net (decrease) increase in interest-bearing deposits	(73,943)		66,058
Net increase in noninterest-bearing deposits	43,043		32,518

Repayment of long-term borrowings	(23,000)		(30,000)
Net increase in short-term borrowings	25,154		4,160
Finance lease principal payments	(134)		(121)
Dividends paid	(6,778)		(6,777)
Distributions to non-controlling interest	—		(16)
Issuance of common stock	307		305
Purchases of treasury stock	(700)		—
Net cash (used for) provided by financing activities	(36,051)		66,127
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(227,000)		68,289
CASH AND CASH EQUIVALENTS, BEGINNING	263,862		213,358
CASH AND CASH EQUIVALENTS, ENDING	$	36,862	$	281,647




SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	4,315	$	7,202
Cash settlement of options	1,074		—
Income taxes paid	2,371		3,175
Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities	—		2,653

Transfer of loans to foreclosed real estate	97		83

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., United Insurance Solutions, LLC., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). All significant inter-company balances and transactions have been eliminated in the consolidation.

The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.

Note 2. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component shown net of tax and parenthesis indicating debits, as of September 30, 2022 and 2021 were as follows:


	Three Months Ended September 30, 2022						Three Months Ended September 30, 2021
(In Thousands)	Net Unrealized (Loss) Gain on Available for Sale Securities		Defined Benefit Plan		Total		Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total
Beginning balance	$	(6,222)	$	(3,458)	$	(9,680)	$	4,085	$	(5,523)	$	(1,438)
Other comprehensive loss before reclassifications	(5,026)		—		(5,026)		(542)		—		(542)
Amounts reclassified from accumulated other comprehensive (loss) gain	123		14		137		(39)		37		(2)
Net current-period other comprehensive (loss) income	(4,903)		14		(4,889)		(581)		37		(544)

Ending balance	$	(11,125)	$	(3,444)	$	(14,569)	$	3,504	$	(5,486)	$	(1,982)


	Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
(In Thousands)	Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total		Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total
Beginning balance	$	2,373	$	(3,485)	$	(1,112)	$	4,714	$	(5,596)	$	(882)
Other comprehensive loss before reclassifications	(13,631)		—		(13,631)		(954)		—		(954)
Amounts reclassified from accumulated other comprehensive gain (loss)	133		41		174		(256)		110		(146)
Net current-period other comprehensive (loss) income	(13,498)		41		(13,457)		(1,210)		110		(1,100)

Ending balance	$	(11,125)	$	(3,444)	$	(14,569)	$	3,504	$	(5,486)	$	(1,982)

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The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of September 30, 2022 and 2021 were as follows:


Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss				Affected Line Item in the Consolidated Statement of Income
	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021
Net unrealized (loss) gain on available for sale securities	$	(156)	$	48	Net debt securities (losses) gains, available for sale
Income tax effect	33		(9)		Income tax provision
Total reclassifications for the period	$	(123)	$	39

Net unrecognized pension costs	$	(17)	$	(45)	Other non-interest expense
Income tax effect	3		8		Income tax provision
Total reclassifications for the period	$	(14)	$	(37)


Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss				Affected Line Item in the Consolidated Statement of Income
	Nine months ended September 30, 2022		Nine months ended September 30, 2021
Net unrealized (losses) gain on available for sale securities	$	(168)	$	323	Net debt securities (losses) gains, available for sale
Income tax effect	35		(67)		Income tax provision
Total reclassifications for the period	$	(133)	$	256

Net unrecognized pension costs	$	(52)	$	(138)	Other non-interest expense
Income tax effect	11		28		Income tax provision
Total reclassifications for the period	$	(41)	$	(110)

Note 3. Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has contracted with a third-party software vendor to assist with the development of our approach in determining the calculations under the new guidance. The Company is currently refining the expected credit losses calculation along with process documentation and data validation testing. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of January 1, 2023 not to exceed 25% of the allowance for loan losses.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives, and Hedging (Topic 815); and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-04 makes clarifying amendments to certain financial instrument standards. For entities that have not yet adopted ASU 2016-13, the

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effective dates for the amendments related to ASU 2016-13 are the same as the effective dates in ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2017-12 as of April 25, 2019, the effective dates for the amendments to Topic 815 are the same as the effective dates in ASU 2017-12. For entities that have adopted ASU 2017-12 as of April 25, 2019, the effective date is as of the beginning of the first annual period beginning after April 25, 2019. The amendments related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted the credit losses standard, the ASU is effective when they implement the credit losses standard. For entities that already have adopted the credit losses standard, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

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In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2020, the FASB issued ASU 2020-11, Financial Services – Insurance (Topic 944), which was made in consideration of the implications of the Coronavirus Disease 2019 (COVID-19) pandemic on an insurance entity’s ability to effectively implement the amendments in Accounting Standards Update No. 2018-12, Financial Services— Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI). The amendments in this Update defer the effective date of LDTI for all entities by one year, as (1) for public business entities that meet the definition of an SEC filer and are not SRCs, LDTI is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years; and (2) for all other entities, LDTI is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This amendment clarifies the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. It also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The amendments will be applied

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prospectively, with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

Note 4. Per Share Data

There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 917,000 stock options, with an average exercise price of $25.35, outstanding on September 30, 2022. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $23.78 being less than the exercise price of the options issued. There were a total of 1,045,475 stock options, with an average exercise price of $27.25 that were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $23.70 being less than the strike price for the period ending September 30, 2021.


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Weighted average common shares issued	7,561,453	7,544,219	7,557,250	7,539,850
Weighted average treasury stock shares	(510,225)	(480,225)	(496,379)	(480,225)


Weighted average common shares outstanding - basic and diluted	7,051,228	7,063,994	7,060,871	7,059,625

Note 5. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at September 30, 2022 and December 31, 2021 are as follows:


	September 30, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):
U.S. Government and agency securities	$	3,003	$	—	$	(101)	$	2,902
Mortgage-backed securities	1,508		—		(226)		1,282

State and political securities	151,663		18		(10,001)		141,680
Other debt securities	46,104		4		(3,776)		42,332
Total debt securities	$	202,278	$	22	$	(14,104)	$	188,196

Investment equity securities:

Equity securities	$	1,350	$	—	$	(220)	$	1,130


	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):

Mortgage-backed securities	$	1,752	$	—	$	(5)	$	1,747

State and political securities	113,852		3,500		(694)		116,658
Other debt securities	47,802		524		(321)		48,005
Total debt securities	$	163,406	$	4,024	$	(1,020)	$	166,410

Investment equity securities:

Equity securities	$	1,350	$	—	$	(62)	$	1,288

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The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at September 30, 2022 and December 31, 2021.


	September 30, 2022
	Less than Twelve Months				Twelve Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):
U.S. Government and agency securities	$	2,902	$	(101)	$	—	$	—	$	2,902	$	(101)
Mortgage-backed securities	1,282		(226)		—		—		1,282		(226)

State and political securities	110,153		(6,288)		29,874		(3,713)		140,027		(10,001)
Other debt securities	25,956		(1,817)		15,272		(1,959)		41,228		(3,776)
Total debt securities	$	140,293	$	(8,432)	$	45,146	$	(5,672)	$	185,439	$	(14,104)


	December 31, 2021
	Less than Twelve Months				Twelve Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):

Mortgage-backed securities	$	1,747	$	(5)	$	—	$	—	$	1,747	$	(5)

State and political securities	34,203		(398)		7,408		(296)		41,611		(694)
Other debt securities	21,446		(301)		1,808		(20)		23,254		(321)
Total debt securities	$	57,396	$	(704)	$	9,216	$	(316)	$	66,612	$	(1,020)

At September 30, 2022, there were a total of 184 securities in a continuous unrealized loss position for less than twelve months and 78 individual securities that were in a continuous unrealized loss position for twelve months or greater.

The Company reviews its position quarterly and has determined that, at September 30, 2022, the declines outlined in the above table represent temporary declines and the Company does not intend to sell, and does not believe it will be required to sell, these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at September 30, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)	Amortized Cost		Fair Value
Due in one year or less	$	19,949	$	19,629
Due after one year to five years	109,208		102,580
Due after five years to ten years	66,429		59,814
Due after ten years	6,692		6,173
Total	$	202,278	$	188,196

Total gross proceeds from sales of debt securities available for sale for the nine months ended September 30, 2022 was $4,151,000, compared to $13,689,000 for the corresponding 2021 period.

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The following table represents gross realized gains and losses from the sales of debt securities available for sale:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2022		2021		2022		2021
Available for sale (AFS):
Gross realized gains:
U.S. Government and agency securities	$	—	$	—	$	—	$	—
Mortgage-backed securities	—		—		—		—

State and political securities	—		1		14		1
Other debt securities	—		48		—		323
Total gross realized gains	$	—	$	49	$	14	$	324

Gross realized losses:



State and political securities	$	156	$	1	$	182	$	1
Other debt securities	—		—		—		—
Total gross realized losses	$	156	$	1	$	182	$	1

There were no impairment charges included in gross realized losses for the three and nine months ended September 30, 2022 and 2021, respectively.

Investment securities with a carrying value of approximately $160,842,000 and $139,435,000 at September 30, 2022 and December 31, 2021, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

At September 30, 2022 and December 31, 2021, we had $1,130,000 and $1,288,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2022 and 2021:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2022		2021		2022		2021
Net losses recognized in equity securities during the period	$	(55)	$	(8)	$	(158)	$	(24)
Less: Net gains realized on the sale of equity securities during the period	—		—		—		—
Unrealized (losses) gains recognized in equity securities held at reporting date	$	(55)	$	(8)	$	(158)	$	(24)

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Note 6. Loans

Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial, financial, and agricultural, real estate, and installment loans. Real estate loans are further segmented into three categories: residential, commercial, and construction, while installment loans are classified as either consumer automobile loans or other installment loans.

The following table presents the related aging categories of loans, by segment, as of September 30, 2022 and December 31, 2021:


	September 30, 2022
			Past Due		Past Due 90
			30 To 89		Days Or More		Non-
(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	172,765	$	147	$	—	$	453	$	173,365
Real estate mortgage:
Residential	679,611		1,948		1,099		584		683,242
Commercial	481,399		594		—		3,545		485,538
Construction	48,694		—		—		—		48,694
Consumer automobile loans	158,676		950		55		—		159,681
Other consumer installment loans	9,706		98		7		—		9,811
	1,550,851		$	3,737	$	1,161	$	4,582	1,560,331
Net deferred loan fees and discounts	369								369
Allowance for loan losses	(15,211)								(15,211)
Loans, net	$	1,536,009							$	1,545,489


	December 31, 2021
			Past Due		Past Due 90
			30 To 89		Days Or More		Non-
(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	162,571	$	139	$	—	$	575	$	163,285
Real estate mortgage:
Residential	590,240		4,083		687		837		595,847
Commercial	442,573		224		—		3,937		446,734
Construction	36,701		554		—		40		37,295
Consumer automobile loans	138,775		490		143		—		139,408
Other consumer installment loans	9,199		47		31		—		9,277
	1,380,059		$	5,537	$	861	$	5,389	1,391,846
Net deferred loan fees and discounts	301								301
Allowance for loan losses	(14,176)								(14,176)
Loans, net	$	1,366,184							$	1,377,971

Impaired Loans

Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks individually evaluate such loans for impairment and do not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the

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collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard or worse. Management may also elect to measure an individual loans of less than $100,000 for impairment on a case-by-case basis.

Mortgage loans on one-to-four family properties and consumer loans are measured for impairment collectively with the exception of loans identified as troubled debt restructurings. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Interest income for impaired loans is recorded consistent to the Banks' policy.

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	302	$	302	$	—
Real estate mortgage:
Residential	3,436		3,436		—
Commercial	2,655		2,655		—
Construction	—		—		—
Consumer automobile loans	—		—		—
Installment loans to individuals	—		—		—
	6,393		6,393		—
With an allowance recorded:
Commercial, financial, and agricultural	422		422		5
Real estate mortgage:
Residential	1,026		1,026		388
Commercial	4,504		4,504		813
Construction	—		—		—
Consumer automobile loans	—		—		—
Installment loans to individuals	—		—		—
	5,952		5,952		1,206
Total:
Commercial, financial, and agricultural	724		724		5
Real estate mortgage:
Residential	4,462		4,462		388
Commercial	7,159		7,159		813
Construction	—		—		—
Consumer automobile loans	—		—		—
Installment loans to individuals	—		—		—
	$	12,345	$	12,345	$	1,206

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	December 31, 2021
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	355	$	355	$	—
Real estate mortgage:
Residential	3,874		3,874		—
Commercial	3,105		3,105		—
Construction	105		105		—
Consumer automobile loans	—		—		—
Installment loans to individuals	—		—		—
	7,439		7,439		—
With an allowance recorded:
Commercial, financial, and agricultural	534		3,321		2
Real estate mortgage:
Residential	1,178		1,178		201
Commercial	4,814		4,814		800
Construction	—		—		—
Consumer automobile loans	—		—		—
Installment loans to individuals	20		20		20
	6,546		9,333		1,023
Total:
Commercial, financial, and agricultural	889		3,676		2
Real estate mortgage:
Residential	5,052		5,052		201
Commercial	7,919		7,919		800
Construction	105		105		—
Consumer automobile loans	—		—		—
Installment loans to individuals	20		20		20
	$	13,985	$	16,772	$	1,023

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,
	2022						2021
(In Thousands)	Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans		Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans
Commercial, financial, and agricultural	$	711	$	5	$	—	$	2,052	$	13	$	—
Real estate mortgage:
Residential	4,586		47		—		5,218		53		—
Commercial	7,227		50		—		10,530		61		—
Construction	—		—		—		115		1		—
Consumer automobile	7		—		—		—		—		—
Other consumer installment loans	10		—		—		20		—		—
	$	12,541	$	102	$	—	$	17,935	$	128	$	—

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	Nine Months Ended September 30,
	2022						2021
(In Thousands)	Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans		Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans
Commercial, financial, and agricultural	$	782	$	15	$	—	$	1,458	$	43	$	—
Real estate mortgage:
Residential	4,765		141		—		5,650		151		—
Commercial	7,492		151		—		9,848		126		—
Construction	42		1		—		119		4		—
Consumer automobile	3		1		—		38		—		—
Other consumer installment loans	15		—		—		10		9		—
	$	13,099	$	309	$	—	$	17,123	$	333	$	—

Troubled Debt Restructurings

The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There were no loan modifications considered to be TDRs completed during the three and nine months ended September 30, 2022, respectively. There were five loan modifications considered TDRs completed during the nine months ended September 30, 2021. Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2021 were as follows:


		Three Months Ended September 30,
	2021
(In Thousands, Except Number of Contracts)			Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural			—	$	—	$	—
Real estate mortgage:
Residential			—	—		—
Commercial			—	—		—
Construction			—	—		—
			—	$	—	$	—

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		Nine Months Ended September 30,
	2021
(In Thousands, Except Number of Contracts)			Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural			1	$	949	$	949
Real estate mortgage:
Residential			2	865		865
Commercial			2	855		855
Construction			—	—		—
			5	$	2,669	$	2,669

There was no loan modification considered to be a TDR made during the twelve months prior to September 30, 2022 that defaulted during the nine months ended September 30, 2022. There were two loan modifications considered to be a TDRs made during the twelve months previous to September 30, 2021 that defaulted during the nine months ended September 30, 2021. The defaulted loan type and recorded investments at September 30, 2021 were as follows: two residential real estate loan with a recorded investment of $706,000.

Troubled debt restructurings amounted to $8,469,000 and $9,410,000 as of September 30, 2022 and December 31, 2021, respectively.

The amount of foreclosed residential real estate held at September 30, 2022 and December 31, 2021, totaled $127,000 and $339,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 2022 and December 31, 2021, totaled $521,000 and $193,000, respectively.

The Company began offering short-term loan modifications to provide relief to borrowers during the COVID-19 national emergency. The CARES Act, along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made in a good faith basis in response to COVID-19 to loans that are current at the time the modification program is implemented do not need to be accounted for as TDRs. Loan modifications and payment deferrals have been at historically high levels as the impact of the pandemic continues. As of September 30, 2022, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on 1,372 loans with no loan remaining in its deferral period. As of September 30, 2021, the loan modification/deferral program in place had generated deferrals of up to 180 days that were granted on 1,371 loans with 14 loans remaining in their deferral period with an aggregate outstanding balance of $1,346,000. These loan modifications met applicable requirements to not be considered TDRs. The Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act (the “Economic Aid Act”) passed in December 2020 extended the CARES Act provisions permitting financial institutions to suspend TDR assessment and reporting requirements under generally accepted accounting principles until the earlier of 60 days after the date that the President terminates the COVID-19 national emergency or January 1, 2022.

Internal Risk Ratings

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated for substandard classification. Loans in the doubtful category exhibit the same weaknesses found in the substandard loans; however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Loans classified as loss are considered uncollectible and charge-off is imminent.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. An external semi-annual loan review of large commercial relationships is

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performed, as well as a sample of smaller transactions. The 2022 loan review will evaluate 55% of the Banks' average outstanding commercial portfolio which can consist of outstanding loans, commercial real estate mortgages and outstanding commitments. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.

The following table presents the credit quality categories identified above as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)			Residential		Commercial		Construction						Totals
Pass	$	171,416	$	680,296	$	475,341	$	48,593	$	159,681	$	9,811	$	1,545,138
Special Mention	152		234		4,360		—		—		—		4,746
Substandard	1,797		2,712		5,837		101		—		—		10,447
	$	173,365	$	683,242	$	485,538	$	48,694	$	159,681	$	9,811	$	1,560,331


	December 31, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)			Residential		Commercial		Construction						Totals
Pass	$	160,899	$	592,570	$	432,158	$	36,511	$	139,408	$	9,257	$	1,370,803
Special Mention	234		284		6,108		676		—		—		7,302
Substandard	2,152		2,993		8,468		108		—		20		13,741
	$	163,285	$	595,847	$	446,734	$	37,295	$	139,408	$	9,277	$	1,391,846

Allowance for Loan Losses

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.

The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Banks' ALL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that are collectively evaluated for impairment are grouped into two classes for evaluation. A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.

For the general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing a twelve quarter moving average. However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the economic cycle. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors. Management also monitors industry loss factors by loan segment for applicable adjustments to actual loss experience.

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Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

Activity in the allowance is presented for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30, 2022
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	2,108	$	4,818	$	5,395	$	199	$	1,307	$	110	$	456	$	14,393
Charge-offs	(18)		—		—		—		(57)		(85)		—		(160)
Recoveries	93		1		1		—		10		18		—		123
Provision	(114)		376		140		11		325		75		42		855
Ending Balance	$	2,069	$	5,195	$	5,536	$	210	$	1,585	$	118	$	498	$	15,211


	Three Months Ended September 30, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,846	$	4,619	$	4,436	$	212	$	1,824	$	44	$	1,457	$	14,438
Charge-offs	(10)		(29)		—		—		(12)		(116)		—		(167)
Recoveries	8		—		84		5		107		7		—		211
Provision	277		175		(500)		11		(226)		194		144		75
Ending Balance	$	2,121	$	4,765	$	4,020	$	228	$	1,693	$	129	$	1,601	$	14,557


t	Nine Months Ended September 30, 2022
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,946	$	4,701	$	5,336	$	179	$	1,411	$	111	$	492	$	14,176
Charge-offs	(18)		(15)		(155)		—		(234)		(188)		—		(610)
Recoveries	138		46		3		28		32		63		—		310
Provision	3		463		352		3		376		132		6		1,335
Ending Balance	$	2,069	$	5,195	$	5,536	$	210	$	1,585	$	118	$	498	$	15,211


	Nine Months Ended September 30, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,936	$	4,460	$	3,635	$	134	$	1,906	$	261	$	1,471	$	13,803
Charge-offs	(45)		(172)		—		—		(235)		(173)		—		(625)
Recoveries	22		112		109		10		139		47		—		439
Provision	208		365		276		84		(117)		(6)		130		940
Ending Balance	$	2,121	$	4,765	$	4,020	$	228	$	1,693	$	129	$	1,601	$	14,557

The shift in allocation and the increase in the loan provision is primarily due to changes in the credit metrics within the loan portfolio and decreasing economic uncertainty caused by the COVID-19 pandemic including supply chain disruptions.

The Company grants commercial, industrial, residential, and installment loans to customers primarily throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.

The Company has a concentration of the following to gross loans at September 30, 2022 and 2021:


	September 30,
	2022		2021
Owners of residential rental properties	19.95	%	18.84	%
Owners of commercial rental properties	16.09	%	14.03	%

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2022 and December 31, 2021:


	September 30, 2022
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)			Residential		Commercial		Construction								Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	5	$	388	$	813	$	—	$	—	$	—	$	—	$	1,206
Collectively evaluated for impairment	2,064		4,807		4,723		210		1,585		118		498		14,005
Total ending allowance balance	$	2,069	$	5,195	$	5,536	$	210	$	1,585	$	118	$	498	$	15,211

Loans:
Individually evaluated for impairment	$	724	$	4,462	$	7,159	$	—	$	—	$	—			$	12,345

Collectively evaluated for impairment	172,641		678,780		478,379		48,694		159,681		9,811				1,547,986
Total ending loans balance	$	173,365	$	683,242	$	485,538	$	48,694	$	159,681	$	9,811			$	1,560,331


	December 31, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)			Residential		Commercial		Construction								Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2	$	201	$	800	$	—	$	—	$	20	$	—	$	1,023
Collectively evaluated for impairment	1,944		4,500		4,536		179		1,411		91		492		13,153
Total ending allowance balance	$	1,946	$	4,701	$	5,336	$	179	$	1,411	$	111	$	492	$	14,176

Loans:
Individually evaluated for impairment	$	889	$	5,052	$	7,919	$	105	$	—	$	20			$	13,985

Collectively evaluated for impairment	162,396		590,795		438,815		37,190		139,408		9,257				1,377,861
Total ending loans balance	$	163,285	$	595,847	$	446,734	$	37,295	$	139,408	$	9,277			$	1,391,846

Note 7. Net Periodic Benefit Cost-Defined Benefit Plans

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2021.

The following sets forth the components of the net periodic expense/(gain) of the domestic non-contributory defined benefit plan for the three and nine months ended September 30, 2022 and 2021, respectively:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2022		2021		2022		2021

Interest cost	$	138	$	127	$	414	$	381
Expected return on plan assets	(412)		(386)		(1,237)		(1,158)


Amortization of net loss	17		45		52		138
Net periodic benefit	$	(257)	$	(214)	$	(771)	$	(639)

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Employer Contributions

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2021, that it does not expect to contribute to its defined benefit plan in 2022. As of September 30, 2022, there were no contributions made to the pension plan.

Note 8. Stock Purchase Plans

The Company maintains an Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to 1,500,000 shares to be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. During the nine months ended September 30, 2022 and 2021, there were 2,960 and 2,873 shares issued under the Plan, respectively, for total proceeds of $67,000 and $65,000.

The Company maintains the 2020 Non-Employee Director Compensation Plan ("Director Plan"). Under this Director Plan, non-employee directors who have not attained specified stock ownership levels are required to receive a portion of their annual compensation in the form of common stock (currently 50%of total annual compensation), with the ability to elect to receive up to 100% of annual compensation in the form of common stock by making a written election prior to the calendar year to which the compensation relates. The Director Plan allows for up to 100,000 shares to be issued. As of September 30 2022, the Company has issued a total of 31,678 shares of common stock to non-employee directors under the Director Plan in lieu of otherwise payable cash compensation with 9,968 and 10,473 shares issued during the nine months ended September 30, 2022 and 2021.

Note 9. Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily comprised of commitments to extend credit, standby letters of credit, and credit exposure from the sale of assets with recourse. These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.

Financial instruments whose contract amounts represent credit risk are as follows at September 30, 2022 and December 31, 2021:


(In Thousands)	September 30, 2022		December 31, 2021
Commitments to extend credit	$	180,752	$	184,364
Standby letters of credit	9,795		7,027
Credit exposure from the sale of assets with recourse	10,454		10,248
	$	201,001	$	201,639

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, on an extension of credit is based on management’s credit assessment of the counterparty.

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management.

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Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

Note 10. Fair Value Measurements

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.


Level I:						Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:						Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:						Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

This hierarchy requires the use of observable market data when available.

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of September 30, 2022 and December 31, 2021, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	September 30, 2022
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Investment securities, available for sale:
U.S. Government and agency securities	$	—	$	2,902	$	—	$	2,902
Mortgage-backed securities	—		1,282		—		1,282

State and political securities	—		141,680		—		141,680
Other debt securities	—		42,332		—		42,332
Investment equity securities:

Equity securities	1,130		—		—		1,130


	December 31, 2021
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Investment securities, available for sale:

Mortgage-backed securities	$	—	$	1,747	$	—	$	1,747

State and political securities	—		116,658		—		116,658
Other debt securities	—		48,005		—		48,005
Investment equity securities:

Equity securities	1,288		—		—		1,288

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The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of September 30, 2022 and December 31, 2021, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	September 30, 2022
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	—	$	—	$	2,006	$	2,006
Other real estate owned	—		—		127		127


	December 31, 2021
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	—	$	—	$	2,360	$	2,360
Other real estate owned	—		—		83		83

The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of September 30, 2022 and December 31, 2021:

September 30, 2022

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

2,006

Appraisal of collateral (1)

Appraisal adjustments (1)

(10)% to (34)%

(14)%

Other real estate owned

127

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

December 31, 2021

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

2,360

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (34)%

(15)%

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The discounted cash flow valuation technique is utilized to determine the fair value of performing impaired loans, while non-performing impaired loans utilize the appraisal of collateral method.

The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses. The significant unobservable input used in the fair value measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of collateral valuation technique.

Note 11. Fair Value of Financial Instruments

The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair values.

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Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments. The Company’s fair values are set forth below for the Company’s other financial instruments.

As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, this fair value of financial instruments would not represent the full market value of the Company.

The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at September 30, 2022 and December 31, 2021:


	Carrying		Fair		Fair Value Measurements at September 30, 2022
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:






Loans held for sale (1)	$	2,485	$	2,485	$	2,485	$	—	$	—
Loans, net	1,545,489		1,503,285		—		—		1,503,285



Financial liabilities:

Time deposits	142,808		135,457		—		—		135,457
Short-term borrowings	30,901		30,901		30,901		—		—
Long-term borrowings	102,829		99,100		—		—		99,100

(1) The financial instrument is carried at cost at, September 30, 2022 which approximate the fair value of the instruments


	Carrying		Fair		Fair Value Measurements at December 31, 2021
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:





Loans held for sale (1)	$	3,725	$	3,725	$	3,725	$	—	$	—
Loans, net	1,377,971		1,379,787		—		—		1,379,787



Financial liabilities:

Time deposits	205,367		204,512		—		—		204,512
Short-term borrowings	5,747		5,747		5,747		—		—
Long-term borrowings	125,963		127,679		—		—		127,679

(1) The financial instrument is carried at cost at, December 31, 2021 which approximate the fair value of the instruments

The methods and assumptions used by the Company in estimating fair values of financial instruments is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables.

Note 12. Stock Options

In 2020, the Company adopted the 2020 Equity Incentive Plan which replaced the 2014 Equity Incentive Plan that did not have any remaining shares available for issuance. The plans are designed to help the Company attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, restricted stock, restricted stock units, and other equity-based awards may be granted as part of the plan.

As of January 1, 2022, the Company had a total of 1,034,525 stock options outstanding. During the period ended September 30, 2022, the Company issued 234,000 stock options with a strike price of $24.10 to a group of employees. The options granted in 2022 all expire ten years from the grant date. Of the 234,000 grants awarded in 2022, 156,000 of the options vest in three years while the 78,000 remaining options vest in five years. During the nine month period ended September 30, 2022, a voluntary cash settlement of 346,725 outstanding stock options with an average strike price of $30.07 was initiated. The repurchase price per outstanding share ranged from $1.4770 to $3.3685 as determined by the utilization of a Black Scholes valuation methodology.

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Stock options outstanding as of September 30, 2022 are presented below:


Stock Options Granted
Date	Shares	Forfeited	Cash Settlement	Outstanding	Strike Price		Vesting Period	Expiration
January 18, 2022	156,000	—	—	156,000	$	24.10	3 years	10 years
January 18, 2022	78,000	—	—	78,000	24.10		5 years	10 years
April 9, 2021	156,500	—	—	156,500	24.23		3 years	10 years
April 9, 2021	78,000	—	—	78,000	24.23		5 years	10 years
March 11, 2020	119,300	—	—	119,300	25.34		3 years	10 years
March 11, 2020	119,200	—	—	119,200	25.34		5 years	10 years
March 15, 2019	120,900	(16,800)	—	104,100	28.01		3 years	10 years
March 15, 2019	119,100	(16,200)	—	102,900	28.01		5 years	10 years






August 27, 2015	58,125	(26,250)	(28,875)	3,000	28.02		5 years	10 years

A summary of stock option activity is presented below:


	September 30, 2022
	Shares	Weighted Average Exercise Price
Outstanding, beginning of year	1,034,525	$	27.23
Granted	234,000	24.10
Cash settlement	(346,725)	30.07
Forfeited	(4,800)	28.59
Expired	—	—
Outstanding, end of period	917,000	$	25.35

Exercisable, end of period	107,100	$	28.01

The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straightline basis over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the value of the vested portion of the award at that date.

The fair value of stock options is estimated using the Black-Scholes option pricing model. The following is a summary of the assumptions used in this model for stock options granted for the nine months ended September 30, 2022:


	Nine months ended September 30,
	2022
Risk-free interest rate	1.23		%
Expected volatility	33		%
Expected Annual dividend	$	1.28
Expected life	6.84 years
Weighted average grant date fair value per option	$	4.28

Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense related to stock options was $1,004,000 for the nine months ended September 30, 2022 compared to $754,000 for the same period of 2021. The expense level for the nine months ended September 30, 2022 was impacted by the voluntary cash settlement of 346,725 stock options which resulted in $183,000 in additional compensation expense and a reduction in additional paid-in capital of $1,074,000. As of September 30, 2022, a total

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of 107,100 stock options were exercisable and the weighted average years to expiration of these options was 6.96 years. Total unrecognized compensation cost for non-vested options was $1,848,000 and will be recognized over their weighted average remaining vesting period of 1.26 years.

Note 13. Leases

The following table shows finance lease right of use assets and finance lease liabilities as of:



(In Thousands)	Statement of Financial Condition classification	September 30, 2022		December 31, 2021
Finance lease right of use assets	Premises and equipment, net	$	7,113	$	7,435
Finance lease liabilities	Long-term borrowings	7,829		7,963

The following table shows the components of finance and operating lease expense for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2022		2021		2022		2021

Finance Lease Cost:
Amortization of right-of-use asset	$	107	$	108	$	322	$	367
Interest expense	61		62		184		195
Operating lease cost	71		73		214		223

Variable lease cost	—		—		—		—
Total Lease Cost	$	239	$	243	$	720	$	785

A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:



(In Thousands)	Operating		Finance
2022	$	72	$	105
2023	265		421
2024	255		427
2025	257		929
2026	260		387
2027 and thereafter	2,568		9,277
Total undiscounted cash flows	3,677		11,546
Discount on cash flows	(924)		(3,717)
Total lease liability	$	2,753	$	7,829

The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of September 30, 2022.



	Operating		Finance
Weighted-average term (years)	17.2		23.6
Weighted-average discount rate	3.54	%	3.20	%

Note 14. Reclassification of Comparative Amounts

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.

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CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; (vi) the length and extent of the economic contraction as a result of the COVID-19 pandemic; or (vii) the effect of changes in the business cycle and downturns in the local, regional or national economies, including the effects of inflation,; and (viii) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 and in other filings made by the Company under the Securities Exchange Act of 1934.

You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

EARNINGS SUMMARY

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

Summary Results

Net income for the three and nine months ended September 30, 2022 was $5,250,000 and $12,913,000 compared to $4,125,000 and $11,154,000 for the same periods of 2021. Results for the three and nine months ended September 30, 2022 compared to 2021 were impacted by an increase in after-tax securities losses of $199,000 (from a gain of $32,000 to a loss of $167,000) for the three month period and an increase in after-tax securities losses of $494,000 (from a gain of $236,000 to a loss of $258,000) for the nine month period. Results for the nine months ended September 30, 2022 were impacted by additional compensation expense of $183,000 (after-tax $145,000) associated with the voluntary cash settlement of 346,725 outstanding stock options. In addition, an after-tax loss of $201,000 related to a branch closure negatively impacted results for the nine months ended September 30, 2022. The provision for loan losses increased $780,000 for the three months and $395,000 for the nine months ended September 30, 2022 to $855,000 and $1.3 million, respectively, compared to $75,000 and $940,000 for the 2021 periods. The increases in the provision for loan losses were primarily due to the significant growth in the loan portfolio. Basic and diluted earnings per share for the three and nine months ended September 30, 2022 were $0.74 and $1.83. Basic and diluted earnings per share for the three and nine months ended September 30, 2021 were $0.58 and $1.58. Annualized return on average assets was 1.09% for three months ended September 30, 2022, compared to 0.86% for the corresponding period of 2021. Annualized return on average assets was 0.89% for the nine months ended September 30, 2022, compared to 0.79% for the corresponding period of 2021.Annualized return on average equity was 12.61% for the three months ended September 30, 2022, compared to 9.85% for the corresponding period of 2021. Annualized return on average equity was 10.48% for the nine months ended September 30, 2022, compared to 9.17% for the corresponding period of 2021. Net income from core operations (“core earnings”), which is a non-generally accepted accounting principles (GAAP) measure of net income excluding net securities gains or losses, was $5,417,000 for the three months ended September 30, 2022 compared to $4,093,000 for the same period of 2021. Core earnings were $13.2 million for the nine months ended September 30, 2022, compared to $10.9 million for the same period of 2021. Core earnings per share for the three months ended September 30, 2022 were $0.77 basic and diluted, compared to $0.58 basic and diluted core earnings per share for the same period of 2021. Core earnings per share for the nine months ended September 30, 2022 were $1.87 basic and diluted, compared to $1.55 basic and diluted for the same period of 2021.

Management uses the non-GAAP measure of net income from core operations in its analysis of the Company’s performance. This measure, as used by the Company, adjusts net income by excluding significant gains or losses that are unusual in nature. Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company’s core businesses. For purposes of this Quarterly Report on Form 10-Q, net income from core operations means net income adjusted to exclude after-tax net securities gains or losses. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Reconciliation of GAAP and Non-GAAP Financial Measures


(Dollars in Thousands, Except Per Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
GAAP net income	$	5,250	$	4,125	$	12,913	$	11,154
Less: net securities (losses) gains, net of tax	(167)		32		(258)		236
Non-GAAP core earnings	$	5,417	$	4,093	$	13,171	$	10,918


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
GAAP Return on average assets (ROA)	1.09	%	0.86	%	0.89	%	0.79	%
Less: net securities (losses) gains, net of tax	(0.03)	%	—	%	(0.02)	%	0.02	%
Non-GAAP core ROA	1.12	%	0.86	%	0.91	%	0.77	%

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		Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021
GAAP Return on average equity (ROE)		12.61	%	9.85	%	10.48	%	9.17	%
Less: net securities (losses) gains, net of tax		(0.41)	%	0.07	%	(0.21)	%	0.19	%
Non-GAAP core ROE	.	13.02	%	9.78	%	10.69	%	8.98	%


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
GAAP Basic earnings per share (EPS)	$	0.74	$	0.58	$	1.83	$	1.58
Less: net securities (losses) gains, net of tax	(0.03)		—		(0.04)		0.03
Non-GAAP core operating EPS	$	0.77	$	0.58	$	1.87	$	1.55


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
GAAP Diluted EPS	$	0.74	$	0.58	$	1.83	$	1.58
Less: net securities (losses) gains, net of tax	(0.03)		—		(0.04)		0.03
Non-GAAP diluted core EPS	$	0.77	$	0.58	$	1.87	$	1.55

Interest and Dividend Income

Interest and dividend income for the three and nine months ended September 30, 2022 increased $2,150,000 and $2,608,000 compared to the same periods of 2021. The increase in loan portfolio income was due to a increase in the average loan portfolio balance offset partially by a decrease in average rate earned on the portfolio. Investment securities income has been impacted by a decrease in the average rate earned on the portfolio for the nine month period as higher yielding legacy investments matured. The yield on the the investment portfolio increased during the three months ended September 30, 2022 as compared to the same period in 2021 as investment yields began to move upward. The increase in dividend and other interest income is due to the increase in interest earned on federal funds sold and interest-bearing deposits.

Interest and dividend income composition for the three and nine months ended September 30, 2022 and 2021 was as follows:


	Three Months Ended
	September 30, 2022				September 30, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	$	15,051	89.25	%	$	13,382	90.95	%	$	1,669	12.47	%
Investment securities:
Taxable	949		5.63		834		5.67		115		13.79
Tax-exempt	236		1.40		160		1.09		76		47.50
Dividend and other interest income	628		3.72		338		2.29		290		85.80
Total interest and dividend income	$	16,864	100.00	%	$	14,714	100.00	%	$	2,150	14.61	%


	Nine Months Ended
	September 30, 2022				September 30, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	$	41,709	90.04	%	$	39,826	91.10	%	$	1,883	4.73	%
Investment securities:
Taxable	2,550		5.50		2,491		5.70		59		2.37
Tax-exempt	594		1.28		495		1.13		99		20.00
Dividend and other interest income	1,470		3.18		903		2.07		567		62.79
Total interest and dividend income	$	46,323	100.00	%	$	43,715	100.00	%	$	2,608	5.97	%

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Interest Expense

Interest expense for the three and nine months ended September 30, 2022 decreased $750,000 and $2,827,000 compared to the same periods of 2021. Interest-bearing deposit rates continued to remain at low levels due to the continued economic impact of supply chain disruption and level of excess balance sheet liquidity. The decrease in deposit rates was offset in part by an increase in average interest-bearing demand deposits for the nine month period. Growth in the deposit portfolio has allowed for a decrease in average long-term borrowings resulting in a decrease in long-term borrowing interest expense.

Interest expense composition for the three and nine months ended September 30, 2022 and 2021 was as follows:


	Three Months Ended
	September 30, 2022				September 30, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	$	693	52.03	%	$	1,308	62.83	%	$	(615)	(47.02)	%
Short-term borrowings	26		1.95		3		0.14		23		766.67
Long-term borrowings	613		46.02		771		37.03		(158)		(20.49)
Total interest expense	$	1,332	100.00	%	$	2,082	100.00	%	$	(750)	(36.02)	%


	Nine Months Ended
	September 30, 2022				September 30, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	$	2,191	53.56	%	$	4,481	64.77	%	$	(2,290)	(51.10)	%
Short-term borrowings	29		0.71		7		0.10		22		314.29
Long-term borrowings	1,871		45.73		2,430		35.13		(559)		(23.00)
Total interest expense	$	4,091	100.00	%	$	6,918	100.00	%	$	(2,827)	(40.86)	%

Net Interest Margin

The net interest margin for the three and nine months ended September 30, 2022 was 3.47% and 3.17%, compared to 2.85% and 2.84% for the corresponding periods of 2021. The increase in the net interest margin for the three and nine month periods was driven by a decline in the rate paid on interest-bearing deposits of 23 and 29 basis points ("bps") as rates paid decreased throughout 2021 and remained at historically low levels during 2022. Leading the decline in the rate paid on interest-bearing deposits were decreases of 84 and 91 bps in the rate paid on time deposits as time deposits issued prior to the COVID-19 pandemic matured. The increase in the earning asset yield was driven by an increase in yield on federal funds sold and interest-bearing deposits due to the rate increases enacted by the Federal Open Market Committee ("FOMC"). For the three and nine months ended September 30, 2022 in comparison to the same periods of 2021, there was an increase in rate on federal funds sold of 186 and 70 bps, respectively, while the rate on interest bearing deposits increased 218 and 48 bps. The three month period ended September 30, 2022 was impacted by an increase of 18 bps in the yield earned on the securities portfolio as legacy securities matured with the funds reinvested at higher rates.

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The following is a schedule of average balances and associated yields for the three and nine months ended September 30, 2022 and 2021:


	AVERAGE BALANCES AND INTEREST RATES
	Three Months Ended September 30, 2022						Three Months Ended September 30, 2021
(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:
Tax-exempt loans (3)	$	58,735	$	394	2.66	%	$	46,193	$	307	2.64	%
All other loans	1,463,330		14,740		4.00	%	1,296,790		13,139		4.02	%
Total loans (2)	1,522,065		15,134		3.94	%	1,342,983		13,446		3.97	%

Federal funds sold	33,641		218		2.57	%	40,000		72		0.71	%

Taxable securities	159,721		1,158		2.94	%	150,308		1,022		2.76	%
Tax-exempt securities (3)	49,177		299		2.47	%	37,069		203		2.22	%
Total securities	208,898		1,457		2.83	%	187,377		1,225		2.65	%

Interest-bearing deposits	34,202		201		2.33	%	205,715		78		0.15	%

Total interest-earning assets	1,798,806		17,010		3.76	%	1,776,075		14,821		3.32	%

Other assets	130,576						132,820

Total assets	$	1,929,382					$	1,908,895

Liabilities and shareholders’ equity:
Savings	$	249,083	26		0.04	%	$	228,255	22		0.04	%
Super Now deposits	405,173		287		0.28	%	308,591		219		0.28	%
Money market deposits	287,660		200		0.28	%	306,177		238		0.31	%
Time deposits	148,968		180		0.48	%	248,649		829		1.32	%
Total interest-bearing deposits	1,090,884		693		0.25	%	1,091,672		1,308		0.48	%

Short-term borrowings	8,062		26		1.23	%	8,696		3		0.14	%
Long-term borrowings	109,269		613		2.23	%	133,536		771		2.29	%
Total borrowings	117,331		639		2.16	%	142,232		774		2.16	%

Total interest-bearing liabilities	1,208,215		1,332		0.44	%	1,233,904		2,082		0.67	%

Demand deposits	533,681						490,500
Other liabilities	21,008						17,027
Shareholders’ equity	166,478						167,464

Total liabilities and shareholders’ equity	$	1,929,382					$	1,908,895
Interest rate spread (3)					3.32	%					2.65	%
Net interest income/margin (3)			$	15,678	3.47	%			$	12,739	2.85	%

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 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% and are reconciled to the equivalent GAAP

measurement below the tables.

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	AVERAGE BALANCES AND INTEREST RATES
	Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:
Tax-exempt loans (3)	$	53,269	$	1,033	2.59	%	$	46,217	$	991	2.87	%
All other loans	1,403,504		40,893		3.90	%	1,292,028		39,043		4.04	%
Total loans (2)	1,456,773		41,926		3.85	%	1,338,245		40,034		4.00	%

Federal funds sold	43,938		465		1.41	%	21,993		117		0.71	%

Taxable securities	152,937		3,126		2.76	%	147,942		3,105		2.84	%
Tax-exempt securities (3)	45,357		752		2.24	%	36,638		627		2.31	%
Total securities	198,294		3,878		2.64	%	184,580		3,732		2.73	%

Interest-bearing deposits	97,520		429		0.59	%	206,895		172		0.11	%

Total interest-earning assets	1,796,525		46,698		3.48	%	1,751,713		44,055		3.37	%

Other assets	129,048						128,567

Total assets	$	1,925,573					$	1,880,280

Liabilities and shareholders’ equity:
Savings	$	246,063	72		0.04	%	$	222,889	94		0.06	%
Super Now deposits	388,149		721		0.25	%	294,570		694		0.31	%
Money market deposits	296,998		596		0.27	%	307,309		761		0.33	%
Time deposits	167,876		802		0.64	%	253,130		2,932		1.55	%
Total interest-bearing deposits	1,099,086		2,191		0.27	%	1,077,898		4,481		0.56	%

Short-term borrowings	6,308		29		0.59	%	7,152		7		0.13	%
Long-term borrowings	112,457		1,871		2.22	%	138,669		2,430		2.34	%
Total borrowings	118,765		1,900		2.14	%	145,821		2,437		2.23	%

Total interest-bearing liabilities	1,217,851		4,091		0.45	%	1,223,719		6,918		0.76	%

Demand deposits	519,599						473,088
Other liabilities	23,814						21,327
Shareholders’ equity	164,309						162,146

Total liabilities and shareholders’ equity	$	1,925,573					$	1,880,280
Interest rate spread (3)					3.03	%					2.61	%
Net interest income/margin (3)			$	42,607	3.17	%			$	37,137	2.84	%

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 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% and are reconciled to the equivalent GAAP

measure below the tables.

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2022		2021		2022		2021
Total interest income	$	16,864	$	14,714	$	46,323	$	43,715
Total interest expense	1,332		2,082		4,091		6,918
Net interest income (GAAP)	15,532		12,632		42,232		36,797
Tax equivalent adjustment	146		107		375		340
Net interest income (fully taxable equivalent) (NON-GAAP)	$	15,678	$	12,739	$	42,607	$	37,137

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The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,						Three months ended September 30,
	2022 vs. 2021						2022 vs. 2021
	Increase (Decrease) Due to						Increase (Decrease) Due to
(In Thousands)	Volume		Rate		Net		Volume			Rate		Net
Interest income:
Tax-exempt loans	$	85	$	2	$	87	$	104		$	(62)	$	42
All other loans	1,666		(65)		1,601		2,600			(750)		1,850
Federal funds sold	(13)		159		146		175			173		348
Taxable investment securities	66		70		136		75			(54)		21
Tax-exempt investment securities	71		25		96		134			(9)		125
Interest bearing deposits	(114)		237		123		(60)			317		257
Total interest-earning assets	1,761		428		2,189		3,028			(385)		2,643

Interest expense:
Savings deposits	4		—		4		5			(27)		(22)
Super Now deposits	68		—		68		126			(99)		27
Money market deposits	(14)		(24)		(38)		(26)			(139)		(165)
Time deposits	(251)		(398)		(649)		(776)			(1,354)		(2,130)
Short-term borrowings	—		23		23		(1)		0	23		22
Long-term borrowings	(138)		(20)		(158)		(439)		0	(120)		(559)
Total interest-bearing liabilities	(331)		(419)		(750)		(1,111)			(1,716)		(2,827)
Change in net interest income	$	2,092	$	847	$	2,939	$	4,139		$	1,331	$	5,470

Provision for Loan Losses

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 annually for the Banks. Management remains committed to an aggressive program of problem loan identification and resolution.

The allowance for loan losses is determined 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 non-performing loans and its knowledge and experience with specific lending segments.

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at September 30, 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, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance. The banking agencies could require the recognition of 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 $15,211,000 at September 30, 2022. The increase in allowance was due to growth in the loan portfolio. At September 30, 2022 and December 31, 2021, the allowance for loan losses to total loans was 0.97% and 1.02%, respectively.

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The provision for loan losses totaled $855,000 and $1,335,000 for the three and nine months ended September 30, 2022 and the amounts for the corresponding 2021 periods were $75,000 and $940,000. The increase in the provision for loan losses for the three months and nine months ended September 30 2022 compared to the corresponding 2021 periods was primarily the result of loan portfolio growth and to a lesser extent the continued economic uncertainty caused by continued supply chain shortages.

Nonperforming loans decreased to $5,743,000 at September 30, 2022 from $6,250,000 at December 31, 2021. The majority of nonperforming loans involve loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses. The ratio of non-performing loans to total loans ratio decreased to 0.37% at September 30, 2022 from 0.58% at September 30, 2021 as non-performing loans have decreased to $5.7 million at September 30, 2022 from $7.8 million at September 30, 2021. Net loan charge-offs of $300,000 for the nine months ended September 30, 2022 impacted the allowance for loan losses, which was 0.97% of total loans at September 30, 2022 compared to 1.08% at September 30, 2021.

The following is a table showing total nonperforming loans as of:


	Total Nonperforming Loans
(In Thousands)	90 Days Past Due		Non-accrual		Total
September 30, 2022	$	1,161	$	4,582	$	5,743
June 30, 2022	421		4,679		5,100
March 31, 2022	364		4,917		5,281
December 31, 2021	861		5,389		6,250
September 30, 2021	854		6,909		7,763

Additional allowance for loan losses and net (chargte-offs) recoveries information is presented by loan portfolio segment in the tables below.


	September 30, 2022
	Amount of Allowance for Loan Losses Allocated			Total loans		Allowance for Loan Losses to Total Loans Ratio		Net (Charge-Offs) Recoveries		Average Loans		Ratio of Net (Charge-Offs) Recoveries to Average Loans


(In Thousands)

Commercial, financial, and agricultural	$	2,069		$	173,365	1.19	%	$	120	$	169,822	0.07	%
Real estate mortgage:
Residential	5,195			683,242		0.76	%	31		634,031		—	%
Commercial	5,536			485,538		1.14	%	(152)		458,523		(0.03)	%
Construction	210			48,694		0.43	%	28		44,161		0.06	%
Consumer automobiles	1,585			159,681		0.99	%	(202)		140,595		(0.14)	%
Other consumer installment loans	118			9,811		1.20	%	(125)		9,641		(1.30)	%
Unallocated	498
	$	15,211		$	1,560,331	0.97	%	$	(300)	$	1,456,773	(0.02)	%

Total non-accrual loans outstanding	$	4,582
Non-accrual loans to total loans outstanding	0.29		%
Allowance for loan losses to non-accrual loans	331.97		%

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	December 31, 2021
	Amount of Allowance for Loan Losses Allocated			Total loans		Allowance for Loan Losses to Total Loans Ratio		Net (Charge-Offs) Recoveries		Average Loans		Ratio of Net (Charge-Offs) Recoveries to Average Loans


(In Thousands)

Commercial, financial, and agricultural	$	1,946		$	163,285	1.19	%	$	(10)	$	175,631	(0.01)	%
Real estate mortgage:
Residential	4,701			595,847		0.79	%	(107)		584,849		(0.02)	%
Commercial	5,336			446,734		1.19	%	95		381,306		0.02	%
Construction	179			37,295		0.48	%	10		41,564		0.02	%
Consumer automobiles	1,411			139,408		1.01	%	(143)		152,496		(0.09)	%
Other consumer installment loans	111			9,277		1.20	%	(112)		9,787		(1.14)	%
Unallocated	492
	$	14,176		$	1,391,846	1.02	%	$	(267)	$	1,345,633	(0.02)	%

Total non-accrual loans outstanding	$	5,389
Non-accrual loans to total loans outstanding	0.39		%
Allowance for loan losses to non-accrual loans	263.05		%

Non-interest Income

Total non-interest income for the three and nine months ended September 30, 2022 compared to the same periods in 2021 decreased $868,000 and $1,842,000. Excluding net securities gains, non-interest income for the three and nine months ended September 30, 2022 decreased $617,000 and $1,217,000 compared to the same periods in 2021. Gain on sale of loans decreased as the volume of loan sales has declined and the product mix has caused the Company to increasingly act in a broker capacity with the fee income from broker activity included in loan broker commissions. Service charges increased for the three and nine month periods primarily due to an increase in overdraft fees. Brokerage commissions have declined due to changes in the product mix and reduced consumer activity. The decrease in debit card fees is a result of an decrease in debit card usage.

Non-interest income composition for the three and nine months ended September 30, 2022 and 2021 was as follows:


	Three Months Ended
	September 30, 2022				September 30, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	$	559	26.84	%	$	456	15.45	%	$	103	22.59	%
Net debt securities (losses) gains, available for sale	(156)		(7.49)		48		1.63		(204)		425.00
Net equity securities losses	(55)		(2.64)		(8)		(0.27)		(47)		(587.50)

Bank-owned life insurance	170		8.16		279		9.45		(109)		(39.07)
Gain on sale of loans	294		14.11		456		15.45		(162)		(35.53)
Insurance commissions	109		5.23		129		4.37		(20)		(15.50)
Brokerage commissions	142		6.82		237		8.03		(95)		(40.08)
Loan broker commissions	438		21.03		772		26.16		(334)		(43.26)
Debit card income	344		16.51		388		13.15		(44)		(11.34)
Other	238		11.43		194		6.57		44		22.68
Total non-interest income	$	2,083	100.00	%	$	2,951	100.00	%	$	(868)	(29.41)	%

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	Nine Months Ended
	September 30, 2022				September 30, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	$	1,563	23.57	%	$	1,218	14.37	%	$	345	28.33	%
Net debt securities (losses) gains, available for sale	(168)		(2.53)		323		3.81		(491)		152.01
Net equity securities losses	(158)		(2.38)		(24)		(0.28)		(134)		(558.33)

Bank-owned life insurance	501		7.55		614		7.25		(113)		(18.40)
Gain on sale of loans	905		13.65		2,034		24.00		(1,129)		(55.51)
Insurance commissions	386		5.82		436		5.15		(50)		(11.47)
Brokerage commissions	500		7.54		663		7.82		(163)		(24.59)
Loan broker commissions	1,350		20.36		1,449		17.10		(99)		(6.83)
Debit card income	1,080		16.28		1,166		13.76		(86)		(7.38)
Other	673		10.14		595		7.02		78		13.11
Total non-interest income	$	6,632	100.00	%	$	8,474	100.00	%	$	(1,842)	(21.74)	%

Non-interest Expense

Total non-interest expense decreased $127,000 for the three months ended September 30, 2022 and increased $1,101,000 for the nine months ended September 30, 2022 compared to the same periods of 2021. The increase in salaries and employee benefits is attributable to the current employment environment, employee retention efforts, routine annual wage increases, and the voluntary cash settlement of 346,725 outstanding stock options resulting in $183,000 of compensation expense recognized during the second quarter of 2022. Furniture and equipment expenses in addition to occupancy expenses have decreased as maintenance costs and the level of depreciation have decreased. Software amortization fluctuations are due to changes in software licensing costs. Other expense increased for the nine month period primarily from a write down on leasehold improvements of $254,000 related to a branch closure during the first quarter of 2022.

Non-interest expense composition for the three and nine months ended September 30, 2022 and 2021 was as follows:


	Three Months Ended
	September 30, 2022				September 30, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	$	6,016	58.29	%	$	5,837	55.87	%	$	179	3.07	%
Occupancy	730		7.07		745		7.13		(15)		(2.01)
Furniture and equipment	816		7.91		883		8.45		(67)		(7.59)
Software amortization	188		1.82		226		2.16		(38)		(16.81)
Pennsylvania shares tax	334		3.24		373		3.57		(39)		(10.46)
Professional fees	626		6.07		615		5.89		11		1.79
Federal Deposit Insurance Corporation deposit insurance	260		2.52		220		2.11		40		18.18

Marketing	151		1.46		231		2.21		(80)		(34.63)
Intangible amortization	34		0.33		44		0.42		(10)		(22.73)
Other	1,165		11.29		1,273		12.19		(108)		(8.48)
Total non-interest expense	$	10,320	100.00	%	$	10,447	100.00	%	$	(127)	(1.22)	%

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	Nine Months Ended
	September 30, 2022				September 30, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	$	18,421	58.02	%	$	17,107	55.82	%	$	1,314	7.68	%
Occupancy	2,380		7.50		2,438		7.96		(58)		(2.38)
Furniture and equipment	2,454		7.73		2,663		8.69		(209)		(7.85)
Software amortization	660		2.08		632		2.06		28		4.43
Pennsylvania shares tax	1,119		3.52		1,097		3.58		22		2.01
Professional fees	1,746		5.50		1,882		6.14		(136)		(7.23)
Federal Deposit Insurance Corporation deposit insurance	690		2.17		705		2.30		(15)		(2.13)

Marketing	435		1.37		434		1.42		1		0.23
Intangible amortization	119		0.37		147		0.48		(28)		(19.05)
Other	3,723		11.74		3,541		11.55		182		5.14
Total non-interest expense	$	31,747	100.00	%	$	30,646	100.00	%	$	1,101	3.59	%

Provision for Income Taxes

Income taxes increased $258,000 and $353,000 for the three and nine months ended September 30, 2022 compared to the same periods of 2021. The effective tax rate for the three and nine months ended September 30, 2022 was 18.48% and 18.18% compared to 18.42% and 18.39% for the same periods of 2021. The Company currently is in a deferred tax asset position. A valuation allowance was established on the $1,003,000 of capital loss carryforwards for the twelve months ended December 31, 2021, which remained unchanged during the third quarter of 2022.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents decreased $227,000,000 from $263,862,000 at December 31, 2021 to $36,862,000 at September 30, 2022, primarily as a result of the following activity during the nine months ended September 30, 2022. The decrease in cash and cash equivalents is primarily due to the decrease in interest-bearing balances held with other financial institutions.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds being greater than loan originations, less $905,000 in realized gains, by $1,240,000 for the nine months ended September 30, 2022.

Loans

Gross loans increased $168,553,000 since December 31, 2021 due primarily to an increase in both residential and commercial real estate mortgage categories in addition to consumer automobile loans increasing as used car inventories rebounded from historically low levels.

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The allocation of the loan portfolio, by category, as of September 30, 2022 and December 31, 2021 is presented below:


	September 30, 2022				December 31, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Commercial, financial, and agricultural	$	173,365	11.11	%	$	163,285	11.73	%	$	10,080	6.17	%
Real estate mortgage:
Residential	683,242		43.78		595,847		42.80		87,395		14.67	%
Commercial	485,538		31.11		446,734		32.09		38,804		8.69	%
Construction	48,694		3.12		37,295		2.68		11,399		30.56	%
Consumer automobile loans	159,681		10.23		139,408		10.01		20,273		14.54	%
Other consumer installment loans	9,811		0.63		9,277		0.67		534		5.76	%
Net deferred loan fees and discounts	369		0.02		301		0.02		68		22.59	%
Gross loans	$	1,560,700	100.00	%	$	1,392,147	100.00	%	$	168,553	12.11	%

The following table shows the amount of accrual and non-accrual TDRs at September 30, 2022 and December 31, 2021:


	September 30, 2022						December 31, 2021
(In Thousands)	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
Commercial, financial, and agricultural	$	271	$	452	$	723	$	314	$	574	$	888
Real estate mortgage:
Residential	3,735		174		3,909		3,999		178		4,177
Commercial	1,600		2,237		3,837		1,836		2,509		4,345


	$	5,606	$	2,863	$	8,469	$	6,149	$	3,261	$	9,410

Investments

The fair value of the investment debt securities portfolio at September 30, 2022 increased $21,786,000 since December 31, 2021, while the amortized cost of the portfolio increased $38,872,000. The increase in the investment portfolio amortized value occurred within the state and political segment of the portfolio. The mortgage-backed segment was reduced as bonds prepaid due to the low interest rate environment. The other debt segment of the investment portfolio is primarily corporate bonds and decreased due to maturities. The municipal segment was increased as primarily bonds with a final maturity of one to five years have been purchased. The portfolio continues to be actively managed in order to reduce interest rate and market risk. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 89.29% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

The Company considers various factors, which include examples from applicable accounting guidance, when analyzing the available for sale portfolio for possible other than temporary impairment. The Company primarily considers the following factors in its analysis: length of time and severity of the fair value being less than carrying value; reduction of dividend paid (equities); continued payment of dividend/interest, credit rating, and financial condition of an issuer; intent and ability to hold until anticipated recovery (which may be maturity); and general outlook for the economy, specific industry, and entity in question.

The bond portion of the portfolio review is conducted with emphases on several factors. Continued payment of principal and interest is given primary importance with credit rating and financial condition of the issuer following as the next most important. Credit ratings were reviewed with the ratings of the bonds being satisfactory. Bonds that were not currently rated were discussed with a third party and/or underwent an internal financial review. Each bond is reviewed to determine whether it is a general obligation bond, which is backed by the credit and taxing power of the issuing jurisdiction, or a revenue bond, which is only payable from specified revenues. Based on the review undertaken by the Company, the Company determined that the decline in value of the various bond holdings were temporary and were the result of the general market downturns and interest rate/yield curve changes, not credit issues. The fact that almost all of such bonds are general obligation bonds further solidified the Company’s determination that the decline in the value of these bond holdings is temporary.

The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at $1,350,000 for September 30, 2022 and December 31, 2021 while the fair value decreased $158,000 over the same time period.

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The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at September 30, 2022 follows:


	A- to AAA					B- to BBB+				C- to CCC+				Not Rated				Total
(In Thousands)	Amortized Cost			Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale (AFS):
U.S. Government and agency securities	$	3,003		$	2,902	$	—	$	—	$	—	$	—	$	—	$	—	$	3,003	$	2,902
Mortgage-backed securities	1,508		7	1,282		—		—		—		—		—		—		1,508		1,282

State and political securities	151,088			141,138		80		80		—		—		495		462		151,663		141,680
Other debt securities	25,007			22,785		5,664		5,130		—		—		15,433		14,417		46,104		42,332
Total debt securities AFS	$	180,606		$	168,107	$	5,744	$	5,210	$	—	$	—	$	15,928	$	14,879	$	202,278	$	188,196

Financing Activities

Deposits

Total deposits decreased $30,900,000 from December 31, 2021 to September 30, 2022. Time deposits decreased $62,559,000 over this period to a total of $142,808,000 as excess on balance sheet liquidity has allowed for a decrease in the reliance on higher rate time deposit funding. An increase in core deposits (deposits less time deposits) of $31,659,000 has provided relationship driven funding for the loan and investment portfolios. Emphasis during 2021 and through 2022 has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking has increased due to these efforts coupled with a change in consumer behavior due to the business and travel restrictions that were temporarily in effect due to the COVID-19 pandemic.

Deposit balances and their changes for the periods being discussed follow:


	September 30, 2022				December 31, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Demand deposits	$	537,403	33.79	%	$	494,360	30.49	%	$	43,043	8.71	%
NOW accounts	392,140		24.66		366,399		22.60		25,741		7.03
Money market deposits	268,532		16.88		318,877		19.67		(50,345)		(15.79)
Savings deposits	249,532		15.69		236,312		14.58		13,220		5.59
Time deposits	142,808		8.98		205,367		12.66		(62,559)		(30.46)
Total deposits	$	1,590,415	100.00	%	$	1,621,315	100.00	%	$	(30,900)	(1.91)	%

Borrowed Funds

Total borrowed funds increased 1.53%, or $2,020,000, to $133,730,000 at September 30, 2022 compared to $131,710,000 at December 31, 2021. The decrease in long term borrowings occurred as fixed rate borrowings matured and were replaced by short-term FHLB borrowings. Securities sold under agreements to repurchase have decreased as customers balances have decreased.


	September 30, 2022				December 31, 2021				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Short-term borrowings:
FHLB repurchase agreements	$	25,852	19.33	%	$	—	—	%	$	25,852	100.00	%

Securities sold under agreement to repurchase	5,049		3.78		5,747		4.36		(698)		(12.15)
Total short-term borrowings	30,901		23.11		5,747		4.36		25,154		437.69
Long-term borrowings:
Long-term FHLB borrowings	95,000		71.03		118,000		89.59		(23,000)		(19.49)
Long-term finance lease	7,829		5.85		7,963		6.05		(134)		(1.68)

Total long-term borrowings	102,829		76.89		125,963		95.64		(23,134)		(18.37)
Total borrowed funds	$	133,730	100.00	%	$	131,710	100.00	%	$	2,020	1.53	%

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Short-Term Borrowings

The following table provides further information in regards to secured borrowings that have been accounted for as repurchase agreements.


	Remaining Contractual Maturity Overnight and Continuous
(In Thousands)	September 30, 2022		December 31, 2021
Investment debt securities pledged, fair value	$	6,941	$	8,881
Repurchase agreements	5,049		5,747

Capital

The adequacy of the Company’s capital is reviewed on an ongoing basis with reference to the size, composition, and quality of the Company’s resources and regulatory guidelines. Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings.

Banking institutions are generally required to comply with risk-based capital guidelines set by bank regulatory agencies. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets. Specifically, each is required to maintain certain minimum dollar amounts and ratios of common equity tier I risk-based, tier I risk-based, total risk-based, and tier I leverage capital. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvements Act ("FDICIA") established five capital categories for banks ranging from “well capitalized” to “critically undercapitalized” for purposes of the FDIC's prompt corrective action rules. To be classified as “well capitalized” under the prompt corrective action rules, common equity tier I risk-based, tier I risked-based, total risk-based, and tier I leverage capital ratios must be at least 6.5%, 8%, 10%, and 5%, respectively.

Under existing capital rules, the minimum capital to risk-adjusted assets requirements for banking organizations 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 total capital ratio of 8.0% (10.0% to be considered “well capitalized”). Under existing capital rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), 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.

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The Company's capital ratios as of September 30, 2022 and December 31, 2021 were as follows:


	September 30, 2022				December 31, 2021
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	162,230	10.178	%	$	156,439	10.791	%
For Capital Adequacy Purposes	71,727		4.500		65,237		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	111,575		7.000		101,480		7.000
To Be Well Capitalized	103,605		6.500		94,232		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	177,572	11.141	%	$	170,708	11.776	%
For Capital Adequacy Purposes	127,509		8.000		115,970		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	167,355		10.500		152,211		10.500
To Be Well Capitalized	159,386		10.000		144,963		10.000
Tier I Capital (to Risk-weighted Assets)
Actual	$	162,230	10.178	%	$	156,439	10.791	%
For Capital Adequacy Purposes	95,636		6.000		86,983		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	135,484		8.500		123,226		8.500
To Be Well Capitalized	127,514		8.000		115,977		8.000
Tier I Capital (to Average Assets)
Actual	$	162,230	8.548	%	$	156,439	8.397	%
For Capital Adequacy Purposes	75,915		4.000		74,521		4.000
To Be Well Capitalized	94,894		5.000		93,152		5.000

Jersey Shore State Bank's capital ratios as of September 30, 2022 and December 31, 2021 were as follows:


	September 30, 2022				December 31, 2021
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	116,369	9.887	%	$	110,682	10.337	%
For Capital Adequacy Purposes	52,965		4.500		48,183		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	82,389		7.000		74,952		7.000
To Be Well Capitalized	76,504		6.500		69,598		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	127,706	10.850	%	$	121,094	11.309	%
For Capital Adequacy Purposes	94,161		8.000		85,662		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	123,586		10.500		112,431		10.500
To Be Well Capitalized	117,701		10.000		107,078		10.000
Tier I Capital (to Risk-weighted Assets)	-				-
Actual	$	116,369	9.887	%	$	110,682	10.337	%
For Capital Adequacy Purposes	70,619		6.000		64,244		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	100,044		8.500		91,013		8.500
To Be Well Capitalized	94,159		8.000		85,659		8.000
Tier I Capital (to Average Assets)
Actual	$	116,369	8.355	%	$	110,682	8.326	%
For Capital Adequacy Purposes	55,712		4.000		53,174		4.000
To Be Well Capitalized	69,640		5.000		66,468		5.000

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Luzerne Bank's capital ratios as of September 30, 2022 and December 31, 2021 were as follows:


	September 30, 2022				December 31, 2021
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	43,380	10.406	%	$	42,291	11.164	%
For Capital Adequacy Purposes	18,759		4.500		17,047		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	29,181		7.000		26,517		7.000
To Be Well Capitalized	27,097		6.500		24,623		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	47,385	11.367	%	$	46,148	12.182	%
For Capital Adequacy Purposes	33,349		8.000		30,306		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	43,771		10.500		39,776		10.500
To Be Well Capitalized	41,686		10.000		37,882		10.000
Tier I Capital (to Risk-weighted Assets)
Actual	$	43,380	10.406	%	$	42,291	11.164	%
For Capital Adequacy Purposes	25,012		6.000		22,729		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	35,434		8.500		32,199		8.500
To Be Well Capitalized	33,350		8.000		30,305		8.000
Tier I Capital (to Average Assets)
Actual	$	43,380	7.973	%	$	42,291	7.537	%
For Capital Adequacy Purposes	21,763		4.000		22,444		4.000
To Be Well Capitalized	27,204		5.000		28,056		5.000

Liquidity; Interest Rate Sensitivity and Market Risk

The asset/liability committee addresses the liquidity needs of the Company to ensure that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.

The following liquidity measures are monitored for compliance and were within the limits cited at September 30, 2022:

1. Net Loans to Total Assets, 85% maximum

2. Net Loans to Total Deposits, 100% maximum

3. Cumulative 90 day Maturity GAP %, +/- 15% maximum

4. Cumulative 1 Year Maturity GAP %, +/- 20% maximum

Fundamental objectives of the Company’s asset/liability management process are to maintain adequate liquidity while minimizing interest rate risk. The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations to depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.

The Banks, like other financial institutions, must have sufficient funds available to meet liquidity needs for deposit withdrawals, loan commitments and originations, and expenses. In order to control cash flow, the Banks estimate future cash flows from deposits, loan payments, and investment security payments. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, FHLB borrowings, and brokered deposits. Management believes the Banks have adequate resources to meet their normal funding requirements.

Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by

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maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides core funding to satisfy depositor, borrower, and creditor needs.

Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a total current maximum borrowing capacity at the FHLB of $720,252,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $100,000,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled $120,852,000 as of September 30, 2022.

Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process segments both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be effected. Repriceable assets are subtracted from repriceable liabilities for a specific time period to determine the “gap”, or difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In addition to gap management, the Company has an asset/liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Company’s consolidated balance sheet.

The Company currently maintains a gap position of being asset sensitive. The Company has strategically taken this position as it has previously decreased the duration of the earning asset portfolio by adding quality short and intermediate term loans such as home equity loans. The Company has added certain longer-term earning assets due to the significant increase in interest rates. Lengthening of the liability portfolio, primarily time deposits, has been undertaken to build protection during the current rising rate environment.

A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Company’s balance sheet and more specifically shareholders’ equity. The Company does not manage the balance sheet structure in order to maintain compliance with this calculation. The calculation serves as a guideline with greater emphasis placed on interest rate sensitivity. Changes to calculation results from period to period are reviewed as changes in results could be a signal of future events. As of the most recent analysis, the results of the market value at risk calculation were within established guidelines due to the strategic direction being taken.

Interest Rate Sensitivity

In this analysis the Company examines the result of a 100, 200, 300, and 400 basis point change in market interest rates and the effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner. Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.

The following is a rate shock forecast for the twelve month period ending September 30, 2023 assuming a static balance sheet as of September 30, 2022.


	Parallel Rate Shock in Basis Points
(In Thousands)	-200			-100			Static		+100			+200			+300			+400
Net interest income	$	66,551		$	69,113		$	71,694	$	74,346		$	76,969		$	79,559		$	82,072
Change from static	(5,143)			(2,581)			—		2,652			5,275			7,865			10,378
Percent change from static	-7.17		%	-3.60		%	—		3.70		%	7.36		%	10.97		%	14.48		%

The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

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Inflation

Substantially all of the Company's assets and liabilities relate to banking activities and are monetary. The consolidated financial statements and related financial data are presented following GAAP. GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, except for securities available for sale, impaired loans, and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.

Management's opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do affect each other but do not always move in correlation with each other. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at both the level of the Company and the Banks. The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party. There have been no substantial changes in the Company’s gap analysis or simulation analysis compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 2021. Additional information and details are provided in the “Liquidity, Interest Rate Sensitivity, and Market Risk” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of that document.

Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Certain risk factors are set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides certain information with respect to the Company's repurchase of common stock during the quarter ended September 30, 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 (July 1 - July 31, 2022)	—	$	—	—	324,000
Month #2 (August 1 - August 31, 2022)	—	—		—	324,000
Month #3 (September 1 - September 30, 2022)	—	—		—	324,000

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


3(i)						Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2019).
3(ii)						Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020).
10.1						Amendment to Employment Agreement, dated July 15, 2022, between Penns Woods Bancorp, Inc. and Richard A. Grafmyre (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on July 21, 2022)
10.2						Amendment to Employment Agreement, dated July 15, 2022, between Penns Woods Bancorp, Inc. and Brian L. Knepp (incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K filed on July 21, 2022)
31(i)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
31(ii)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
32(i)						Section 1350 Certification of Chief Executive Officer.
32(ii)						Section 1350 Certification of Chief Financial Officer.
101						Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at September 30, 2022 and December 31, 2021; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, 2022 and 2021; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2022 and 2021 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.
104						Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PENNS WOODS BANCORP, INC.
		(Registrant)

Date:	November 9, 2022	/s/ Richard A. Grafmyre
		Richard A. Grafmyre, Chief Executive Officer
		(Principal Executive Officer)


Date:	November 9, 2022	/s/ Brian L. Knepp
		Brian L. Knepp, President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting
		Officer)