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PENNS WOODS BANCORP INC - Quarter Report: 2023 March (Form 10-Q)

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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 March 31, 2023. 
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) 
Pennsylvania300 Market Street, P.O. Box 96723-2226454
(State or other jurisdiction ofWilliamsport(I.R.S. Employer Identification No.)
incorporation or organization)Pennsylvania17703-0967
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, $5.55 par valuePWODThe 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 filerAccelerated 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 May 1, 2023 there were 7,062,943 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
 
   
   
  
  
  
 
  
   
   
   
   
 
   
   
   
   
   
   
   
   
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Part I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

March 31,December 31,
(In Thousands, Except Share And Per Share Data)20232022
ASSETS: 
Noninterest-bearing balances$31,701 $27,390 
Interest-bearing balances in other financial institutions9,945 12,943 
Total cash and cash equivalents41,646 40,333 
Investment debt securities, available for sale, at fair value197,190 193,673 
Investment equity securities, at fair value1,163 1,142 
Restricted investment in bank stock18,656 19,171 
Loans held for sale1,705 3,298 
Loans1,700,023 1,639,731 
Allowance for credit losses(11,734)(15,637)
Loans, net1,688,289 1,624,094 
Premises and equipment, net31,602 31,844 
Accrued interest receivable9,357 9,481 
Bank-owned life insurance33,359 34,452 
Investment in limited partnerships8,529 8,656 
Goodwill16,450 16,450 
Intangibles292 327 
Operating lease right-of-use asset2,635 2,651 
Deferred tax asset5,741 6,868 
Other assets8,529 7,640 
TOTAL ASSETS$2,065,143 $2,000,080 
LIABILITIES:  
Interest-bearing deposits$1,136,483 $1,037,397 
Noninterest-bearing deposits502,352 519,063 
Total deposits1,638,835 1,556,460 
Short-term borrowings97,102 153,349 
Long-term borrowings132,738 102,783 
Accrued interest payable1,172 603 
Operating lease liability2,690 2,708 
Other liabilities18,636 16,512 
TOTAL LIABILITIES1,891,173 1,832,415 
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; 7,570,086 and 7,566,810 shares issued; 7,059,861 and 7,056,585 outstanding
42,057 42,039 
Additional paid-in capital54,572 54,252 
Retained earnings102,194 98,147 
Accumulated other comprehensive loss:  
Net unrealized loss on available for sale securities(7,928)(9,819)
Defined benefit plan(4,110)(4,139)
Treasury stock at cost, 510,225 and 510,225
(12,815)(12,815)
TOTAL SHAREHOLDERS' EQUITY173,970 167,665 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,065,143 $2,000,080 

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 March 31,
(In Thousands, Except Share And Per Share Data)20232022
INTEREST AND DIVIDEND INCOME:  
Loans, including fees$18,005 $13,038 
Investment securities:  
Taxable1,218 737 
Tax-exempt178 164 
Dividend and other interest income463 336 
TOTAL INTEREST AND DIVIDEND INCOME19,864 14,275 
INTEREST EXPENSE:  
Deposits3,372 788 
Short-term borrowings1,440 
Long-term borrowings754 633 
TOTAL INTEREST EXPENSE5,566 1,422 
NET INTEREST INCOME14,298 12,853 
PROVISION FOR CREDIT LOSSES71 150 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES14,227 12,703 
NON-INTEREST INCOME:  
Service charges496 495 
Net debt securities losses, available for sale(61)(2)
Net equity securities gains (losses)21 (59)
Bank-owned life insurance556 170 
Gain on sale of loans231 345 
Insurance commissions165 170 
Brokerage commissions165 200 
Loan broker commissions170 541 
Debit card income335 345 
Other179 207 
TOTAL NON-INTEREST INCOME2,257 2,412 
NON-INTEREST EXPENSE:  
Salaries and employee benefits6,176 6,264 
Occupancy866 910 
Furniture and equipment846 892 
Software amortization183 253 
Pennsylvania shares tax248 389 
Professional fees688 538 
Federal Deposit Insurance Corporation deposit insurance245 202 
Marketing155 64 
Intangible amortization35 43 
Other1,456 1,452 
TOTAL NON-INTEREST EXPENSE10,898 11,007 
INCOME BEFORE INCOME TAX PROVISION5,586 4,108 
INCOME TAX PROVISION928 676 
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS'$4,658 $3,432 
EARNINGS PER SHARE - BASIC$0.66 $0.49 
EARNINGS PER SHARE - DILUTED$0.64 $0.49 
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,058,397 7,072,575 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED7,334,197 7,072,575 
See accompanying notes to the unaudited consolidated financial statements.
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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
 Three Months Ended March 31,
(In Thousands)20232022
Net Income$4,658 $3,432 
Other comprehensive income (loss):  
Net unrealized gain (loss) on available for sale securities2,333 (6,897)
Tax effect(490)1,448 
Net realized loss on available for sale securities included in net income61 
Tax effect(13)— 
   Amortization of unrecognized pension loss37 17 
        Tax effect(8)(4)
Total other comprehensive income (loss)1,920 (5,434)
Comprehensive income (loss)$6,578 $(2,002)
 
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 STOCKADDITIONAL
PAID-IN CAPITAL
RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS
TREASURY STOCKTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)SHARESAMOUNT
Balance, December 31, 20227,566,810 $42,039 $54,252 $98,147 $(13,958)$(12,815)$167,665 
Cumulative effect of adoption of ASU 2016-131,647 1,647 
Net income4,658 4,658 
Other comprehensive income1,920 1,920 
Stock-based compensation 253 253 
Dividends declared ($0.32 per share)
(2,258)(2,258)
Common shares issued for employee stock purchase plan854 16 21 
Director Compensation Plan2,422 13 51 64 
Balance, March 31, 20237,570,086 $42,057 $54,572 $102,194 $(12,038)$(12,815)$173,970 


COMMON STOCKADDITIONAL
PAID-IN CAPITAL
RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS
TREASURY STOCKTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)SHARESAMOUNT
Balance, December 31, 20217,550,272 $41,945 $53,795 $89,761 $(1,112)$(12,115)$172,274 
Net income3,432 3,432 
Other comprehensive loss(5,434)(5,434)
Stock-based compensation315 315 
Dividends declared ($0.32 per share)
(2,265)(2,265)
Common shares issued for employee stock purchase plan880 16 21 
Director Compensation Plan3,415 19 65 84 
Balance, March 31, 20227,554,567 $41,969 $54,191 $90,928 $(6,546)$(12,115)$168,427 


See accompanying notes to the unaudited consolidated financial statements.


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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
Three Months Ended March 31,
(In Thousands)20232022
OPERATING ACTIVITIES:  
Net Income$4,658 $3,432 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization807 948 
Write down of leasehold improvements— 254 
Amortization of intangible assets35 43 
Provision for credit losses71 150 
Stock based compensation253 315 
Accretion and amortization of investment security discounts and premiums162 343 
Net securities losses, available for sale61 
Originations of loans held for sale(6,187)(9,140)
Proceeds of loans held for sale8,011 11,850 
Gain on sale of loans(231)(345)
Net equity securities (gains) losses(21)59 
Security trades payable— 1,290 
Earnings on bank-owned life insurance(556)(170)
Decrease (increase) in deferred tax asset624 (175)
Other, net3,419 (1,766)
Net cash provided by operating activities11,106 7,090 
INVESTING ACTIVITIES:  
Proceeds from sales of available for sale securities12,913 90 
Proceeds from calls and maturities of available for sale securities2,120 920 
Purchases of available for sale securities(16,379)(16,251)
Net increase in loans(64,266)(14,175)
Acquisition of premises and equipment(255)(92)
Purchase of bank-owned life insurance(6)(18)
Proceeds from bank-owned life insurance death benefit1,655 
Investment in limited partnership— (123)
Proceeds from redemption of regulatory stock6,749 1,674 
Purchases of regulatory stock(6,234)(938)
Net cash used for investing activities(63,703)(28,911)
FINANCING ACTIVITIES:  
Net increase (decrease) in interest-bearing deposits99,086 (28,690)
Net (decrease) increase in noninterest-bearing deposits(16,711)19,770 
Proceeds from long-term borrowings35,000 — 
Repayment of long-term borrowings(5,000)(13,000)
Net (decrease) increase in short-term borrowings(56,247)887 
Finance lease principal payments(45)(45)
Dividends paid(2,258)(2,265)
Issuance of common stock85 105 
Net cash provided by (used for) financing activities53,910 (23,238)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS1,313 (45,059)
CASH AND CASH EQUIVALENTS, BEGINNING40,333 263,862 
CASH AND CASH EQUIVALENTS, ENDING$41,646 $218,803 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
Interest paid$4,997 $1,602 
Income taxes paid10 
Non-cash investing and financing activities:
Transfer of loans to foreclosed real estate— 53 

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, 2022.

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.

CECL Adoption and Updated Significant Accounting Policy
On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology, and is referred to as CECL. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to off-balance sheet (“OBS”) credit exposures (loan commitments, standby letters of credit, financial guarantees, and other similar instruments.

The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, net of investments in leases and OBS credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Company recorded an overall decrease of $3,789,000 to the Allowance for Credit Losses (“ACL”) on January 1, 2023 as a result of the adoption of CECL with an associated increase to retained earnings of $2,993,000 and decrease to deferred tax assets of $796,000. The Company also recorded a liability of $1,703,000 for OBS credit exposures that resulted in a decrease to retained earnings of $1,346,000 and an increase to deferred tax assets of $357,000.

Allowance for Credit Losses: The discussion that follows describes the methodology for determining the ACL under the CECL model that was adopted effective January 1, 2023. The allowance methodology for prior periods is disclosed in the Company’s 2022 Annual Report on Form 10-K.

The Company has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income.

Loans: The ACL for loans is an estimate of the expected losses to be realized over the life of the loans in the portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated collectively for expected credit losses and 2) loans evaluated individually for expected credit losses. The ACL also includes certain qualitative adjustments to the CECL model.

Loans Evaluated Collectively: Management believes that internal credit ratings are the most relevant credit quality indicator for these types of loans, however; the Company does not assign internal credit ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, and consumer automobile loans. For these loans, the most relevant credit quality indicator is delinquency status and management evaluates credit quality based on the aging status of the loan. In order to determine the ACL:
Loans aggregated into pools based on similar risk characteristics.
The probability of default "PD" and loss given default rate "LGD" CECL model components are determined based on loss estimates driven by historical experience at the input level.
The PD model component uses "through the economic cycle transition" matrices based on the Company's historical loan and transaction data across each pool of loans.
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The LGD model component calculates a lifetime LGD estimate across each pool of loans utilizing a nonparametric loss curve modeling approach.
Reasonable and supportable forecasts are incorporated into the PD model component.
Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate.
A constant prepayment rate is calculated for each loan pool in the CECL model.
Loans Evaluated Individually: Loans evaluated individually for expected credit losses include loans determined to be collateral-dependant.

Loans evaluated individually may have specific allocations assigned. For loans measured using the fair value of collateral, if the analysis determines that sufficient collateral value would be available for repayment of the debt, then no allocations would be assigned to those loans. Collateral could be in the form of real estate or business assets, such as accounts receivable or inventory, in the case of commercial and industrial loans.

For loans secured by real estate, estimated fair values are determined through appraisals performed by third-party appraisers or third party evaluations for commercial real estate loans and our internal appraisal department for 1-4 family real estate secured loans, discounted to arrive at expected net sale proceeds. For collateral dependent loans, estimated real estate fair values are also net of estimated selling costs. When a real estate secured loan is impaired, a decision is made regarding whether an updated appraisal of the real estate is necessary. This decision is based on various considerations, including: the age of the most recent appraisal; the loan-to-value ratio based on the original appraisal; the condition of the property; the Company’s experience and knowledge of the real estate market; the purpose of the loan; market factors; payment status; the strength of any guarantors; and the existence and age of other indications of value such as broker price opinions, among others. The Company generally obtains updated evaluations for collateral dependent loans secured predominantly by real estate every 12 months.

When updated evaluations are not obtained for loans secured by real estate, fair values are estimated based on the original appraisal values, as long as the original appraisal indicated an acceptable loan-to-value position and there has not been a significant deterioration in the collateral value since the original appraisal was performed.

Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification. For commercial loans, commercial mortgages and construction loans to commercial borrowers, an internal credit rating process is used. The Company believes that internal credit ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal credit rating categories is a significant component of the ACL methodology for these loans, which bases the PD on this migration. Assigning credit ratings involves judgment. Credit ratings may be changed based on ongoing monitoring procedures, or if specific loan review assessments identify a deterioration or an improvement in the loan.

The following is a summary of the Company's internal credit rating categories:
Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.
Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.
Substandard or Lower: There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.

The allocation of the ACL is reviewed to evaluate its appropriateness in relation to the overall risk profile of the loan portfolio. The Company considers risk factors such as: local and national economic conditions; trends in delinquencies and non-accrual loans; the diversity of borrower industry types; and the composition of the portfolio by loan type.

Qualitative and Other Adjustments to ACL: In addition to the quantitative credit loss estimates for loans evaluated collectively, qualitative factors that may not be fully captured in the quantitative results are also evaluated. These include changes in lending policy, volume of the portfolio, economy conditions, credit concentrations, level of problem loans, loan review, collateral value, and experience of credit staff. Qualitative adjustments are judgmental and are based on Management’s knowledge of the portfolio and the markets in which the Company operates. Qualitative adjustments are evaluated and approved on a quarterly basis.

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OBS Credit Exposures: The ACL for OBS credit exposures is recorded in other liabilities on the consolidated balance sheet. This ACL represents management’s estimate of expected losses in its unfunded loan commitments and other OBS credit exposures, such as letters of credit and credit recourse on sold residential mortgage loans. The ACL specific to unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). The ACL for OBS credit exposures is increased or decreased by charges or reductions to expense, through the provision for credit losses.

The impact from the adoption of CECL is shown below:
January 1, 2023
(In Thousands)Pre-adoptionAdoption impactAs Reported
Assets
ACL on loans
Commercial, financial, and agricultural$1,914 $2,656 $4,570 
Real estate mortgage:
Residential5,061 (3,893)1,168 
Commercial6,110 (2,660)3,450 
Construction188 (96)92 
Consumer automobile loans1,617 240 1,857 
Other consumer installment loans109 602 711 
Unallocated638 (638)— 
Liabilities
ACL for unfunded commitments143 1,703 1,846 
$15,780 $(2,086)$13,694 

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 March 31, 2023 and 2022 were as follows:
 Three Months Ended March 31, 2023Three Months Ended March 31, 2022
(In Thousands)Net Unrealized Gain (Loss) on Available for Sale SecuritiesDefined
Benefit 
Plan
TotalNet Unrealized Gain (Loss) on Available
for Sale Securities
Defined
Benefit 
Plan
Total
Beginning balance$(9,819)$(4,139)$(13,958)$2,373 $(3,485)$(1,112)
Other comprehensive income (loss) before reclassifications1,843 — 1,843 (5,449)— (5,449)
Amounts reclassified from accumulated other comprehensive gain48 29 77 13 15 
Net current-period other comprehensive income (loss)1,891 29 1,920 (5,447)13 (5,434)
Ending balance$(7,928)$(4,110)$(12,038)$(3,074)$(3,472)$(6,546)











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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 March 31, 2023 and 2022 were as follows:
Details about Accumulated Other Comprehensive Loss ComponentsAmount Reclassified from Accumulated Other Comprehensive LossAffected Line Item
 in the Consolidated 
Statement of Income
Three months ended March 31, 2023Three months ended March 31, 2022
Net unrealized losses on available for sale securities$(61)$(2)Net debt securities losses, available for sale
Income tax effect13 — Income tax provision
Total reclassifications for the period$(48)$(2)
Net unrecognized pension costs$(37)$(17)Other non-interest expense
Income tax effectIncome tax provision
Total reclassifications for the period$(29)$(13)
Note 3.  Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This standard, along with several other subsequent codification updates, replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses that are expected to occur over the remaining life of a financial asset and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model (“CECL”) will apply to the allowance for loan losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures.

Management has completed its implementation plan, segmentation and testing, and model validation. The implementation plan included drafting of additional controls and policies to govern data uploads to its third-party vendor, balancing and reconciling, testing and auditing of inputs, and review and decision-making surrounding segmentation, methodologies, qualitative factor adjustments, and reasonable and supportable forecasts and reversion techniques. Parallel runs were processed during 2022 and the results were consistent with management's expectations. The implementation plan is currently going through the Company's control structure and internal control testing is being performed.

As a result of adopting this standard, the Company recorded a decrease in its allowance effective January 1, 2023, of $2,086,000. As a result, the Company recorded a decrease in its loan allowance as of January 1, 2023, of $3,789,000; as well as an increase in its allowance for off-balance sheet credit exposures of $1,703,000. These estimates are subject to further refinements based on ongoing evaluations of our model, methodologies, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.

At adoption, the Company did not have any securities classified as HTM debt securities. No allowance was recorded related to AFS debt securities at the date of adoption, January 1, 2023.

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 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
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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.

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 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. This Update did not 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 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.

In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. This Update is not expected to have a significant impact on the Company’s financial statements.








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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 1,003,000 stock options, with an average exercise price of $25.56, outstanding on March 31, 2023. A portion of these options were included, 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 $25.96 for the quarter being greater than the strike price. There were a total of 1,268,525 stock options, with an average exercise price of $26.65 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 $24.24 being less than the strike price for the period ending March 31, 2022.
 Three Months Ended March 31,
 20232022
Weighted average common shares issued7,568,622 7,552,800 
Weighted average treasury stock shares(510,225)(480,225)
Weighted average common shares outstanding - basic 7,058,397 7,072,575 
Dilutive effect of outstanding stock options275,800 — 
Weighted average common shares outstanding - diluted7,334,197 7,072,575 
 

Note 5. Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at March 31, 2023 and December 31, 2022 are as follows:
 March 31, 2023
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
U.S. Government and agency securities$3,002 $— $(82)$2,920 
Mortgage-backed securities8,159 15 (222)7,952 
State and political securities145,998 266 (6,572)139,692 
Other debt securities50,066 (3,444)46,626 
Total debt securities$207,225 $285 $(10,320)$197,190 
Investment equity securities:
Equity securities$1,350 $— $(187)$1,163 
 December 31, 2022
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
U.S. Government and agency securities$3,002 $— $(106)$2,896 
Mortgage-backed securities1,496 — (214)1,282 
State and political securities151,426 157 (8,774)142,809 
Other debt securities50,178 58 (3,550)46,686 
Total debt securities$206,102 $215 $(12,644)$193,673 
Investment equity securities:
Equity securities$1,350 $— $(208)$1,142 

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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 March 31, 2023 and December 31, 2022.
 March 31, 2023
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
U.S. Government and agency securities$2,446 $(56)$474 $(26)$2,920 $(82)
Mortgage-backed securities5,139 (36)1,297 (186)6,436 (222)
State and political securities53,390 (1,264)72,923 (5,308)126,313 (6,572)
Other debt securities5,332 (89)40,190 (3,355)45,522 (3,444)
Total debt securities$66,307 $(1,445)$114,884 $(8,875)$181,191 $(10,320)
 December 31, 2022
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
U.S. Government and agency securities$2,896 $(106)$— $— $2,896 $(106)
Mortgage-backed securities— — 1,282 (214)1,282 (214)
State and political securities95,444 (4,797)36,283 (3,977)131,727 (8,774)
Other debt securities16,896 (664)25,144 (2,886)42,040 (3,550)
Total debt securities$115,236 $(5,567)$62,709 $(7,077)$177,945 $(12,644)
 
At March 31, 2023, there were a total of 70 securities in a continuous unrealized loss position for less than twelve months and 165 individual securities that were in a continuous unrealized loss position for twelve months or greater. No credit losses occurred for the period ending March 31, 2023.

The Company reviews its position quarterly and has determined that, at March 31, 2023, the declines outlined in the above table represent temporary non-credit 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 credit-related 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 March 31, 2023, 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 CostFair Value
Due in one year or less$30,883 $30,393 
Due after one year to five years102,687 97,428 
Due after five years to ten years65,362 61,218 
Due after ten years8,293 8,151 
Total$207,225 $197,190 

Total gross proceeds from sales of debt securities available for sale for the three months ended March 31, 2023 was $12,913,000, compared to $90,000 for the corresponding 2022 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 March 31,
(In Thousands)20232022
Available for sale (AFS):
Gross realized gains:  
State and political securities$54 $
Gross realized losses:  
State and political securities$(115)$(3)

Investment securities with a carrying value of approximately $149,415,000 and $154,946,000 at March 31, 2023 and December 31, 2022, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

At March 31, 2023 and December 31, 2022, we had $1,163,000 and $1,142,000, 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 months ended March 31, 2023 and 2022:
Three Months Ended March 31,
(In Thousands)20232022
Net gains (losses) recognized in equity securities during the period$21 $(59)
Less: Net gains realized on the sale of equity securities during the period— — 
Unrealized gains (losses) recognized in equity securities held at reporting date$21 $(59)


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 class, as of March 31, 2023 and December 31, 2022:
 March 31, 2023
 Past Due  Past Due 90
 30 To 89 Days Or More
(In Thousands)DaysCurrentTotal& Still Accruing
Commercial, financial, and agricultural$261 $200,171 $200,432 $— 
Real estate mortgage:   
Residential5,068 717,710 723,932 1,154 
Commercial914 507,190 509,466 1,362 
Construction472 46,617 47,121 32 
Consumer automobile loans1,121 206,482 207,747 144 
Other consumer installment loans157 10,239 10,400 
 $7,993 $1,688,409 1,699,098 $2,696 
Net deferred loan fees and discounts 925 
Allowance for credit losses (11,734)
Loans, net $1,688,289 
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 December 31, 2022
 Past DuePast Due 90  
 30 To 89Days Or MoreNon- 
(In Thousands)Days& Still AccruingAccrualCurrentTotal
Commercial, financial, and agricultural$94 $— $432 $189,935 $190,461 
Real estate mortgage:     
Residential5,472 1,120 524 701,093 708,209 
Commercial2,564 60 2,659 495,349 500,632 
Construction511 — — 42,797 43,308 
Consumer automobile loans2,089 80 — 183,943 186,112 
Other consumer installment loans152 15 — 10,194 10,361 
 $10,882 $1,275 $3,615 $1,623,311 1,639,083 
Net deferred loan fees and discounts   648 
Allowance for loan losses   (15,637)
Loans, net   $1,624,094 

The Allowance for Credit Losses ("ACL") related to loans consists of loans evaluated collectively and individually for expected credit losses. The ACL related to loans represents an estimate of expected credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. The ACL for off balance sheet credit exposure includes estimated losses on unfunded loan commitments, letters of credit and other off balance sheet credit exposures and is recorded in other liabilities. The total ACL is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The following table presents the components of the ACL as of March 31, 2023:
March 31,
(In Thousands)2023
ACL - loans$11,734 
ACL - off balance sheet credit exposure1,920 
Total ACL$13,654 
 
Non-accrual Loans
 March 31, 2023December 31, 2022
 Non-accrual Loans
(In Thousands)With a Related ACLWithout a Related ACLTotalTotal Non-accrual loans
Commercial, financial, and agricultural$456 $— $456 $432 
Real estate mortgage:
Residential510 — 510 524 
Commercial248 2,337 2,585 2,659 
Construction— — — — 
Consumer automobile— — — — 
Other consumer installment loans— — — — 
$1,214 $2,337 $3,551 $3,615 

Total interest income recorded on non-accrual loans at March 31, 2023 totaled $32,000.



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The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of December 31, 2022:
 December 31, 2022
 RecordedUnpaid PrincipalRelated
(In Thousands)InvestmentBalanceAllowance
With no related allowance recorded:  
Commercial, financial, and agricultural$295 $295 $— 
Real estate mortgage:   
Residential3,388 3,388 — 
Commercial2,588 2,588 — 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 6,271 6,271 — 
With an allowance recorded:   
Commercial, financial, and agricultural403 403 
Real estate mortgage:   
Residential933 933 111 
Commercial3,607 3,607 827 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals19 — 19 
 4,962 4,943 961 
Total:   
Commercial, financial, and agricultural698 698 
Real estate mortgage:   
Residential4,321 4,321 111 
Commercial6,195 6,195 827 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals19 — 19 
 $11,233 $11,214 $961 

The following table presents outstanding loan balances of collateral-dependent loans by class as of March 31, 2023:
(In Thousands)Real estateOther*Unsecured**
Real estate mortgage:
Residential$525 $— $— 
Commercial154 1,225 332 
Total$679 $1,225 $332 
* 90% of loan balances guaranteed by USDA remaining 10% is unsecured
** Loan considered unsecured due to lien position on property









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The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2022:
 Three Months Ended March 31,
 2022
(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
Commercial, financial, and agricultural$853 $$— 
Real estate mortgage:   
Residential4,944 46 — 
Commercial7,757 52 — 
Construction85 — 
Consumer automobile— — — 
Other consumer installment loans20 — — 
$13,659 $104 $— 

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 months ended March 31, 2023 and 2022.
There were no loan modification considered to be a TDR made during the twelve months prior to March 31, 2023 that defaulted during the three months ended March 31, 2023. There was one loan modifications considered to be a TDR made during the twelve months previous to March 31, 2022 that defaulted during the three months ended March 31, 2022. The defaulted loan type and recorded investments at March 31, 2022 were as follows: one residential real estate loan with a recorded investment of $400,000.

Troubled debt restructurings amounted to $7,328,000 and $7,468,000 as of March 31, 2023 and December 31, 2022, respectively.

The amount of foreclosed residential real estate held at March 31, 2023 and December 31, 2022, totaled $846,000 and $950,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2023 and December 31, 2022, totaled $722,000 and $890,000, respectively.

Internal Credit Ratings

Management uses a ten point internal credit 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 credit 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
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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 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.





















































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The following table presents the credit quality categories identified above as of March 31, 2023 and December 31, 2022:
March 31, 2023
(In Thousands)20232022202120202019PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial, financial, and agricultural
Pass$17,392 $57,070 $40,861 $34,532 $9,298 $10,195 $29,713 $131 $199,192 
Special Mention— — — — — 97 — — 97 
Substandard or Lower— — — — — — 430 713 1,143 
$17,392 $57,070 $40,861 $34,532 $9,298 $10,292 $30,143 $844 $200,432 
 
Current period gross write offs$— $— $— $— $— $— $— $— $— 
Real estate mortgage:
Residential
Pass$32,256 $218,074 $127,155 $74,334 $49,003 $68,165 $44,114 $108,180 $721,281 
Special Mention— — 163 — — — — — 163 
Substandard or Lower— — — 90 — 2,301 68 29 2,488 
$32,256 $218,074 $127,318 $74,424 $49,003 $70,466 $44,182 $108,209 $723,932 
Current period gross write offs$— $— $— $— $— $$73 $— $78 
Commercial
Pass$11,022 $102,142 $140,306 $52,744 $27,194 $157,392 $10,849 $599 $502,248 
Special Mention— — 186 — — 48 — — 234 
Substandard or Lower— — — — — 6,921 22 41 6,984 
$11,022 $102,142 $140,492 $52,744 $27,194 $164,361 $10,871 $640 $509,466 
Current period gross write offs$— $— $— $— $— $$— $— $
Construction
Pass$10,388 $17,545 $11,711 $1,726 $611 $4,775 $269 $— $47,025 
Special Mention— — — — — — — — — 
Substandard or Lower— — — — — 96 — — 96
$10,388 $17,545 $11,711 $1,726 $611 $4,871 $269 $— $47,121 
Current period gross write offs$— $— $— $— $— $— $— $— $— 
Consumer Automobile
Pass$35,550 $100,204 $27,682 $22,834 $12,400 $9,077 $— $— $207,747 
Special Mention— — — — — — — — — 
Substandard or Lower— — — — — — — — — 
$35,550 $100,204 $27,682 $22,834 $12,400 $9,077 $— $— $207,747 
Current period gross write offs$$58 $— $29 $— $$— $— $91 
Installment loans to individuals
Pass$888 $3,334 $1,590 $701 $499 $3,339 $— $49 $10,400 
Special Mention— — — — — — — — — 
Substandard or Lower— — — — — — — — — 
$888 $3,334 $1,590 $701 $499 $3,339 $— $49 $10,400 
Current period gross write offs$40 $$21 $— $$$13 $— $88 

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The information presented in the table above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, internal credit ratings for the report loan segments as of December 31, 2022:
 December 31, 2022
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobile Other consumer installment loans 
(In Thousands)ResidentialCommercialConstructionTotals
Pass$184,783 $705,515 $488,993 $43,209 $186,112 $10,361 $1,618,973 
Special Mention125 266 4,526 — — — 4,917 
Substandard5,553 2,428 7,113 99 — — 15,193 
 $190,461 $708,209 $500,632 $43,308 $186,112 $10,361 $1,639,083 

Allowance for Credit Losses

Maintaining an appropriate Allowance for Credit Losses ("ACL") is dependent on various factors, including the ability to identify potential problem loans in a timely manner. For commercial construction, residential construction, commercial and industrial, and commercial real estate, an internal credit rating process is used. Management believes that internal credit ratings are the most relevant credit quality indicator for these types of loans. The migration of loans through the various internal credit rating categories is a significant component of the ACL methodology for these loans, which bases the probability of default on this migration. Assigning credit ratings involves judgment. The Company's loan review process provide a separate assessment of credit rating accuracy. Credit ratings may be changed based on the ongoing monitoring procedures performed by loan officers or credit administration staff or if specific loan review assessments identify a deterioration or an improvement in the loans.

Management considers the performance of the loan portfolio and its impact on the ACL. The Company does not assign internal Credit ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, and consumer automobile loans. For these loans, the most relevant credit quality indicator is delinquency status and management evaluates credit quality based on the aging status of the loan.

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 the charge-off and recovery data over the past ten years.  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; 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.

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

Activity in the allowance is presented for the three months ended March 31, 2023 and 2022:

 
tThree Months Ended March 31, 2023
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,914 $5,061 $6,110 $188 $1,617 $109 $638 $15,637 
Impact of adopting ASC 3262,656 (3,893)(2,660)(96)240 602 (638)(3,789)
Charge-offs— (78)(3)— (93)(88)— (262)
Recoveries105 — 12 17 — 139 
Provision(813)320 31 92 337 42 — 
Ending Balance$3,862 $1,412 $3,481 $184 $2,113 $682 $— $11,734 
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 Three Months Ended March 31, 2022
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,946 $4,701 $5,336 $179 $1,411 $111 $492 $14,176 
Charge-offs— — (155)— (129)(60)— (344)
Recoveries— 24 — 41 
Provision(14)97 33 18 85 39 (108)150 
Ending Balance$1,936 $4,801 $5,215 $197 $1,376 $114 $384 $14,023 

The shift in allocation and the increase in the loan provision is primarily due to changes in the credit metrics within the loan portfolio coupled with the adoption of CECL on January 1, 2023. The increase in provision for the period end March 31, 2023 for residential real estate and consumer auto was loan volume driven.

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 March 31, 2023 and 2022: 
 March 31,
 20232022
Owners of residential rental properties19.12 %19.95 %
Owners of commercial rental properties15.28 %15.60 %


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 December 31, 2022:
 December 31, 2022
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer AutomobileOther consumer installmentUnallocated 
(In Thousands)ResidentialCommercialConstructionTotals
Allowance for Loan Losses:       
Ending allowance balance attributable to loans:       
Individually evaluated for impairment$$111 $827 $— $— $19 $— $961 
Collectively evaluated for impairment1,910 4,950 5,283 188 1,617 90 638 14,676 
Total ending allowance balance$1,914 $5,061 $6,110 $188 $1,617 $109 $638 $15,637 
Loans:       
Individually evaluated for impairment$698 $4,321 $6,195 $— $— $19  $11,233 
Collectively evaluated for impairment189,763 703,888 494,437 43,308 186,112 10,342  1,627,850 
Total ending loans balance$190,461 $708,209 $500,632 $43,308 $186,112 $10,361  $1,639,083 


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, 2022.





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The following sets forth the components of the net periodic expense/(gain) of the domestic non-contributory defined benefit plan for the three months ended March 31, 2023 and 2022, respectively:
Three Months Ended March 31,
(In Thousands)20232022
Interest cost$198 $138 
Expected return on plan assets(326)(412)
Amortization of net loss37 17 
Net periodic benefit$(91)$(257)

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, 2022, that it does not expect to contribute to its defined benefit plan in 2023.  As of March 31, 2023, 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 three months ended March 31, 2023 and 2022, there were 854 and 880 shares issued under the Plan, respectively, for total proceeds of $21,000 and $21,000.

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 March 31 2023, the Company has issued a total of 37,053 shares of common stock to non-employee directors under the Director Plan in lieu of otherwise payable cash compensation with 2,422 and 3,415 shares issued, respectively with an associated expense of $64,000 and $84,000 during the three months ended March 31, 2023 and 2022.

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 March 31, 2023 and December 31, 2022:
(In Thousands)March 31, 2023December 31, 2022
Commitments to extend credit$175,959 $169,365 
Standby letters of credit10,197 9,915 
Credit exposure from the sale of assets with recourse7,358 7,358 
$193,514 $186,638 
Allowance for credit losses$1,920 $143 

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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.  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 March 31, 2023 and December 31, 2022, 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.
 March 31, 2023
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
U.S. Government and agency securities$— $2,920 $— $2,920 
Mortgage-backed securities— 7,952 — 7,952 
State and political securities— 139,692 — 139,692 
Other debt securities— 46,626 — 46,626 
Investment equity securities:
  Equity securities1,163 — — 1,163 

 December 31, 2022
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
U.S. Government and agency securities$— $2,896 $— $2,896 
Mortgage-backed securities— 1,282 — 1,282 
State and political securities— 142,809 — 142,809 
Other debt securities— 46,686 — 46,686 
Investment equity securities:
  Equity securities1,142 — — 1,142 

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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 March 31, 2023 and December 31, 2022, 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. 
 March 31, 2023
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Collateral dependent loans$— $— $1,905 $1,905 
Other real estate owned— — 83 83 
 December 31, 2022
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$— $— $1,923 $1,923 
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 March 31, 2023 and December 31, 2022: 
 March 31, 2023
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Collateral dependent loans$1,905 
Appraisal of collateral (1)
Appraisal adjustments (1)
(10)% to (34)%
(14)%
Other real estate owned$83 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
 December 31, 2022
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans$1,923 
Appraisal of collateral (1)
Appraisal adjustments (1)
0% to (34)%
(14)%
Other real estate owned$83 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(20)%
(1) Appraisals may be adjusted 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 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 March 31, 2023 and December 31, 2022:
 CarryingFairFair Value Measurements at March 31, 2023
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Loans held for sale (1)$1,705 $1,705 $1,705 $— $— 
Loans, net1,688,289 1,672,564 — — 1,672,564 
Financial liabilities:     
Time deposits & brokered deposits233,136 228,079 — — 228,079 
Short-term borrowings 97,102 97,102 97,102 — — 
Long-term borrowings132,738 130,067 — — 130,067 
(1) The financial instrument is carried at cost at, March 31, 2023 which approximate the fair value of the instruments
 CarryingFairFair Value Measurements at December 31, 2022
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Loans held for sale (1)$3,298 $3,298 $3,298 $— $— 
Loans, net1,624,094 1,594,073 — — 1,594,073 
Financial liabilities:     
Time deposits & brokered deposits146,282 137,559 — — 137,559 
Short-term borrowings153,349 153,349 153,349 — — 
Long-term borrowings102,783 99,118 — — 99,118 
(1) The financial instrument is carried at cost at, December 31, 2022 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, 2023, the Company had a total of 914,000 stock options outstanding. During the period ended March 31, 2023, the Company issued 89,000 stock options with a strike price of $27.77 to a group of employees. The options granted in 2023 all expire ten years from the grant date. Of the 89,000 grants awarded in 2023, 59,500 of the options vest in three years while the 29,500 remaining options vest in five years.







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Stock options outstanding as of March 31, 2023 are presented below:
Stock Options Granted
DateSharesForfeitedCash SettlementOutstandingStrike PriceVesting PeriodExpiration
January 20, 202359,500 — — 59,500 $27.77 3 years10 years
January 20, 202329,500 — — 29,500 27.77 5 years10 years
January 18, 2022156,000 — — 156,000 24.10 3 years10 years
January 18, 202278,000 — — 78,000 24.10 5 years10 years
April 9, 2021156,500 — — 156,500 24.23 3 years10 years
April 9, 202178,000 — — 78,000 24.23 5 years10 years
March 11, 2020119,300 — — 119,300 25.34 3 years10 years
March 11, 2020119,200 — — 119,200 25.34 5 years10 years
March 15, 2019120,900 (18,300)— 102,600 28.01 3 years10 years
March 15, 2019119,100 (17,700)— 101,400 28.01 5 years10 years
August 27, 201558,125 (26,250)(28,875)3,000 28.02 5 years10 years

A summary of stock option activity is presented below:
March 31, 2023
SharesWeighted Average Exercise Price
Outstanding, beginning of year914,000 $25.34 
Granted89,000 27.77 
Cash settlement— — 
Forfeited— — 
Expired— — 
Outstanding, end of period1,003,000 $25.56 
Exercisable, end of period224,900 $26.59 

The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straight line 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 three months ended March 31, 2023:

Three months ended March 31,
2023
Risk-free interest rate3.76 %
Expected volatility31 %
Expected Annual dividend$1.28 
Expected life6.84 years
Weighted average grant date fair value per option$6.11 



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 $253,000 for the three months ended March 31, 2023 compared to $315,000 for the same period of 2022. As of March 31, 2023, a total of 224,900 stock options were exercisable and the weighted average years to expiration of these options was 6.44 years. Total unrecognized
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compensation cost for non-vested options was $1,906,000 and will be recognized over their weighted average remaining vesting period of 1.24 years.


Note 13.  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, 2022 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 Months Ended March 31, 2023 and 2022

Summary Results

Net income for the three months ended March 31, 2023 was $4,658,000 compared to $3,432,000 for the same period of 2022. Results for the three months ended March 31, 2023 compared to 2022 were impacted by a decrease in after-tax securities losses of $16,000 (from a loss of $48,000 to a loss of $32,000) for the period. In addition, bank-owned life insurance income increased due to a gain on death benefit of $380,000 during the three months ended March 31, 2023, while an after-tax loss of $201,000 related to a branch closure negatively impacted the three months ended March 31, 2022. The provision for credit losses decreased $79,000 for the three months ended March 31, 2023 to a provision of $71,000 compared to a provision of $150,000 for the 2022 period. The decrease in the provision for credit losses was primarily due to improving loan portfolio credit metrics and a minimal level of net loan charge-offs. Basic earnings per share for the three months ended March 31, 2023 was $0.66 and diluted earnings per share was $0.64. Basic and diluted earnings per share for the three months ended March 31, 2022 were $0.49. Annualized return on average assets was 0.92% for three months ended March 31, 2023, compared to 0.72% for the corresponding period of 2022. Annualized return on average equity was 11.12% for the three months ended March 31, 2023, compared to 8.17% for the corresponding period of 2022. 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 $4,690,000 for the three months ended March 31, 2023 compared to $3,480,000 for the same period of 2022. Core earnings per share for the three months ended March 31, 2023 was $0.66 basic and $0.64 diluted, compared to $0.50 basic and diluted core earnings per share for the same period of 2022.

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 March 31,
20232022
GAAP net income$4,658 $3,432 
Net securities losses, net of tax32 48 
Non-GAAP core earnings$4,690 $3,480 
Three Months Ended March 31,
 20232022
GAAP Return on average assets (ROA)0.92 %0.72 %
Net securities losses, net of tax0.01 %0.01 %
Non-GAAP core ROA0.93 %0.73 %
Three Months Ended March 31,
 20232022
GAAP Return on average equity (ROE)11.12 %8.17 %
Net securities losses, net of tax0.07 %0.11 %
Non-GAAP core ROE.11.19 %8.28 %
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Three Months Ended March 31,
 20232022
GAAP Basic earnings per share (EPS)$0.66 $0.49 
Net securities losses, net of tax— 0.01 
Non-GAAP core operating EPS$0.66 $0.50 
Three Months Ended March 31,
 20232022
GAAP Diluted EPS$0.64 $0.49 
Net securities losses, net of tax— 0.01 
Non-GAAP diluted core EPS$0.64 $0.50 
 
Interest and Dividend Income

Interest and dividend income for the three months ended March 31, 2023 increased $5,589,000 compared to the same period of 2022. The increase in loan portfolio income was due to a increase in the average loan portfolio balance coupled with an increase of in average rate earned on the portfolio.  Investment securities income has been impacted primarily by an increase in the average rate earned on the portfolio as lower yielding legacy investments matured. The increase in dividend and other interest income is due primarily to an increase in dividends received on FHLB restricted stock.

Interest and dividend income composition for the three months ended March 31, 2023 and 2022 was as follows:
 Three Months Ended
 March 31, 2023March 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$18,005 90.64 %$13,038 91.34 %$4,967 38.10 %
Investment securities:      
Taxable1,218 6.13 737 5.16 481 65.26 
Tax-exempt178 0.90 164 1.15 14 8.54 
Dividend and other interest income463 2.33 336 2.35 127 37.80 
Total interest and dividend income$19,864 100.00 %$14,275 100.00 %$5,589 39.15 %

Interest Expense

Interest expense for three months ended March 31, 2023 increased $4,144,000 compared to the same period of 2022. Interest-bearing deposit interest expense increased significantly due to a time deposit gathering campaign that generated funding for the increase in the loan portfolio. In addition, competition for deposits along with the impact of the rising rate environment contributed to the increase in deposit interest expense. Short-term interest expenses increased as overnight borrowings were utilized to supplement the funding of the growth in the loan portfolio.

Interest expense composition for the three months ended March 31, 2023 and 2022 was as follows:
 Three Months Ended
 March 31, 2023March 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$3,372 60.58 %$788 55.42 %$2,584 327.92 %
Short-term borrowings1,440 25.87 0.07 1,439 n/m
Long-term borrowings754 13.55 633 44.51 121 19.12 
Total interest expense$5,566 100.00 %$1,422 100.00 %$4,144 291.42 %



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Net Interest Margin

The net interest margin for the three months ended March 31, 2023 was 3.10% compared to 2.93% for the corresponding period of 2022. The increase in the net interest margin for the three month period was driven by an increase in the earning asset yield which was driven by an increase in yield on the loan portfolio due in part to the rate increases enacted by the Federal Open Market Committee ("FOMC"). The rate paid on interest-bearing deposits increased significantly due to the actions of the FOMC, competition, and time deposit gathering campaigns. The rate paid on short-term borrowings increased as the FOMC actions increased the cost of overnight of funding. In addition, short-term borrowing volume increased significantly as these borrowings were utilized to assist with the funding of the loan portfolio growth.

The following is a schedule of average balances and associated yields for the three months ended March 31, 2023 and 2022:

 AVERAGE BALANCES AND INTEREST RATES
 Three Months Ended March 31, 2023Three Months Ended March 31, 2022
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)$64,703 $448 2.81 %$47,974 $308 2.60 %
All other loans1,601,105 17,651 4.47 %1,351,414 12,795 3.84 %
Total loans (2)1,665,808 18,099 4.41 %1,399,388 13,103 3.80 %
Federal funds sold— — n/a50,000 93 0.75 %
Taxable securities181,421 1,579 3.53 %144,438 920 2.58 %
Tax-exempt securities (3)
33,565 225 2.72 %40,981 208 2.06 %
Total securities214,986 1,804 3.40 %185,419 1,128 2.47 %
Interest-bearing deposits7,031 102 5.88 %157,541 60 0.15 %
Total interest-earning assets1,887,825 20,005 4.30 %1,792,348 14,384 3.25 %
Other assets135,276   127,421   
Total assets$2,023,101  $1,919,769   
Liabilities and shareholders’ equity:    
Savings$243,302 120 0.20 %$240,953 22 0.04 %
Super Now deposits366,424 939 1.04 %370,895 195 0.21 %
Money market deposits289,734 1,280 1.79 %298,820 186 0.25 %
Time deposits188,476 1,033 2.22 %190,819 385 0.82 %
Total interest-bearing deposits1,087,936 3,372 1.26 %1,101,487 788 0.29 %
Short-term borrowings121,754 1,440 4.80 %5,194 0.08 %
Long-term borrowings119,267 754 2.56 %115,267 633 2.23 %
Total borrowings241,021 2,194 3.69 %120,461 634 2.13 %
Total interest-bearing liabilities1,328,957 5,566 1.70 %1,221,948 1,422 0.47 %
Demand deposits498,180   506,348   
Other liabilities28,367   23,357   
Shareholders’ equity167,597   168,116   
Total liabilities and shareholders’ equity$2,023,101   $1,919,769   
Interest rate spread (3)
  2.60 %  2.78 %
Net interest income/margin (3)
 $14,439 3.10 % $12,962 2.93 %
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.




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The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
(In Thousands)20232022
Total interest income$19,864 $14,275 
Total interest expense5,566 1,422 
Net interest income (GAAP)14,298 12,853 
Tax equivalent adjustment141 109 
Net interest income (fully taxable equivalent) (NON-GAAP)$14,439 $12,962 
 
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 months ended March 31, 2023 and 2022:
 Three months ended March 31,
 2023 vs. 2022
 Increase (Decrease) Due to
(In Thousands)VolumeRateNet
Interest income:   
Tax-exempt loans$114 $26 $140 
All other loans2,572 2,284 4,856 
Federal funds sold(93)— (93)
Taxable investment securities271 388 659 
Tax-exempt investment securities(43)60 17 
Interest bearing deposits(108)150 42 
Total interest-earning assets2,713 2,908 5,621 
Interest expense:   
Savings deposits— 98 98 
Super Now deposits(2)746 744 
Money market deposits(6)1,100 1,094 
Time deposits(5)653 648 
Short-term borrowings394 1,045 1,439 
Long-term borrowings23 98 121 
Total interest-bearing liabilities404 3,740 4,144 
Change in net interest income$2,309 $(832)$1,477 

Provision for Credit Losses

The provision for credit 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 credit losses is determined by applying loss factors to outstanding loans by type,.  A historical charge-off factor is calculated utilizing the charge-off and recovery data over the past ten years. 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.

Although management believes it uses the best information available to make such determinations and that the allowance for credit losses is adequate at March 31, 2023, 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
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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 credit losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.

The allowance for credit losses decreased from $15,637,000 at December 31, 2022 to $11,734,000 at March 31, 2023. The decrease in allowance was due to the adoption of CECL on January 1, 2023. At March 31, 2023 and December 31, 2022, the allowance for credit losses to total loans was 0.69% and 0.95%, respectively.

The provision for credit losses totaled $71,000 and $150,000 for the three months ended March 31, 2023 and the corresponding 2022 period. The decrease in the provision for credit losses was the result of improving credit metrics and the adoption of CECL offset by loan portfolio growth.

Nonperforming loans decreased to $4,766,000 at March 31, 2023 from $4,890,000 at December 31, 2022. 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 been classified as impaired and have a specific allocation recorded within the allowance for credit losses. The ratio of non-performing loans to total loans ratio decreased to 0.28% at March 31, 2023 from 0.38% at March 31, 2022 as non-performing loans have decreased to $4,766,000 from $5,281,000 at March 31, 2022. Net loan charge-offs of $123,000 for the three months ended March 31, 2023 impacted the allowance for credit losses, which was 0.69% of total loans at March 31, 2023 compared to 1.00% at March 31, 2022.

The following is a table showing total nonperforming loans as of:
 Total Nonperforming Loans
(In Thousands)90 Days Past DueNon-accrualTotal
March 31, 2023$1,215 $3,551 $4,766 
December 31, 20221,275 3,615 4,890 
September 30, 20221,161 4,582 5,743 
June 30, 2022421 4,679 5,100 
March 31, 2022364 4,917 5,281 

Additional allowance for credit losses and net (charge-offs) recoveries information is presented by loan portfolio segment in the tables below. The three months ending March 31, 2023 was impacted by the CECL adoption reclassification entry disclosed in Note 6. Loans.
March 31, 2023
Amount of Allowance for Credit Losses AllocatedTotal loansAllowance for Credit Losses to Total Loans RatioNet (Charge-Offs) RecoveriesAverage LoansRatio of Net (Charge-Offs) Recoveries to Average Loans
(In Thousands)
Commercial, financial, and agricultural$3,862$200,432 1.93 %$105 $196,291 0.05 %
Real estate mortgage:
Residential1,412723,932 0.20 %(76)713,064 (0.01)%
Commercial3,481509,466 0.68 %— 502,884 — %
Construction18447,121 0.39 %— 43,683 — %
Consumer automobiles2,113207,747 1.02 %(81)199,642 (0.04)%
Other consumer installment loans68210,400 6.56 %(71)10,244 (0.69)%
$11,734$1,699,098 0.69 %$(123)$1,665,808 (0.01)%
Total non-accrual loans outstanding$3,551
Non-accrual loans to total loans outstanding0.21 %
Allowance for credit losses to non-accrual loans330.44 %
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December 31, 2022
Amount of Allowance for Loan Losses AllocatedTotal loansAllowance for Loan Losses to Total Loans RatioNet (Charge-Offs) RecoveriesAverage LoansRatio of Net (Charge-Offs) Recoveries to Average Loans
(In Thousands)
Commercial, financial, and agricultural$1,914$190,461 1.00 %$165 $173,433 0.10 %
Real estate mortgage:
Residential5,061708,209 0.71 %26 649,989 — %
Commercial6,110500,632 1.22 %(150)466,526 (0.03)%
Construction18843,308 0.43 %29 44,968 0.06 %
Consumer automobiles1,617186,112 0.87 %(328)150,261 (0.22)%
Other consumer installment loans10910,361 1.05 %(191)9,737 (1.96)%
Unallocated638
$15,637$1,639,083 0.95 %$(449)$1,494,914 (0.03)%
Total non-accrual loans outstanding$3,615
Non-accrual loans to total loans outstanding0.22 %
Allowance for loan losses to non-accrual loans432.56 %

Non-interest Income

Total non-interest income for the three months ended March 31, 2023 compared to the same period in 2022 decreased $155,000. Excluding net securities gains, non-interest income for the three months ended March 31, 2023 decreased $176,000 compared to the same period in 2022. Gain on sale of loans and loan broker commissions decreased as the volume of loan sales has declined as a reduction in housing inventory and higher rates has reduced mortgage activity. Bank-owned life insurance increased due to a gain on death benefit of $380,000 recognized during the 2023 period.

Non-interest income composition for the three months ended March 31, 2023 and 2022 was as follows:

 Three Months Ended
 March 31, 2023March 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$496 21.98 %$495 20.52 %$0.20 %
Net debt securities losses, available for sale(61)(2.70)(2)(0.08)(59)(2,950.00)
Net equity securities gains (losses)21 0.93 (59)(2.44)80 135.59 
Bank-owned life insurance556 24.63 170 7.05 386 227.06 
Gain on sale of loans231 10.23 345 14.30 (114)(33.04)
Insurance commissions165 7.31 170 7.05 (5)(2.94)
Brokerage commissions165 7.31 200 8.29 (35)(17.50)
Loan broker commissions170 7.53 541 22.43 (371)(68.58)
Debit card income335 14.84 345 14.30 (10)(2.90)
Other179 7.94 207 8.58 (28)(13.53)
Total non-interest income$2,257 100.00 %$2,412 100.00 %$(155)(6.43)%

Non-interest Expense

Total non-interest expense decreased $109,000 for the three months ended March 31, 2023 compared to the same period of 2022. The decrease in salaries and employee benefits is attributable to the closing of a branch location in the first quarter of 2022 coupled with a reduction in branch hours at select locations. 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. Marketing costs increased as a time deposit gathering campaign was initiated during 2023. Pennsylvania shares tax decreased as tax credits were purchased and charitable contributions were made to
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organizations that resulted in the obtainment of tax credits. Professional fees increased primarily due to legal fees and the utilization of a proxy solicitor related to the shareholder vote to update the Company's Articles of Incorporation.

Non-interest expense composition for the three months ended March 31, 2023 and 2022 was as follows:
 Three Months Ended
 March 31, 2023March 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$6,176 56.67 %$6,264 56.91 %$(88)(1.40)%
Occupancy866 7.95 910 8.27 (44)(4.84)
Furniture and equipment846 7.76 892 8.10 (46)(5.16)
Software amortization183 1.68 253 2.30 (70)(27.67)
Pennsylvania shares tax248 2.28 389 3.53 (141)(36.25)
Professional fees688 6.31 538 4.89 150 27.88 
Federal Deposit Insurance Corporation deposit insurance245 2.25 202 1.84 43 21.29 
Marketing155 1.42 64 0.58 91 142.19 
Intangible amortization35 0.32 43 0.39 (8)(18.60)
Other1,456 13.36 1,452 13.19 0.28 
Total non-interest expense$10,898 100.00 %$11,007 100.00 %$(109)(0.99)%

Provision for Income Taxes

Income taxes increased $252,000 for the three months ended March 31, 2023 compared to the same period of 2022. The effective tax rate for the three months ended March 31, 2023 was 16.61% compared to 16.46% for the same period of 2022. The Company currently is in a deferred tax asset position. A valuation allowance was established on the $1,810,000 of capital loss carryforwards as of December 31, 2022, which remained unchanged during the first quarter of 2023.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents increased $1,313,000 from $40,333,000 at December 31, 2022 to $41,646,000 at March 31, 2023, primarily as a result of the following activity during the three months ended March 31, 2023.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds being greater than loan originations, less $231,000 in realized gains, by $1,593,000 for the three months ended March 31, 2023.

Loans

Gross loans increased $60,292,000 since December 31, 2022 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 continue to rebound from historically low levels.

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The allocation of the loan portfolio, by category, as of March 31, 2023 and December 31, 2022 is presented below:
 March 31, 2023December 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Commercial, financial, and agricultural$200,432 11.79 %$190,461 11.62 %$9,971 5.24 %
Real estate mortgage:      
Residential723,932 42.58 708,209 43.19 15,723 2.22 %
Commercial509,466 29.97 500,632 30.53 8,834 1.76 %
Construction47,121 2.77 43,308 2.64 3,813 8.80 %
Consumer automobile loans207,747 12.22 186,112 11.35 21,635 11.62 %
Other consumer installment loans10,400 0.61 10,361 0.63 39 0.38 %
Net deferred loan fees and discounts925 0.06 648 0.04 277 42.75 %
Gross loans$1,700,023 100.00 %$1,639,731 100.00 %$60,292 3.68 %
 
Investments

The fair value of the investment debt securities portfolio at March 31, 2023 increased $3,517,000 since December 31, 2022, while the amortized cost of the portfolio increased $1,123,000.  The increase in the investment portfolio amortized value occurred within the mortgage-backed segment of the portfolio. The state and political segment declined as bonds matured. The other debt segment balances remained constant and consists primarily of corporate bonds. The municipal segment was flat as cash flow was reinvested into primarily bonds with a final maturity of one to five years. 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 85.51% 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 March 31, 2023 and December 31, 2022 while the fair value increased $21,000 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 March 31, 2023 follows:
 A- to AAAB- to BBB+C- to CCC+Not RatedTotal
(In Thousands)Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Available for sale (AFS):        
U.S. Government and agency securities$504$483$$$$$2,498$2,437$3,002$2,920
Mortgage-backed securities 8,1597,9528,1597,952
State and political securities143,652137,39580802,2662,217145,998139,692
Other debt securities24,87523,1435,3244,86919,86718,61450,06646,626
Total debt securities AFS$177,190$168,973$5,404$4,949$$$24,631$23,268$207,225$197,190
 
Financing Activities

Deposits

Total deposits increased $82,375,000 from December 31, 2022 to March 31, 2023. Time deposits increased $53,254,000 over this period to a total of $191,203,000 as deposit gathering efforts focused on time deposits as customers sought a higher return on their deposit balances. Brokered deposits increased in usage as they provided an alternative to FHLB borrowings. Core deposits (deposits less time deposits) remained stable as deposit balances flowed from noninterest-bearing and lower rate products into higher rate products such as money market accounts. Emphasis has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking products has increased due to these efforts coupled with a change in consumer behavior over the past several years.

Deposit balances and their changes for the periods being discussed follow:
 March 31, 2023December 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Demand deposits$502,352 30.65 %$519,063 33.35 %$(16,711)(3.22)%
NOW accounts363,548 22.18 372,574 23.94 (9,026)(2.42)
Money market deposits300,273 18.32 270,589 17.38 29,684 10.97 
Savings deposits239,526 14.62 247,952 15.93 (8,426)(3.40)
Time deposits191,203 11.67 137,949 8.86 53,254 38.60 
Brokered deposits41,933 2.56 8,333 0.54 33,600 2.16 
 Total deposits$1,638,835 100.00 %$1,556,460 100.00 %$82,375 5.29 %

As of March 31, 2023 and December 31, 2022 the Company had $633,342,000 and $617,515,000, respectively, in uninsured deposits. Included in the total uninsured deposits is a concentration of public funds which were collateralized by the Banks in the amount of $199,812,000 and $180,252,000 at March 31, 2023 and December 31, 2022, respectively. Total uninsured deposits less collateralized public funds was $433,530,000 at March 31, 2023 and $437,263,000 at December 31, 2022.

Borrowed Funds

Total borrowed funds decreased 10.27%, or $26,292,000, to $229,840,000 at March 31, 2023 compared to $256,132,000 at December 31, 2022. The increase in long term borrowings occurred as fixed rate borrowings were initiated to lock in interest rates and to reduce the usage of FHLB overnight borrowings. Securities sold under agreements to repurchase have decreased as customers balances have decreased.

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 March 31, 2023December 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Short-term borrowings:      
FHLB repurchase agreements$92,853 40.40 %$148,195 57.86 %$(55,342)100.00 %
Securities sold under agreement to repurchase4,249 1.85 5,154 2.01 (905)(17.56)
Total short-term borrowings97,102 42.25 153,349 59.87 (56,247)(36.68)
Long-term borrowings:
Long-term FHLB borrowings125,000 54.38 95,000 37.09 30,000 31.58 
Long-term finance lease7,738 3.37 7,783 3.04 (45)(0.58)
Total long-term borrowings132,738 57.75 102,783 40.13 29,955 29.14 
Total borrowed funds$229,840 100.00 %$256,132 100.00 %$(26,292)(10.27)%


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)March 31, 2023December 31, 2022
Investment debt securities pledged, fair value$6,923 $7,165 
Repurchase agreements4,249 5,153 

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 March 31, 2023 and December 31, 2022 were as follows:
 March 31, 2023December 31, 2022
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$169,765 9.867 %$165,346 9.973 %
For Capital Adequacy Purposes77,424 4.500 74,607 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date120,437 7.000 116,056 7.000 
To Be Well Capitalized111,835 6.500 107,766 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$183,419 10.661 %$181,127 10.925 %
For Capital Adequacy Purposes137,637 8.000 132,633 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date180,649 10.500 174,081 10.500 
To Be Well Capitalized172,047 10.000 165,791 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$169,765 9.867 %$165,346 9.973 %
For Capital Adequacy Purposes103,232 6.000 99,476 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date146,245 8.500 140,925 8.500 
To Be Well Capitalized137,643 8.000 132,635 8.000 
Tier I Capital (to Average Assets)   
Actual$169,765 8.547 %$165,346 8.636 %
For Capital Adequacy Purposes79,450 4.000 76,585 4.000 
To Be Well Capitalized99,313 5.000 95,731 5.000 
 
Jersey Shore State Bank's capital ratios as of March 31, 2023 and December 31, 2022 were as follows:
 March 31, 2023December 31, 2022
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$122,428 9.681 %$119,783 9.781 %
For Capital Adequacy Purposes56,908 4.500 55,109 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date88,523 7.000 85,725 7.000 
To Be Well Capitalized82,200 6.500 79,602 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$133,875 10.587 %$131,379 10.728 %
For Capital Adequacy Purposes101,162 8.000 97,971 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date132,775 10.500 128,587 10.500 
To Be Well Capitalized126,452 10.000 122,464 10.000 
Tier I Capital (to Risk-weighted Assets)- - 
Actual$122,428 9.681 %$119,783 9.781 %
For Capital Adequacy Purposes75,877 6.000 73,479 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date107,493 8.500 104,095 8.500 
To Be Well Capitalized101,170 8.000 97,972 8.000 
Tier I Capital (to Average Assets)   
Actual$122,428 8.308 %$119,783 8.383 %
For Capital Adequacy Purposes58,945 4.000 57,155 4.000 
To Be Well Capitalized73,681 5.000 71,444 5.000 





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Luzerne Bank's capital ratios as of March 31, 2023 and December 31, 2022 were as follows:
 March 31, 2023December 31, 2022
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$46,049 10.099 %$43,364 9.877 %
For Capital Adequacy Purposes20,519 4.500 19,757 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date31,918 7.000 30,733 7.000 
To Be Well Capitalized29,638 6.500 28,538 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$48,256 10.583 %$47,549 10.830 %
For Capital Adequacy Purposes36,478 8.000 35,124 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date47,878 10.500 46,100 10.500 
To Be Well Capitalized45,598 10.000 43,905 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$46,049 10.099 %$43,364 9.877 %
For Capital Adequacy Purposes27,359 6.000 26,342 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date38,758 8.500 37,318 8.500 
To Be Well Capitalized36,478 8.000 35,123 8.000 
Tier I Capital (to Average Assets)   
Actual$46,049 8.490 %$43,364 8.260 %
For Capital Adequacy Purposes21,696 4.000 21,000 4.000 
To Be Well Capitalized27,120 5.000 26,249 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, with the exception of net loans to total deposits that was 103%, at March 31, 2023:

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 maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating
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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 $787,689,000. 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 $217,853,000 as of March 31, 2023.

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 March 31, 2024 assuming a static balance sheet as of March 31, 2023.
 Parallel Rate Shock in Basis Points
(In Thousands)-300-200-100Static+100+200+300+400
Net interest income$61,690 $64,089 $66,083 $67,784 $69,065 $70,239 $71,375 $72,490 
Change from static(6,094)(3,695)(1,701)— 1,281 2,455 3,591 4,706 
Percent change from static-8.99 %-5.45 %-2.51 %— 1.89 %3.62 %5.30 %6.94 %
 
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, 2022.  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 March 31, 2023.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2023, the Company implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other changes made to the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2023 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, 2022. Such risk factors are supplemented by adding the following:

The recent failures of three large banks in the United States have resulted in trading volatility in financial institution stocks, negative media coverage, and customer concerns regarding insured deposit coverage, all of which could adversely affect our financial condition and results of operations.

In March through early May 2023, three large banks, Silicon Valley Bank (Santa Clara, California; $209.0 billion in assets), Signature Bank (New York, New York; $110.4 billion in assets), and First Republic Bank (San Francisco, California; $229.1 billion in assets) were closed by applicable state banking regulators and the FDIC was named as receiver in each case. These banks had relatively high levels of uninsured deposits and experienced significant outflows of deposits preceding their failures. The failures have resulted in negative media attention, concerns of bank customers generally on FDIC deposit insurance coverage, and significant market volatility for financial institution stocks. These events have also resulted in increased focus by financial institutions, investors, customers, and banking regulators on liquidity and funding sources, the composition of deposits and levels of uninsured deposits, interest rate risk management, the amount and nature of potential other accumulated losses relating to financial institution securities portfolios, and capital levels. These events may also result in increased levels of regulatory scrutiny and regulation designed to address regulatory concerns, which may increase costs, including possible increases in FDIC insurance premiums across the industry. If we are unable to successfully manage our deposits, liquidity and funding, interest rate risk, and capital, and the costs resulting from any new regulatory requirements, it may adversely affect our financial condition and results of operations.

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 March 31, 2023.
PeriodTotal
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 (January 1 - January 31, 2023)— $— — 324,000 
Month #2 (February 1 - February 28, 2023)— — — 324,000 
Month #3 (March 1 - March 31, 2023)— — — 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
 
 Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3(i) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2022).
 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).
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
 Section 1350 Certification of Chief Executive Officer.
 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 March 31, 2023 and December 31, 2022; (ii) the Consolidated Statement of Income for the three months ended March 31, 2023 and 2022; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2023 and 2022; (iv) the Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2023 and 2022; (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 2023 and 2022 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.
104Cover 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:    May 15, 2023/s/ Richard A. Grafmyre
 Richard A. Grafmyre, Chief Executive Officer
 (Principal Executive Officer)
  
  
Date:May 15, 2023/s/ Brian L. Knepp
 Brian L. Knepp, President and Chief Financial Officer
 (Principal Financial Officer and Principal Accounting
 Officer)
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