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Penns Woods Bancorp
PWOD
#8460
Rank
$0.22 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$30.00
Share price
0.00%
Change (1 day)
4.86%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Penns Woods Bancorp
  2. Quarterly Reports (10-Q)
  3. Submitted on 2022-05-10

Penns Woods Bancorp - 10-Q quarterly report FY


Text size:
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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, 2022. 
☐Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from                    to                   .

No. 0-17077
(Commission File Number)

PENNS WOODS BANCORP INC.
(Exact name of Registrant as specified in its charter) 
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 filer☐Accelerated filer☐
  Non-accelerated filer☒   Smaller reporting company☒
Emerging growth company☐

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒
On May 1, 2022 there were 7,058,369 shares of the Registrant’s common stock outstanding.


PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

  Page
  Number
 
   
3
   
3
  
4
  
5
  
6
 
7
  
8
   
30
   
43
   
43
   
 
   
44
   
44
   
44
   
44
   
44
   
44
   
45
   
46
2

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)20222021
ASSETS: 
Noninterest-bearing balances$25,717 $19,233 
Interest-bearing balances in other financial institutions143,086 194,629 
Federal funds sold50,000 50,000 
Total cash and cash equivalents218,803 263,862 
Investment debt securities, available for sale, at fair value175,674 166,410 
Investment equity securities, at fair value1,193 1,251 
Investment securities, trading36 37 
Restricted investment in bank stock, at fair value13,795 14,531 
Loans held for sale1,360 3,725 
Loans1,405,966 1,392,147 
Allowance for loan losses(14,023)(14,176)
Loans, net1,391,943 1,377,971 
Premises and equipment, net33,259 34,025 
Accrued interest receivable8,129 8,048 
Bank-owned life insurance33,953 33,768 
Investment in limited partnerships4,600 4,607 
Goodwill17,104 17,104 
Intangibles437 480 
Operating lease right-of-use asset2,795 2,851 
Deferred tax asset4,569 2,946 
Other assets9,159 9,193 
TOTAL ASSETS$1,916,809 $1,940,809 
LIABILITIES:  
Interest-bearing deposits$1,098,265 $1,126,955 
Noninterest-bearing deposits514,130 494,360 
Total deposits1,612,395 1,621,315 
Short-term borrowings6,634 5,747 
Long-term borrowings112,918 125,963 
Accrued interest payable471 651 
Operating lease liability2,847 2,898 
Other liabilities13,117 11,961 
TOTAL LIABILITIES1,748,382 1,768,535 
SHAREHOLDERS’ EQUITY:  
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued
— — 
Common stock, par value $5.55, 22,500,000 shares authorized; 7,554,567 and 7,550,272 shares issued; 7,074,342 and 7,070,047 outstanding
41,969 41,945 
Additional paid-in capital54,191 53,795 
Retained earnings90,928 89,761 
Accumulated other comprehensive loss:  
Net unrealized (loss) gain on available for sale securities(3,074)2,373 
Defined benefit plan(3,472)(3,485)
Treasury stock at cost, 480,225
(12,115)(12,115)
TOTAL SHAREHOLDERS' EQUITY168,427 172,274 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,916,809 $1,940,809 
See accompanying notes to the unaudited consolidated financial statements.
3

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended March 31,
(In Thousands, Except Per Share Data)20222021
INTEREST AND DIVIDEND INCOME:  
Loans, including fees$13,038 $13,345 
Investment securities:  
Taxable737 819 
Tax-exempt164 171 
Dividend and other interest income336 260 
TOTAL INTEREST AND DIVIDEND INCOME14,275 14,595 
INTEREST EXPENSE:  
Deposits788 1,684 
Short-term borrowings1 2 
Long-term borrowings633 839 
TOTAL INTEREST EXPENSE1,422 2,525 
NET INTEREST INCOME12,853 12,070 
PROVISION FOR LOAN LOSSES150 515 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES12,703 11,555 
NON-INTEREST INCOME:  
Service charges495 383 
Net debt securities (losses) gains, available for sale(2)138 
Net equity losses(58)(23)
Net securities (losses) gains, trading(1)4 
Bank-owned life insurance170 173 
Gain on sale of loans345 908 
Insurance commissions170 157 
Brokerage commissions200 219 
Loan broker commissions541 181 
Debit card income345 380 
Other207 94 
TOTAL NON-INTEREST INCOME2,412 2,614 
NON-INTEREST EXPENSE:  
Salaries and employee benefits6,264 5,598 
Occupancy910 976 
Furniture and equipment892 809 
Software amortization253 198 
Pennsylvania shares tax389 352 
Professional fees538 583 
Federal Deposit Insurance Corporation deposit insurance202 221 
Marketing64 63 
Intangible amortization43 53 
Other1,452 1,098 
TOTAL NON-INTEREST EXPENSE11,007 9,951 
INCOME BEFORE INCOME TAX PROVISION4,108 4,218 
INCOME TAX PROVISION676 771 
CONSOLIDATED NET INCOME$3,432 $3,447 
Less: Net income attributable to noncontrolling interest— 6 
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.$3,432 $3,441 
EARNINGS PER SHARE - BASIC$0.49 $0.49 
EARNINGS PER SHARE - DILUTED$0.49 $0.49 
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,072,575 7,055,116 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED7,072,575 7,055,116 
See accompanying notes to the unaudited consolidated financial statements.
4



PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
 
 Three Months Ended March 31,
(In Thousands)20222021
Net Income$3,432 $3,441 
Other comprehensive income loss:  
Change in unrealized loss on available for sale securities(6,897)(1,911)
Tax effect1,448 401 
Net realized loss (gain) on available for sale securities included in net income2 (138)
Tax effect— 29 
   Amortization of unrecognized pension gain17 46 
        Tax effect(4)(10)
Total other comprehensive loss(5,434)(1,583)
Comprehensive (loss) income$(2,002)$1,858 
 
See accompanying notes to the unaudited consolidated financial statements.
5

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 STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except 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 compensation 315 315 
Dividends declared ($0.32 per share)
(2,265)(2,265)
Common shares issued for employee stock purchase plan880 5 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 


COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS 		TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)SHARESAMOUNT
Balance, December 31, 20207,532,576 $41,847 $52,523 $82,769 $(882)$(12,115)$4 $164,146 
Net income3,441 6 3,447 
Other comprehensive loss(1,583)(1,583)
Stock-based compensation220 220 
Dividends declared ($0.32 per share)
(2,262)(2,262)
Common shares issued for employee stock purchase plan939 5 15 20 
Director Compensation Plan3,727 21 60 81 
Distributions to noncontrolling interest(6)(6)
Balance, March 31, 20217,537,242 $41,873 $52,818 $83,948 $(2,465)$(12,115)$4 $164,063 

See accompanying notes to the unaudited consolidated financial statements.
6



PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
Three Months Ended March 31,
(In Thousands)20222021
OPERATING ACTIVITIES:  
Net Income$3,432 $3,447 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization948 839 
Write down of leasehold improvements254 — 
Amortization of intangible assets43 53 
Provision for loan losses150 515 
Stock based compensation315 220 
Accretion and amortization of investment security discounts and premiums343 251 
Net securities losses (gains), available for sale2 (138)
Originations of loans held for sale(9,140)(26,658)
Proceeds of loans held for sale11,850 30,237 
Gain on sale of loans(345)(908)
Net equity securities losses58 23 
Net securities losses (gains), trading1 (4)
Security trades payable1,290 — 
Earnings on bank-owned life insurance(170)(173)
Increase in deferred tax asset(175)(761)
Other, net(1,766)2,447 
Net cash provided by operating activities7,090 9,390 
INVESTING ACTIVITIES:  
Proceeds from sales of available for sale securities90 11,372 
Proceeds from calls and maturities of available for sale securities920 3,428 
Purchases of available for sale securities(16,251)(21,955)
Net (increase) decrease in loans(14,175)8,312 
Acquisition of premises and equipment(92)(197)
Proceeds from the sale of foreclosed assets— 246 
Purchase of bank-owned life insurance(18)(26)
Proceeds from bank-owned life insurance death benefit2 — 
Investment in limited partnership(123)(711)
Proceeds from redemption of regulatory stock1,674 1,082 
Purchases of regulatory stock(938)(737)
Net cash (used for) provided by investing activities(28,911)814 
FINANCING ACTIVITIES:  
Net (decrease) increase in interest-bearing deposits(28,690)40,362 
Net increase in noninterest-bearing deposits19,770 29,559 
Repayment of long-term borrowings(13,000)(15,000)
Net increase in short-term borrowings887 1,406 
Finance lease principal payments(45)(34)
Dividends paid(2,265)(2,262)
Distributions to non-controlling interest— (6)
Issuance of common stock105 101 
Net cash (used for) provided by financing activities(23,238)54,126 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS(45,059)64,330 
CASH AND CASH EQUIVALENTS, BEGINNING263,862 213,358 
CASH AND CASH EQUIVALENTS, ENDING$218,803 $277,688 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
Interest paid$1,602 $2,649 
Income taxes paid10 — 
Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities— 2,653 
Transfer of loans to foreclosed real estate53 — 
See accompanying notes to the unaudited consolidated financial statements.
7

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

Note 1.  Basis of Presentation
 
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., United Insurance Solutions, LLC., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”).  All significant inter-company balances and transactions have been eliminated in the consolidation.

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

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

Note 2.  Accumulated Other Comprehensive Gain (Loss)

The changes in accumulated other comprehensive gain (loss) by component shown net of tax and parenthesis indicating debits, as of March 31, 2022 and 2021 were as follows:
Three Months Ended March 31, 2022Three Months Ended March 31, 2021
(In Thousands)Net Unrealized Gain on Available
for Sale Securities		Defined
Benefit 
Plan		TotalNet Unrealized
Gain on Available
for Sale Securities		Defined
Benefit 
Plan		Total
Beginning balance$2,373 $(3,485)$(1,112)$4,714 $(5,596)$(882)
Other comprehensive loss before reclassifications(5,449)— (5,449)(1,510)— (1,510)
Amounts reclassified from accumulated other comprehensive gain (loss)2 13 15 (109)36 (73)
Net current-period other comprehensive (loss) income(5,447)13 (5,434)(1,619)36 (1,583)
Ending balance$(3,074)$(3,472)$(6,546)$3,095 $(5,560)$(2,465)
The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of March 31, 2022 and 2021 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, 2022Three Months Ended March 31, 2021
Net unrealized (loss) gain on available for sale securities$(2)$138 Net debt securities gains, available for sale
Income tax effect— (29)Income tax provision
Total reclassifications for the period$(2)$109 
Net unrecognized pension costs$(17)$(46)Other non-interest expense
Income tax effect4 10 Income tax provision
Total reclassifications for the period$(13)$(36)


8

Note 3.  Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives, and Hedging (Topic 815); and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-04 makes clarifying amendments to certain financial instrument standards. For entities that have not yet adopted ASU 2016-13, the effective dates for the amendments related to ASU 2016-13 are the same as the effective dates in ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2017-12 as of April 25, 2019, the effective dates for the amendments to Topic 815 are the same as the effective dates in ASU 2017-12. For entities that have adopted ASU 2017-12 as of April 25, 2019, the effective date is as of the beginning of the first annual period beginning after April 25, 2019. The amendments related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

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

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant
9

disclosures involving amortized cost basis. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

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

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

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

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

10

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

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


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 1,268,525 stock options, with an average exercise price of $26.65, outstanding on March 31, 2022. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $24.24 being less than the exercise price of the options issued. There were a total of 841,275 stock options, with an average exercise price of $28.17 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 $20.21 being less than the strike price for the period ending March 31, 2021.
 Three Months Ended March 31,
 20222021
Weighted average common shares issued7,552,800 7,535,341 
Weighted average treasury stock shares(480,225)(480,225)
Weighted average common shares outstanding - basic and diluted7,072,575 7,055,116 
 















11

Note 5. Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at March 31, 2022 and December 31, 2021 are as follows:
 March 31, 2022
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
Mortgage-backed securities$1,532 $— $(80)$1,452 
State and political securities129,868 926 (3,238)127,556 
Other debt securities48,165 41 (1,540)46,666 
Total debt securities$179,565 $967 $(4,858)$175,674 
Investment equity securities:
Other equity securities$1,300 $— $(107)$1,193 
Trading:
Other equity securities$50 $— $(14)$36 
 December 31, 2021
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
Mortgage-backed securities$1,752 $— $(5)$1,747 
State and political securities113,852 3,500 (694)116,658 
Other debt securities47,802 524 (321)48,005 
Total debt securities$163,406 $4,024 $(1,020)$166,410 
Investment equity securities:
Other equity securities$1,300 $— $(49)$1,251 
Trading:
Other equity securities$50 $— $(13)$37 

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, 2022 and December 31, 2021.
 March 31, 2022
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
Mortgage-backed securities$1,452 $(80)$— $— $1,452 $(80)
State and political securities71,755 (2,242)12,375 (996)84,130 (3,238)
Other debt securities29,693 (1,324)4,737 (216)34,430 (1,540)
Total debt securities$102,900 $(3,646)$17,112 $(1,212)$120,012 $(4,858)
12

 December 31, 2021
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
Mortgage-backed securities$1,747 $(5)$— $— $1,747 $(5)
State and political securities34,203 (398)7,408 (296)41,611 (694)
Other debt securities21,446 (301)1,808 (20)23,254 (321)
Total debt securities$57,396 $(704)$9,216 $(316)$66,612 $(1,020)
 
At March 31, 2022, there were a total of 172 securities in a continuous unrealized loss position for less than twelve months and 25 individual securities that were in a continuous unrealized loss position for twelve months or greater.

The Company reviews its position quarterly and has determined that, at March 31, 2022, the declines outlined in the above table represent temporary declines and the Company does not intend to sell, and does not believe it will be required to sell, these securities before recovery of their cost basis, which may be at maturity.  The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at March 31, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands)Amortized CostFair Value
Due in one year or less$12,419 $12,400 
Due after one year to five years104,442 101,967 
Due after five years to ten years60,675 59,347 
Due after ten years2,029 1,960 
Total$179,565 $175,674 

Total gross proceeds from sales of debt securities available for sale for the three months ended March 31, 2022 was $90,000, compared to $11,372,000 for the corresponding 2021 period.

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)20222021
Available for sale (AFS):
Gross realized gains:  
Mortgage-backed securities$— $— 
State and political securities1 — 
Other debt securities— 138 
Total gross realized gains$1 $138 
Gross realized losses:  
State and political securities$3 $— 
Other debt securities— — 
Total gross realized losses$3 $— 

There were no impairment charges included in gross realized losses for the three months ended March 31, 2022 and 2021, respectively.

13

Investment securities with a carrying value of approximately $146,810,000 and $139,435,000 at March 31, 2022 and December 31, 2021, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

At March 31, 2022 and December 31, 2021, we had $1,193,000 and $1,251,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
(In Thousands)20222021
Net losses recognized in equity securities during the period$(58)$(23)
Less: Net gains realized on the sale of equity securities during the period— — 
Unrealized losses recognized in equity securities held at reporting date$(58)$(23)

Net gains and losses on trading account securities are as follows for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
(In Thousands)20222021
Net gains on sale transactions$— $— 
Net mark-to-market (losses) gains(1)4 
Net (loss) gain on trading account securities$(1)$4 



Note 6. Loans

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

The following table presents the related aging categories of loans, by segment, as of March 31, 2022 and December 31, 2021:
 March 31, 2022
  Past DuePast Due 90  
  30 To 89Days Or MoreNon- 
(In Thousands)CurrentDays& Still AccruingAccrualTotal
Commercial, financial, and agricultural$161,764 $— $— $509 $162,273 
Real estate mortgage:     
Residential609,728 2,399 319 715 613,161 
Commercial439,344 378 — 3,693 443,415 
Construction41,609 314 — — 41,923 
Consumer automobile loans135,015 545 8 — 135,568 
Other consumer installment loans9,285 44 37 — 9,366 
 1,396,745 $3,680 $364 $4,917 1,405,706 
Net deferred loan fees and discounts260    260 
Allowance for loan losses(14,023)   (14,023)
Loans, net$1,382,982    $1,391,943 
14

 December 31, 2021
  Past DuePast Due 90  
  30 To 89Days Or MoreNon- 
(In Thousands)CurrentDays& Still AccruingAccrualTotal
Commercial, financial, and agricultural$162,571 $139 $— $575 $163,285 
Real estate mortgage:     
Residential590,240 4,083 687 837 595,847 
Commercial442,573 224 — 3,937 446,734 
Construction36,701 554 — 40 37,295 
Consumer automobile loans138,775 490 143 — 139,408 
Other consumer installment loans9,199 47 31 — 9,277 
 1,380,059 $5,537 $861 $5,389 1,391,846 
Net deferred loan fees and discounts301    301 
Allowance for loan losses(14,176)   (14,176)
Loans, net$1,366,184    $1,377,971 
 
Impaired Loans

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

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

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















15

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2022 and December 31, 2021:
March 31, 2022
RecordedUnpaid PrincipalRelated
(In Thousands)InvestmentBalanceAllowance
With no related allowance recorded:   
Commercial, financial, and agricultural$346 $346 $— 
Real estate mortgage:   
Residential3,678 3,678 — 
Commercial2,884 2,884 — 
Construction65 65 — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 6,973 6,973 — 
With an allowance recorded:   
Commercial, financial, and agricultural470 3,257 2 
Real estate mortgage:   
Residential1,159 1,159 192 
Commercial4,712 4,712 741 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals19 19 19 
 6,360 9,147 954 
Total:   
Commercial, financial, and agricultural816 3,603 2 
Real estate mortgage:   
Residential4,837 4,837 192 
Commercial7,596 7,596 741 
Construction65 65 — 
Consumer automobile loans— — — 
Installment loans to individuals19 19 19 
 $13,333 $16,120 $954 
16

 December 31, 2021
 RecordedUnpaid PrincipalRelated
(In Thousands)InvestmentBalanceAllowance
With no related allowance recorded:  
Commercial, financial, and agricultural$355 $355 $— 
Real estate mortgage:   
Residential3,874 3,874 — 
Commercial3,105 3,105 — 
Construction105 105 — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 7,439 7,439 — 
With an allowance recorded:   
Commercial, financial, and agricultural534 3,321 2 
Real estate mortgage:   
Residential1,178 1,178 201 
Commercial4,814 4,814 800 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals20 20 20 
 6,546 9,333 1,023 
Total:   
Commercial, financial, and agricultural889 3,676 2 
Real estate mortgage:   
Residential5,052 5,052 201 
Commercial7,919 7,919 800 
Construction105 105 — 
Consumer automobile loans— — — 
Installment loans to individuals20 20 20 
 $13,985 $16,772 $1,023 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2022 and 2021:
 Three Months Ended March 31,
 20222021
(In Thousands)Average
Investment in
Impaired Loans		Interest Income
Recognized on an
Accrual Basis on
Impaired Loans		Interest Income
Recognized on a
Cash Basis on
Impaired Loans		Average
Investment in
Impaired Loans		Interest Income
Recognized on an
Accrual Basis on
Impaired Loans		Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural$853 $5 $— $864 $— $— 
Real estate mortgage:       
Residential4,944 46 — 6,081 51 — 
Commercial7,757 52 — 9,167 28 — 
Construction85 1 — 122 — — 
Consumer automobile— — — 76 — — 
Other consumer installment loans20 — — — — — 
 $13,659 $104 $— $16,310 $79 $— 


17

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, 2022, respectively. There were two loan modifications considered TDRs completed during the three months ended March 31, 2021. Loan modifications that are considered TDRs completed during the three months ended March 31, 2021 were as follows:

Three Months Ended March 31,
2021
(In Thousands, Except Number of Contracts)Number
of
Contracts		Pre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural— $— $— 
Real estate mortgage:
Residential1 687 687 
Commercial1 125 125 
Construction— — — 
 2 $812 $812 
There was one loan modification considered to be a TDR made during the twelve months prior to March 31, 2022 that defaulted during the three months ended March 31, 2022. The defaulted loan type and recorded investment at March 31, 2022 are as follows: one residential real estate loan with a recorded investment of $400,000. There was one loan modification considered to be a TDR made during the twelve months previous to March 31, 2021 that defaulted during the three months ended March 31, 2021. The defaulted loan type and recorded investments at March 31, 2021 are as follows: one residential real estate loan with a recorded investment of $687,000.

Troubled debt restructurings amounted to $9,084,000 and $9,410,000 as of March 31, 2022 and December 31, 2021, respectively.

The amount of foreclosed residential real estate held at March 31, 2022 and December 31, 2021, totaled $136,000 and $339,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2022 and December 31, 2021, totaled $204,000 and $193,000, respectively.

The Company began offering short-term loan modifications to provide relief to borrowers during the COVID-19 national emergency. The CARES Act, along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made in a good faith basis in response to COVID-19 to loans that are current at the time the modification program is implemented do not need to be accounted for as TDRs. Loan modifications and payment deferrals have been at historically high levels as the impact of the pandemic continues. As of March 31, 2022, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on 1,372 loans with 1 loan remaining in its deferral period with an aggregate outstanding balance of $158,000. As of March 31, 2021, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on 1,365 loans with 70 loans remaining in their deferral period with an aggregate outstanding balance of $12,345,000.These loan modifications met applicable requirements to not be considered TDRs. The Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act (the “Economic Aid Act”) passed in December 2020 extended the CARES Act provisions permitting financial institutions to suspend TDR assessment and reporting requirements under generally accepted accounting principles until the earlier of 60 days after the date that the President terminates the COVID-19 national emergency or January 1, 2022.




18

Internal Risk Ratings

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

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 2022 loan review will evaluate 55% of the Banks' average outstanding commercial portfolio which can consist of outstanding loans, commercial real estate mortgages and outstanding commitments. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.

The following table presents the credit quality categories identified above as of March 31, 2022 and December 31, 2021:
 March 31, 2022
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment loans 
(In Thousands)ResidentialCommercialConstructionTotals
Pass$160,048 $610,038 $430,063 $41,817 $135,568 $9,347 $1,386,881 
Special Mention209 275 5,187 — — — 5,671 
Substandard2,016 2,848 8,165 106 — 19 13,154 
$162,273 $613,161 $443,415 $41,923 $135,568 $9,366 $1,405,706 
 December 31, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobile Other consumer installment loans 
(In Thousands)ResidentialCommercialConstructionTotals
Pass$160,899 $592,570 $432,158 $36,511 $139,408 $9,257 $1,370,803 
Special Mention234 284 6,108 676 — — 7,302 
Substandard2,152 2,993 8,468 108 — 20 13,741 
 $163,285 $595,847 $446,734 $37,295 $139,408 $9,277 $1,391,846 

Allowance for Loan Losses

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

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

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate.  Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring.  Loans that are collectively evaluated for impairment are grouped into two classes for evaluation.  A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.
19


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

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

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

Activity in the allowance is presented for the three months ended March 31, 2022 and 2021:
 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)
Recoveries4 3 1 — 9 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 
 Three Months Ended March 31, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,936 $4,460 $3,635 $134 $1,906 $261 $1,471 $13,803 
Charge-offs(35)(14)— — (96)(29)— (174)
Recoveries5 3 — 5 17 28 — 58 
Provision700 (48)541 3 (92)(25)(564)515 
Ending Balance$2,606 $4,401 $4,176 $142 $1,735 $235 $907 $14,202 
 
The shift in allocation and the decrease in the loan provision is primarily due to changes in the credit metrics within the loan portfolio and the economic uncertainty caused by the COVID-19 pandemic including supply chain disruptions.

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

The Company has a concentration of the following to gross loans at March 31, 2022 and 2021: 
 March 31,
 20222021
Owners of residential rental properties19.95 %16.73 %
Owners of commercial rental properties15.60 %13.66 %


20

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 March 31, 2022 and December 31, 2021:
 March 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$2 $192 $741 $— $— $19 $— $954 
Collectively evaluated for impairment1,934 4,609 4,474 197 1,376 95 384 13,069 
Total ending allowance balance$1,936 $4,801 $5,215 $197 $1,376 $114 $384 $14,023 
Loans:       
Individually evaluated for impairment$816 $4,837 $7,596 $65 $— $19 $13,333 
Collectively evaluated for impairment161,457 608,324 435,819 41,858 135,568 9,347 1,392,373 
Total ending loans balance$162,273 $613,161 $443,415 $41,923 $135,568 $9,366 $1,405,706 

 December 31, 2021
 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$2 $201 $800 $— $— $20 $— $1,023 
Collectively evaluated for impairment1,944 4,500 4,536 179 1,411 91 492 13,153 
Total ending allowance balance$1,946 $4,701 $5,336 $179 $1,411 $111 $492 $14,176 
Loans:       
Individually evaluated for impairment$889 $5,052 $7,919 $105 $— $20  $13,985 
Collectively evaluated for impairment162,396 590,795 438,815 37,190 139,408 9,257  1,377,861 
Total ending loans balance$163,285 $595,847 $446,734 $37,295 $139,408 $9,277  $1,391,846 


Note 7.  Net Periodic Benefit Cost-Defined Benefit Plans

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

The following sets forth the components of the net periodic expense/(gain) of the domestic non-contributory defined benefit plan for the three months ended March 31, 2022 and 2021, respectively:
Three Months Ended March 31,
(In Thousands)20222021
Interest cost$138 $127 
Expected return on plan assets(412)(386)
Amortization of net loss17 46 
Net periodic benefit$(257)$(213)




21



Employer Contributions

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

Note 8.  Employee Stock Purchase Plan

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, 2022 and 2021, there were 880 and 939 shares issued under the Plan, respectively, for total proceeds of $21,000 and $20,000.

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, 2022 and December 31, 2021:
(In Thousands)March 31, 2022December 31, 2021
Commitments to extend credit$231,011 $184,364 
Standby letters of credit8,644 7,027 
Credit exposure from the sale of assets with recourse10,330 10,248 
$249,985 $201,639 

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

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  These instruments are issued primarily to support bid or performance related contracts.  The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management.  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.
22

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, 2022 and December 31, 2021, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 March 31, 2022
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
Mortgage-backed securities$— $1,452 $— $1,452 
State and political securities— 127,556 — 127,556 
Other debt securities— 46,666 — 46,666 
Investment equity securities:
  Other equity securities1,193 — — 1,193 
Investment securities, trading:
  Other equity securities36 — — 36 

 December 31, 2021
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
Mortgage-backed securities$— $1,747 $— $1,747 
State and political securities— 116,658 — 116,658 
Other debt securities— 48,005 — 48,005 
Investment equity securities:
  Other equity securities1,251 — — 1,251 
Investment securities, trading:
  Other equity securities37 — — 37 


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, 2022 and December 31, 2021, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 
 March 31, 2022
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$— $— $2,186 $2,186 
Other real estate owned— — 136 136 
23

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

The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of March 31, 2022 and December 31, 2021: 
 March 31, 2022
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans2,186 
Appraisal of collateral (1)
Appraisal adjustments (1)
0% to (34)%
(14)%
Other real estate owned$136 
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, 2021
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans2,360 
Appraisal of collateral (1)
Appraisal adjustments (1)
0% to (34)%
(15)%
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 discounted cash flow valuation technique is utilized to determine the fair value of performing impaired loans, while non-performing impaired loans utilize the appraisal of collateral method.

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


Note 11. Fair Value of Financial Instruments

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

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.

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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, 2022 and December 31, 2021:
 CarryingFairFair Value Measurements at March 31, 2022
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Loans held for sale (1)$1,360 $1,360 $1,360 $— $— 
Loans, net1,391,943 1,355,950 — — 1,355,950 
Financial liabilities:     
Time deposits173,600 168,061 — — 168,061 
Short-term borrowings 6,634 6,634 6,634 — — 
Long-term borrowings112,918 110,523 — — 110,523 
(1) The financial instrument is carried at cost at, March 31, 2022 which approximate the fair value of the instruments
 CarryingFairFair Value Measurements at December 31, 2021
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Loans held for sale (1)$3,725 $3,725 $3,725 $— $— 
Loans, net1,377,971 1,379,787 — — 1,379,787 
Financial liabilities:     
Time deposits205,367 204,512 — — 204,512 
Short-term borrowings5,747 5,747 5,747 — — 
Long-term borrowings125,963 127,679 — — 127,679 
(1) The financial instrument is carried at cost at, December 31, 2021 which approximate the fair value of the instruments

The methods and assumptions used by the Company in estimating fair values of financial instruments at March 31, 2022 is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables.


Note 12.  Stock Options

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

As of January 1, 2022, the Company had a total of 1,034,525 stock options outstanding. During the period ended March 31, 2022, the Company issued 234,000 stock options with a strike price of $24.10 to a group of employees. The options granted in 2022 all expire ten years from the grant date. Of the 234,000 grants awarded in 2022, 156,000 of the options vest in three years while the 78,000 remaining options vest in five years.

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Stock Options Granted
DateSharesForfeitedOutstandingStrike PriceVesting PeriodExpiration
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 (14,850)106,050 28.01 3 years10 years
March 15, 2019119,100 (14,400)104,700 28.01 5 years10 years
August 24, 201875,300 (11,550)63,750 30.67 3 years10 years
August 24, 2018149,250 (23,100)126,150 30.67 5 years10 years
January 5, 201818,750 — 18,750 30.07 3 years10 years
January 5, 201818,750 — 18,750 30.07 5 years10 years
March 24, 201769,375 (11,250)58,125 29.47 3 years10 years
March 24, 201735,625 (2,250)33,375 29.47 5 years10 years
August 27, 201558,125 (26,250)31,875 28.02 5 years10 years


A summary of stock option activity is presented below:
March 31, 2022March 31, 2021
SharesWeighted Average Exercise PriceSharesWeighted Average Exercise Price
Outstanding, beginning of year1,034,525 $27.23 841,275 $28.17 
Granted234,000 24.10 — — 
Exercised— — — — 
Forfeited— — — — 
Expired— — — — 
Outstanding, end of period1,268,525 $26.65 841,275 $28.17 
Exercisable, end of period311,925 $29.11 113,250 $29.13 

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















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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, 2022:

Three months ended March 31,
2022
Risk-free interest rate1.23 %
Expected volatility33 %
Expected Annual dividend$1.28 
Expected life6.84 years
Weighted average grant date fair value per option$4.28 

Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense related to stock options was $315,000 for the three months ended March 31, 2022 compared to $220,000 for the same period of 2021. As of March 31, 2022, a total of 311,925 stock options were exercisable and the weighted average years to expiration of these options was 6.70 years. Total unrecognized compensation cost for non-vested options was $2,551,000 and will be recognized over their weighted average remaining vesting period of 1.40 years.



Note 13.  Leases

The following table shows finance lease right of use assets and finance lease liabilities as of:
(In Thousands)Statement of Financial Condition classificationMarch 31, 2022December 31, 2021
Finance lease right of use assetsPremises and equipment, net$7,328 $7,435 
Finance lease liabilitiesLong-term borrowings7,918 7,963 

The following table shows the components of finance and operating lease expense for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
(In Thousands)20222021
Finance Lease Cost:
Amortization of right-of-use asset$108 $152 
Interest expense61 71 
Operating lease cost72 76 
Variable lease cost— — 
Total Lease Cost$241 $299 













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A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
(In Thousands)OperatingFinance
2022$218 $315 
2023265 421 
2024255 427 
2025257 929 
2026260 387 
2027 and thereafter2,568 9,276 
Total undiscounted cash flows3,823 11,755 
Discount on cash flows(976)(3,837)
Total lease liability$2,847 $7,918 

The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of March 31, 2022.
OperatingFinance
Weighted-average term (years)17.524.1
Weighted-average discount rate3.53 %3.20 %

Note 14.  Reclassification of Comparative Amounts

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

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

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

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

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

EARNINGS SUMMARY

Comparison of the Three and Three Months Ended March 31, 2022 and 2021

Summary Results

Net income for the three months ended March 31, 2022 was $3,432,000 compared to $3,441,000 for the same periods of 2021. Results for the three months ended March 31, 2022 compared to 2021 were impacted by an increase in after-tax securities losses of $142,000 (from a gain of $94,000 to a loss of $48,000) for the three month period. In addition, an after-tax loss of $201,000 related to a branch closure negatively impacted the three months ended March 31, 2022. Basic and diluted earnings per share for the three months ended March 31, 2022 were $0.49 compared to basic and diluted earnings per share of $0.49 for the corresponding period of 2021. Return on average assets and return on average equity were 0.72% and 8.17% for the three months ended March 31, 2022 compared to 0.75% and 8.59% for the corresponding period of 2021. Net income from core operations (“core earnings”) was $3,480,000 for the three months ended March 31, 2022 compared to $3,347,000 for the corresponding period of 2021. Core basic and diluted earnings per share for the three months ended March 31, 2022 was $0.50 compared to $0.47 basic and diluted for the corresponding periods of 2021.

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

Reconciliation of GAAP and Non-GAAP Financial Measures
(Dollars in Thousands, Except Per Share Data)Three Months Ended March 31,
20222021
GAAP net income$3,432 $3,441 
Less: net securities (losses) gains, net of tax(48)94 
Non-GAAP core earnings$3,480 $3,347 
Three Months Ended March 31,
 20222021
Return on average assets (ROA)0.72 %0.75 %
Less: net securities (losses) gains, net of tax(0.01)%0.02 %
Non-GAAP core ROA0.73 %0.73 %
Three Months Ended March 31,
 20222021
Return on average equity (ROE)8.17 %8.59 %
Less: net securities (losses) gains, net of tax(0.11)%0.24 %
Non-GAAP core ROE.8.28 %8.35 %
Three Months Ended March 31,
 20222021
Basic earnings per share (EPS)$0.49 $0.49 
Less: net securities (losses) gains, net of tax(0.01)0.02 
Non-GAAP core operating EPS$0.50 $0.47 
30

Three Months Ended March 31,
 20222021
Diluted EPS$0.49 $0.49 
Less: net securities (losses) gains, net of tax(0.01)0.02 
Non-GAAP diluted core EPS$0.50 $0.47 
 
Interest and Dividend Income

Interest and dividend income for the three months ended March 31, 2022 decreased to $14,275,000 compared to $14,595,000 for the same period of 2021. The decrease in loan portfolio income was due to a decrease in average rate paid on loans that was offset partially by an increase in the average loan portfolio balance.  Investment securities income decreased as the increase in the average portfolio balance was more than offset by a decrease in the average rate earned on the portfolio as higher yielding legacy investments matured. The increase in dividend and other interest income is due to the increase in interest earned on federal funds sold.

Interest and dividend income composition for the three months ended March 31, 2022 and 2021 was as follows:
 Three Months Ended
 March 31, 2022March 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$13,038 91.34 %$13,345 91.44 %$(307)(2.30)%
Investment securities:      
Taxable737 5.16 819 5.61 (82)(10.01)
Tax-exempt164 1.15 171 1.17 (7)(4.09)
Dividend and other interest income336 2.35 260 1.78 76 29.23 
Total interest and dividend income$14,275 100.00 %$14,595 100.00 %$(320)(2.19)%

Interest Expense

Interest expense for the three months ended March 31, 2022 decreased $1,103,000 compared to the same period of 2021. Interest-bearing deposit rates continue to reduce due to the economic impact of COVID-19 and an increased level of excess balance sheet liquidity. The decrease in deposit rates was offset in part by an increase in average interest-bearing demand deposits. Growth in the deposit portfolio has allowed for a decrease in average long-term borrowings resulting in a decrease of $206,000 in long-term borrowing interest expense.

Interest expense composition for the three months ended March 31, 2022 and 2021 was as follows:
 Three Months Ended
 March 31, 2022March 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$788 55.42 %$1,684 66.69 %$(896)(53.21)%
Short-term borrowings1 0.07 2 0.08 (1)(50.00)
Long-term borrowings633 44.51 839 33.23 (206)(24.55)
Total interest expense$1,422 100.00 %$2,525 100.00 %$(1,103)(43.68)%
Net Interest Margin

The net interest margin for the three months ended March 31, 2022 was 2.93% compared to 2.88% for the corresponding period of 2021. The increase in the net interest margin for the three month period was driven by a decline in the rate paid on interest-bearing deposits of 35 basis points ("bps") as rates paid decreased throughout 2021 and through the first three months of 2022. Leading the decline in the rate paid on interest-bearing deposits was a 94 bps decline in the rate paid on time deposits as time deposits issued prior to the start of the COVID-19 pandemic matured. Offsetting the decrease in rates paid on the interest
31

bearing liabilities was a decrease in the yield of the loan portfolio of 26 bps coupled with the yield on the investment portfolio declining 32 bps as legacy earning assets were paid down or matured.

The following is a schedule of average balances and associated yields for the three months ended March 31, 2022 and 2021:
 AVERAGE BALANCES AND INTEREST RATES
 Three Months Ended March 31, 2022Three Months Ended March 31, 2021
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)
$47,974 $308 2.60 %$45,534 $349 3.11 %
All other loans1,351,414 12,795 3.84 %1,293,395 13,069 4.10 %
Total loans (2)
1,399,388 13,103 3.80 %1,338,929 13,418 4.06 %
Federal funds sold50,000 93 0.75 %— — — %
Taxable securities144,438 920 2.58 %145,047 1,033 2.89 %
Tax-exempt securities (3)
40,981 208 2.06 %36,369 216 2.41 %
Total securities185,419 1,128 2.47 %181,416 1,249 2.79 %
Interest-bearing deposits157,541 60 0.15 %195,995 46 0.10 %
Total interest-earning assets1,792,348 14,384 3.25 %1,716,340 14,713 3.48 %
Other assets127,421   124,074   
Total assets$1,919,769   $1,840,414   
Liabilities and shareholders’ equity:      
Savings$240,953 22 0.04 %$214,636 44 0.08 %
Super Now deposits370,895 195 0.21 %289,236 267 0.37 %
Money market deposits298,820 186 0.25 %306,000 267 0.35 %
Time deposits190,819 385 0.82 %254,460 1,106 1.76 %
Total interest-bearing deposits1,101,487 788 0.29 %1,064,332 1,684 0.64 %
Short-term borrowings5,194 1 0.08 %5,680 2 0.14 %
Long-term borrowings115,267 633 2.23 %141,483 839 2.40 %
Total borrowings120,461 634 2.13 %147,163 841 2.32 %
Total interest-bearing liabilities1,221,948 1,422 0.47 %1,211,495 2,525 0.85 %
Demand deposits506,348   445,759   
Other liabilities23,357   22,872   
Shareholders’ equity168,116   160,288   
Total liabilities and shareholders’ equity$1,919,769   $1,840,414   
Interest rate spread  2.78 %  2.63 %
Net interest income/margin $12,962 2.93 % $12,188 2.88 %
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%







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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, 2022 and 2021:
Three Months Ended March 31,
(In Thousands)20222021
Total interest income$14,275 $14,595 
Total interest expense1,422 2,525 
Net interest income (GAAP)12,853 12,070 
Tax equivalent adjustment109 118 
Net interest income (fully taxable equivalent) (NON-GAAP)$12,962 $12,188 
 
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, 2022 and 2021:
 Three Months Ended March 31,
 2022 vs. 2021
 Increase (Decrease) Due to
(In Thousands)VolumeRateNet
Interest income:   
Tax-exempt loans$18 $(60)$(42)
All other loans583 (856)(273)
Federal funds sold93 — 93 
Taxable investment securities(4)(109)(113)
Tax-exempt investment securities26 (34)(8)
Interest bearing deposits(10)24 14 
Total interest-earning assets706 (1,035)(329)
Interest expense:   
Savings deposits4 (26)(22)
Super Now deposits63 (135)(72)
Money market deposits(6)(75)(81)
Time deposits(230)(491)(721)
Short-term borrowings— (1)(1)
Long-term borrowings(149)(57)(206)
Total interest-bearing liabilities(318)(785)(1,103)
Change in net interest income$1,024 $(250)$774 

Provision for Loan Losses

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

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

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

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

The allowance for loan losses decreased from $14,176,000 at December 31, 2021 to $14,023,000 at March 31, 2022. The decrease in allowance was due to a lessening of the economic uncertainty caused by the COVID-19 pandemic and significant reduction in loans that were on payment deferral as a result of the COVID-19 pandemic impact. At March 31, 2022 and December 31, 2021, the allowance for loan losses to total loans was 1.00% and 1.02%, respectively.

The provision for loan losses totaled $150,000 for the three months ended March 31, 2022 and the amount for the corresponding 2021 period was $515,000. The decrease in the provision for loan losses for the three months ended March 31, 2022 compared to the corresponding 2021 period was the result of economic improvement along with the 2021 period provision being affected by the continued economic uncertainty caused by COVID-19 and supply chain shortages.

Nonperforming loans decreased to $5,281,000 at March 31, 2022 from $6,250,000 at December 31, 2021. The majority of nonperforming loans involve loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses. The ratio of nonperforming loans to total loans was 0.38% and 0.45% at March 31, 2022 and December 31, 2021, respectively, and the ratio of the allowance for loan losses to nonperforming loans was 265.54% and 226.82% at March 31, 2022 and December 31, 2021, respectively. Internal loan review and analysis coupled with changes in the loan portfolio composition resulted in a provision for loan losses of $150,000 for the three months ended 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, 2022$364 $4,917 $5,281 
December 31, 2021861 5,389 6,250 
September 30, 2021854 6,909 7,763 
June 30, 2021529 7,402 7,931 
March 31, 2021607 8,665 9,272 
 
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March 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$1,936$162,273 1.19 %$4 $161,698 — %
Real estate mortgage:
Residential4,801613,161 0.78 %3 606,449 — %
Commercial5,215443,415 1.18 %(154)445,914 (0.03)%
Construction19741,923 0.47 %— 39,286 — %
Consumer automobiles1,376135,568 1.01 %(120)136,544 (0.09)%
Other consumer installment loans1149,366 1.22 %(36)9,497 (0.38)%
Unallocated384
$14,023$1,405,706 1.00 %$(303)$1,399,388 (0.02)%
Total non-accrual loans outstanding$4,917
Non-accrual loans to total loans outstanding0.35 %
Allowance for loan losses to non-accrual loans285.19 %
December 31, 2021
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$1,946$163,285 1.19 %$(10)$175,631 (0.01)%
Real estate mortgage:
Residential4,701595,847 0.79 %(107)584,849 (0.02)%
Commercial5,336446,734 1.19 %95 381,306 0.02 %
Construction17937,295 0.48 %10 41,564 0.02 %
Consumer automobiles1,411139,408 1.01 %(143)152,496 (0.09)%
Other consumer installment loans1119,277 1.20 %(112)9,787 (1.14)%
Unallocated492
$14,176$1,391,846 1.02 %$(267)$1,345,633 (0.02)%
Total non-accrual loans outstanding$5,389
Non-accrual loans to total loans outstanding0.39 %
Allowance for loan losses to non-accrual loans263.05 %


Non-interest Income

Total non-interest income for the three months ended March 31, 2022 compared to the same period in 2021 decreased $202,000. Excluding net securities gains, non-interest income for the three months ended March 31, 2022 decreased $22,000 compared to the same period in 2021. Gain on sale of loans decreased for the three month period as the product mix has caused the Company to increasingly act in a broker capacity with the fee income from broker activity included in loan broker commissions which increased $360,000. Service charges increased for the three month period primarily due to an increase in overdraft fees. Brokerage commissions have fluctuated due to changes in the product mix and reduced consumer activity. The decrease in debit card fees is a result of an decrease in debit card usage.




35

Non-interest income composition for the three months ended March 31, 2022 and 2021 was as follows:
 Three Months Ended
 March 31, 2022March 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$495 20.52 %$383 14.65 %$112 29.24 %
Net debt securities (losses) gains, available for sale(2)(0.08)138 5.28 (140)101.45 
Net equity securities losses(58)(2.40)(23)(0.88)(35)(152.17)
Net securities (losses) gains, trading(1)(0.04)4 0.15 (5)(125.00)
Bank-owned life insurance170 7.05 173 6.62 (3)(1.73)
Gain on sale of loans345 14.30 908 34.74 (563)(62.00)
Insurance commissions170 7.05 157 6.01 13 8.28 
Brokerage commissions200 8.29 219 8.38 (19)(8.68)
Loan broker commissions541 22.43 181 6.92 360 198.90 
Debit card income345 14.30 380 14.54 (35)(9.21)
Other207 8.58 94 3.59 113 120.21 
Total non-interest income$2,412 100.00 %$2,614 100.00 %$(202)(7.73)%
Non-interest Expense

Total non-interest expense increased $1,056,000 for the three months ended March 31, 2022 compared to the same period of 2021. The increase in salaries and employee benefits is attributable to the current employment environment, employee retention efforts, and routine annual wage increases. Furniture and equipment expenses in addition to occupancy expenses increased as maintenance costs have increased and an increase in the level of depreciation. Software amortization increased due to increased software licensing costs. Other expense increased for the three month period primarily from a write down on leasehold improvements of $254,000 related to a branch closure.

Non-interest expense composition for the three months ended March 31, 2022 and 2021 was as follows:
 Three Months Ended
 March 31, 2022March 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$6,264 56.91 %$5,598 56.26 %$666 11.90 %
Occupancy910 8.27 976 9.81 (66)(6.76)
Furniture and equipment892 8.10 809 8.13 83 10.26 
Software amortization253 2.30 198 1.99 55 27.78 
Pennsylvania shares tax389 3.53 352 3.54 37 10.51 
Professional fees538 4.89 583 5.86 (45)(7.72)
Federal Deposit Insurance Corporation deposit insurance202 1.84 221 2.22 (19)(8.60)
Marketing64 0.58 63 0.63 1 1.59 
Intangible amortization43 0.39 53 0.53 (10)(18.87)
Other1,452 13.19 1,098 11.03 354 32.24 
Total non-interest expense$11,007 100.00 %$9,951 100.00 %$1,056 10.61 %
Provision for Income Taxes

Income taxes decreased $95,000 for the three months ended March 31, 2022 compared to the same period of 2021. The effective tax rate for the three months ended March 31, 2022 was 16.46% compared to 18.28% for the same period of 2021. The Company currently is in a deferred tax asset position. A valuation allowance was established on the $1,003,000 of capital loss carryforwards for the twelve months ended December 31, 2021, which remained unchanged during the first quarter of 2022.



36

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents decreased $45,059,000 from $263,862,000 at December 31, 2021 to $218,803,000 at March 31, 2022, primarily as a result of the following activities during the three months ended March 31, 2022. The decrease in cash and cash equivalents is primarily due to the decrease in interest-bearing balances held with other financial institutions.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds being greater than loan originations, less $345,000 in realized gains, by $2,365,000 for the three months ended March 31, 2022.


Loans

Gross loans increased $13,819,000 since December 31, 2021 due primarily to an increase in both residential and construction real estate mortgage categories. Consumer automobile loans decreased as used car inventories declined due to supply constraints.

The allocation of the loan portfolio, by category, as of March 31, 2022 and December 31, 2021 is presented below:
 March 31, 2022December 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Commercial, financial, and agricultural$162,273 11.54 %$163,285 11.73 %$(1,012)(0.62)%
Real estate mortgage:      
Residential613,161 43.61 595,847 42.80 17,314 2.91 %
Commercial443,415 31.54 446,734 32.09 (3,319)(0.74)%
Construction41,923 2.98 37,295 2.68 4,628 12.41 %
Consumer automobile loans135,568 9.64 139,408 10.01 (3,840)(2.75)%
Other consumer installment loans9,366 0.67 9,277 0.67 89 0.96 %
Net deferred loan fees and discounts260 0.02 301 0.02 (41)(13.62)%
Gross loans$1,405,966 100.00 %$1,392,147 100.00 %$13,819 0.99 %

The following table shows the amount of accrual and non-accrual TDRs at March 31, 2022 and December 31, 2021:
 March 31, 2022December 31, 2021
(In Thousands)AccrualNon-accrualTotalAccrualNon-accrualTotal
Commercial, financial, and agricultural$308 $507 $815 $314 $574 $888 
Real estate mortgage:      
Residential3,961 177 4,138 3,999 178 4,177 
Commercial1,799 2,332 4,131 1,836 2,509 4,345 
 $6,068 $3,016 $9,084 $6,149 $3,261 $9,410 
 
Investments

The fair value of the investment debt securities portfolio at March 31, 2022 increased $9,264,000 since December 31, 2021, while the amortized cost of the portfolio increased $16,159,000.  The increase in the investment portfolio amortized value occurred within the state and political segment of the portfolio. The mortgage-backed segment was reduced as bonds prepaid due to the low interest rate environment. The other debt segment of the investment portfolio is primarily corporate bonds and this segment remained flat. The municipal segment was increased as primarily bonds with a final maturity of one to five years have been purchased. The portfolio continues to be actively managed in order to reduce interest rate and market risk. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 86.73% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

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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 $1,300,000 for March 31, 2022 and December 31, 2021 while the fair value decreased $58,000 over the same time period.

The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at March 31, 2022 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):        
Mortgage-backed securities $1,532 7$1,452 $— $— $— $— $— $— $1,532 $1,452 
State and political securities128,568 126,258 120 121 — — 1,180 1,177 129,868 127,556 
Other debt securities25,639 24,618 5,505 5,396 — — 17,021 16,652 48,165 46,666 
Total debt securities AFS$155,739 $152,328 $5,625 $5,517 $— $— $18,201 $17,829 $179,565 $175,674 
 
Financing Activities

Deposits

Total deposits decreased $8,920,000 from December 31, 2021 to March 31, 2022. Time deposits decreased $31,767,000 over this period to a total of $173,600,000 as excess on balance sheet liquidity has allowed for a decrease in the reliance on higher rate time deposit funding. An increase in core deposits (deposits less time deposits) of $22,847,000 has provided relationship driven funding for the loan and investment portfolios. Emphasis during 2021 and through 2022 has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking has increased due to these efforts coupled with a change in consumer behavior due to the business and travel restrictions that were temporarily in effect due to the COVID-19 pandemic.

Deposit balances and their changes for the periods being discussed follow:
 March 31, 2022December 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Demand deposits$514,130 31.89 %$494,360 30.49 %$19,770 4.00 %
NOW accounts379,838 23.56 366,399 22.60 13,439 3.67 
Money market deposits299,166 18.55 318,877 19.67 (19,711)(6.18)
Savings deposits245,661 15.24 236,312 14.58 9,349 3.96 
Time deposits173,600 10.76 205,367 12.66 (31,767)(15.47)
 Total deposits$1,612,395 100.00 %$1,621,315 100.00 %$(8,920)(0.55)%



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Borrowed Funds

Total borrowed funds decreased 9.23%, or $12,158,000, to $119,552,000 at March 31, 2022 compared to $131,710,000 at December 31, 2021. The decrease in long term borrowings occurred as fixed rate borrowings matured. Securities sold under agreements to repurchase have increased as customers balances have increased.

 March 31, 2022December 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Short-term borrowings:      
Securities sold under agreement to repurchase$6,634 5.55 %$5,747 4.36 %$887 15.43 %
Total short-term borrowings6,634 5.55 5,747 4.36 887 15.43 
Long-term borrowings:
Long-term FHLB borrowings105,000 87.82 118,000 89.59 (13,000)(11.02)
Long-term finance lease7,918 6.62 7,963 6.05 (45)(0.57)
Total long-term borrowings112,918 94.45 125,963 95.64 (13,045)(10.36)
Total borrowed funds$119,552 100.00 %$131,710 100.00 %$(12,158)(9.23)%

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, 2022December 31, 2021
Investment debt securities pledged, fair value$7,748 $8,881 
Repurchase agreements6,634 5,747 

Capital

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

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

Under existing capital rules, the minimum capital to risk-adjusted assets requirements for banking organizations are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”), a tier 1 capital ratio of 6.0% (8.0% to be considered “well capitalized”), and total capital ratio of 8.0% (10.0% to be considered “well capitalized”).  Under existing capital rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. 



39





The Company's capital ratios as of March 31, 2022 and December 31, 2021 were as follows:
 March 31, 2022December 31, 2021
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$158,069 10.730 %$156,439 10.791 %
For Capital Adequacy Purposes66,292 4.500 65,237 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date103,121 7.000 101,480 7.000 
To Be Well Capitalized95,755 6.500 94,232 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$172,198 11.690 %$170,708 11.776 %
For Capital Adequacy Purposes117,843 8.000 115,970 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date154,669 10.500 152,211 10.500 
To Be Well Capitalized147,304 10.000 144,963 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$158,069 10.730 %$156,439 10.791 %
For Capital Adequacy Purposes88,389 6.000 86,983 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date125,218 8.500 123,226 8.500 
To Be Well Capitalized117,852 8.000 115,977 8.000 
Tier I Capital (to Average Assets)   
Actual$158,069 8.330 %$156,439 8.397 %
For Capital Adequacy Purposes75,903 4.000 74,521 4.000 
To Be Well Capitalized94,879 5.000 93,152 5.000 
 
Jersey Shore State Bank's capital ratios as of March 31, 2022 and December 31, 2021 were as follows:
 March 31, 2022December 31, 2021
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$111,825 10.303 %$110,682 10.337 %
For Capital Adequacy Purposes48,841 4.500 48,183 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date75,975 7.000 74,952 7.000 
To Be Well Capitalized70,549 6.500 69,598 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$122,280 11.266 %$121,094 11.309 %
For Capital Adequacy Purposes86,831 8.000 85,662 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date113,966 10.500 112,431 10.500 
To Be Well Capitalized108,539 10.000 107,078 10.000 
Tier I Capital (to Risk-weighted Assets)- - 
Actual$111,825 10.303 %$110,682 10.337 %
For Capital Adequacy Purposes65,122 6.000 64,244 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date92,256 8.500 91,013 8.500 
To Be Well Capitalized86,829 8.000 85,659 8.000 
Tier I Capital (to Average Assets)   
Actual$111,825 8.315 %$110,682 8.326 %
For Capital Adequacy Purposes53,794 4.000 53,174 4.000 
To Be Well Capitalized67,243 5.000 66,468 5.000 

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Luzerne Bank's capital ratios as of March 31, 2022 and December 31, 2021 were as follows:
 March 31, 2022December 31, 2021
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$42,847 11.052 %$42,291 11.164 %
For Capital Adequacy Purposes17,446 4.500 17,047 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date27,138 7.000 26,517 7.000 
To Be Well Capitalized25,200 6.500 24,623 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$46,521 11.999 %$46,148 12.182 %
For Capital Adequacy Purposes31,017 8.000 30,306 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date40,709 10.500 39,776 10.500 
To Be Well Capitalized38,771 10.000 37,882 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$42,847 11.052 %$42,291 11.164 %
For Capital Adequacy Purposes23,261 6.000 22,729 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date32,953 8.500 32,199 8.500 
To Be Well Capitalized31,015 8.000 30,305 8.000 
Tier I Capital (to Average Assets)   
Actual$42,847 7.763 %$42,291 7.537 %
For Capital Adequacy Purposes22,078 4.000 22,444 4.000 
To Be Well Capitalized27,597 5.000 28,056 5.000 

Liquidity; Interest Rate Sensitivity and Market Risk

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

The following liquidity measures are monitored for compliance and were within the limits cited at March 31, 2022:

1.            Net Loans to Total Assets, 85% maximum
2.              Net Loans to Total Deposits, 100% maximum
3.              Cumulative 90 day Maturity GAP %, +/- 15% maximum
4.              Cumulative 1 Year Maturity GAP %, +/- 20% maximum

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

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

Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating
41

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 $669,483,000. 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 $105,000,000 as of March 31, 2022.

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

The Company currently maintains a gap position of being asset sensitive.  The Company has strategically taken this position as it has decreased the duration of the earning asset portfolio by adding quality short and intermediate term loans such as home equity loans and the selling of long-term municipal bonds.  Lengthening of the liability portfolio is being undertaken to build protection in a 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, 2023 assuming a static balance sheet as of March 31, 2022.
 Parallel Rate Shock in Basis Points
(In Thousands)-200-100Static+100+200+300+400
Net interest income$51,824 $54,746 $57,374 $60,914 $64,502 $68,183 $71,893 
Change from static(5,550)(2,628)— 3,540 7,128 10,809 14,519 
Percent change from static-9.67 %-4.58 %— 6.17 %12.42 %18.84 %25.31 %
 
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.

42

Inflation

The asset and liability structure of a financial institution is primarily monetary in nature.  Therefore, interest rates rather than inflation have a more significant impact on the Company’s performance.  Interest rates are not always affected in the same direction or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors which are not measured by a price index.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II.  OTHER INFORMATION
Item 1.                           Legal Proceedings

None.

Item 1A.  Risk Factors

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

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

The following table provides certain information with respect to the Company's repurchase of common stock during the quarter ended March 31, 2022.
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, 2022)— — — 353,000 
Month #2 (February 1 - February, 2022)— — — 353,000 
Month #3 (March 1 - March 31, 2022)— — — 353,000 
On April 12, 2022 the Board of Directors authorized the repurchase of up to 354,000 shares, or approximately 5%, of the outstanding shares of the Company for a one year period ending April 30, 2023.




Item 3.                           Defaults Upon Senior Securities
 
None.
 
Item 4.                           Mine Safety Disclosures
 
Not applicable.
 
Item 5.                           Other Information
 
None.
 
44
Table of Contents

Item 6.                           Exhibits
 
 Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2019).
 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, 2022 and December 31, 2021; (ii) the Consolidated Statement of Income for the three months ended March 31, 2022 and 2021; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2022 and 2021; (iv) the Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2022 and 2021; (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 2022 and 2021 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.
104Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101).
45

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 10, 2022/s/ Richard A. Grafmyre
 Richard A. Grafmyre, Chief Executive Officer
 (Principal Executive Officer)
  
  
Date:May 10, 2022/s/ Brian L. Knepp
 Brian L. Knepp, President and Chief Financial Officer
 (Principal Financial Officer and Principal Accounting
 Officer)
46

What is the market capitalization of a company?

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