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Penns Woods Bancorp
PWOD
#8444
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 2022-11-09

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 September 30, 2022. 
☐Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from                    to                   .

No. 0-17077
(Commission File Number)

PENNS WOODS BANCORP INC.
(Exact name of Registrant as specified in its charter) 
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 November 1, 2022 there were 7,056,199 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
 
8
  
9
   
31
   
47
   
47
   
 
   
48
   
48
   
48
   
48
   
48
   
48
   
49
   
50
2

Part I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

September 30,December 31,
(In Thousands, Except Share And Per Share Data)20222021
ASSETS: 
Noninterest-bearing balances$24,418 $19,233 
Interest-bearing balances in other financial institutions12,444 194,629 
Federal funds sold— 50,000 
Total cash and cash equivalents36,862 263,862 
Investment debt securities, available for sale, at fair value188,196 166,410 
Investment equity securities, at fair value1,130 1,288 
Restricted investment in bank stock14,539 14,531 
Loans held for sale2,485 3,725 
Loans1,560,700 1,392,147 
Allowance for loan losses(15,211)(14,176)
Loans, net1,545,489 1,377,971 
Premises and equipment, net32,227 34,025 
Accrued interest receivable8,647 8,048 
Bank-owned life insurance34,288 33,768 
Investment in limited partnerships4,771 4,607 
Goodwill17,104 17,104 
Intangibles361 480 
Operating lease right-of-use asset2,699 2,851 
Deferred tax asset7,187 2,946 
Other assets9,131 9,193 
TOTAL ASSETS$1,905,116 $1,940,809 
LIABILITIES:  
Interest-bearing deposits$1,053,012 $1,126,955 
Noninterest-bearing deposits537,403 494,360 
Total deposits1,590,415 1,621,315 
Short-term borrowings30,901 5,747 
Long-term borrowings102,829 125,963 
Accrued interest payable427 651 
Operating lease liability2,753 2,898 
Other liabilities13,302 11,961 
TOTAL LIABILITIES1,740,627 1,768,535 
SHAREHOLDERS’ EQUITY:  
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued
— — 
Common stock, par value $5.55, 22,500,000 shares authorized; 7,563,200 and 7,550,272 shares issued; 7,052,975 and 7,070,047 outstanding
42,019 41,945 
Additional paid-in capital53,958 53,795 
Retained earnings95,896 89,761 
Accumulated other comprehensive loss:  
Net unrealized (loss) gain on available for sale securities(11,125)2,373 
Defined benefit plan(3,444)(3,485)
Treasury stock at cost, 510,225 and 480,225
(12,815)(12,115)
TOTAL SHAREHOLDERS' EQUITY164,489 172,274 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,905,116 $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 September 30,Nine Months Ended September 30,
(In Thousands, Except Share And Per Share Data)2022202120222021
INTEREST AND DIVIDEND INCOME:    
Loans, including fees$15,051 $13,382 $41,709 $39,826 
Investment securities:    
Taxable949 834 2,550 2,491 
Tax-exempt236 160 594 495 
Dividend and other interest income628 338 1,470 903 
TOTAL INTEREST AND DIVIDEND INCOME16,864 14,714 46,323 43,715 
INTEREST EXPENSE:    
Deposits693 1,308 2,191 4,481 
Short-term borrowings26 3 29 7 
Long-term borrowings613 771 1,871 2,430 
TOTAL INTEREST EXPENSE1,332 2,082 4,091 6,918 
NET INTEREST INCOME15,532 12,632 42,232 36,797 
PROVISION FOR LOAN LOSSES855 75 1,335 940 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES14,677 12,557 40,897 35,857 
NON-INTEREST INCOME:    
Service charges559 456 1,563 1,218 
Net debt securities (losses) gains, available for sale(156)48 (168)323 
Net equity securities losses(55)(8)(158)(24)
Bank-owned life insurance170 279 501 614 
Gain on sale of loans294 456 905 2,034 
Insurance commissions109 129 386 436 
Brokerage commissions142 237 500 663 
Loan broker commissions438 772 1,350 1,449 
Debit card income344 388 1,080 1,166 
Other238 194 673 595 
TOTAL NON-INTEREST INCOME2,083 2,951 6,632 8,474 
NON-INTEREST EXPENSE:    
Salaries and employee benefits6,016 5,837 18,421 17,107 
Occupancy730 745 2,380 2,438 
Furniture and equipment816 883 2,454 2,663 
Software amortization188 226 660 632 
Pennsylvania shares tax334 373 1,119 1,097 
Professional fees626 615 1,746 1,882 
Federal Deposit Insurance Corporation deposit insurance260 220 690 705 
Marketing151 231 435 434 
Intangible amortization34 44 119 147 
Other1,165 1,273 3,723 3,541 
TOTAL NON-INTEREST EXPENSE10,320 10,447 31,747 30,646 
INCOME BEFORE INCOME TAX PROVISION6,440 5,061 15,782 13,685 
INCOME TAX PROVISION1,190 932 2,869 2,516 
CONSOLIDATED NET INCOME$5,250 $4,129 $12,913 $11,169 
Less: Net income attributable to noncontrolling interest— 4 — 15 
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.$5,250 $4,125 $12,913 $11,154 
EARNINGS PER SHARE - BASIC$0.74 $0.58 $1.83 $1.58 
EARNINGS PER SHARE - DILUTED$0.74 $0.58 $1.83 $1.58 
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,051,228 7,063,994 7,060,871 7,059,625 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED7,051,228 7,063,994 7,060,871 7,059,625 
See accompanying notes to the unaudited consolidated financial statements.
4



PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
 
 Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Net Income$5,250 $4,125 $12,913 $11,154 
Other comprehensive loss:    
Unrealized loss on available for sale securities(6,362)(687)(17,254)(1,208)
Tax effect1,336 145 3,623 254 
Net realized loss (gain) on available for sale securities included in net income156 (48)168 (323)
Tax effect(33)9 (35)67 
   Amortization of unrecognized pension loss17 45 52 138 
        Tax effect(3)(8)(11)(28)
Total other comprehensive loss(4,889)(544)(13,457)(1,100)
Comprehensive income (loss)$361 $3,581 $(544)$10,054 
 
See accompanying notes to the unaudited consolidated financial statements.

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 Share And Per Share Data)SHARESAMOUNT
Balance, June 30, 20227,559,165 $41,995 $53,651 $92,903 $(9,680)$(12,815)$— $166,054 
Net income5,250 5,250 
Other comprehensive loss(4,889)(4,889)
Stock-based compensation 236 236 
Dividends declared ($0.32 per share)
(2,257)(2,257)
Common shares issued for employee stock purchase plan1,057 6 17 23 
Director Compensation Plan2,978 18 54 72 
Balance, September 30, 20227,563,200 $42,019 $53,958 $95,896 $(14,569)$(12,815)$— $164,489 


COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS 		TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)SHARESAMOUNT
Balance, June 30, 20217,541,627 $41,897 $53,205 $85,281 $(1,438)$(12,115)$5 $166,835 
Net income4,125 4 4,129 
Other comprehensive loss(544)(544)
Stock-based compensation227 227 
Dividends declared ($0.32 per share)
(2,260)(2,260)
Common shares issued for employee stock purchase plan889 5 15 20 
Director Compensation Plan3,406 19 61 80 
Distributions to noncontrolling interest(6)(6)
Balance, September 30, 20217,545,922 $41,921 $53,508 $87,146 $(1,982)$(12,115)$3 $168,481 


See accompanying notes to the unaudited consolidated financial statements.






6


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)



 Nine months ended:
COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS		TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)SHARESAMOUNT
Balance, December 31, 20217,550,272 $41,945 $53,795 $89,761 $(1,112)$(12,115)$— $172,274 
Net income   12,913   12,913 
Other comprehensive loss    (13,457) (13,457)
Stock-based compensation 1,004 1,004 
Cash settlement of options(1,074)(1,074)
Dividends declared ($0.96 per share)
   (6,778)  (6,778)
Common shares issued for employee stock purchase plan2,960 17 50    67 
Director Compensation Plan9,968 57 183240 
Purchase of treasury stock (30,000 shares)
(700)(700)
Balance, September 30, 20227,563,200 $42,019 $53,958 $95,896 $(14,569)$(12,815)$— $164,489 
COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS 		TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)SHARESAMOUNT
Balance, December 31, 20207,532,576 $41,847 $52,523 $82,769 $(882)$(12,115)$4 $164,146 
Net income   11,154   15 11,169 
Other comprehensive loss  (1,100) (1,100)
Stock-based compensation754 754 
Dividends declared ($0.96 per share)
   (6,777)  (6,777)
Common shares issued for employee stock purchase plan2,873 16 49    65 
Director Compensation Plan10,473 58 182 240 
Distributions to noncontrolling interest(16)(16)
Balance, September 30, 20217,545,922 $41,921 $53,508 $87,146 $(1,982)$(12,115)$3 $168,481 


See accompanying notes to the unaudited consolidated financial statements.
7

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
Nine Months Ended September 30,
(In Thousands)20222021
OPERATING ACTIVITIES:  
Net Income$12,913 $11,169 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization2,660 2,235 
Loss (gain) on sale of premises and equipment275 (18)
Amortization of intangible assets119 147 
Provision for loan losses1,335 940 
Stock based compensation1,004 754 
Accretion and amortization of investment security discounts and premiums932 829 
Net securities losses (gains), available for sale168 (323)
Originations of loans held for sale(30,644)(68,328)
Proceeds of loans held for sale32,789 72,355 
Gain on sale of loans(905)(2,034)
Net equity securities losses158 24 
Security trades payable(111)— 
Earnings on bank-owned life insurance(501)(614)
Increase in deferred tax asset(653)(1,201)
Other, net(905)(3,548)
Net cash provided by operating activities18,634 12,387 
INVESTING ACTIVITIES:  
Proceeds from sales of available for sale securities4,151 13,689 
Proceeds from calls and maturities of available for sale securities13,116 15,898 
Purchases of available for sale securities(57,239)(36,124)
Net increase in loans(168,950)(3,167)
Acquisition of premises and equipment(263)(939)
Proceeds from the sale of premises and equipment137 2 
Proceeds from the sale of foreclosed assets46 335 
Purchase of bank-owned life insurance(21)(30)
Proceeds from bank-owned life insurance death benefit2 453 
Investment in limited partnership(554)(1,070)
Proceeds from redemption of regulatory stock6,692 2,167 
Purchases of regulatory stock(6,700)(1,439)
Net cash used for investing activities(209,583)(10,225)
FINANCING ACTIVITIES:  
Net (decrease) increase in interest-bearing deposits(73,943)66,058 
Net increase in noninterest-bearing deposits43,043 32,518 
Repayment of long-term borrowings(23,000)(30,000)
Net increase in short-term borrowings25,154 4,160 
Finance lease principal payments(134)(121)
Dividends paid(6,778)(6,777)
Distributions to non-controlling interest— (16)
Issuance of common stock307 305 
Purchases of treasury stock(700)— 
Net cash (used for) provided by financing activities(36,051)66,127 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS(227,000)68,289 
CASH AND CASH EQUIVALENTS, BEGINNING263,862 213,358 
CASH AND CASH EQUIVALENTS, ENDING$36,862 $281,647 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
Interest paid$4,315 $7,202 
Cash settlement of options1,074 — 
Income taxes paid2,371 3,175 
Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities— 2,653 
Transfer of loans to foreclosed real estate97 83 

See accompanying notes to the unaudited consolidated financial statements.
8

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

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

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

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

Note 2.  Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component shown net of tax and parenthesis indicating debits, as of September 30, 2022 and 2021 were as follows:
Three Months Ended September 30, 2022Three Months Ended September 30, 2021
(In Thousands)Net Unrealized (Loss) Gain on Available
for Sale Securities		Defined
Benefit 
Plan		TotalNet Unrealized Gain (Loss) on Available
for Sale Securities		Defined
Benefit 
Plan		Total
Beginning balance$(6,222)$(3,458)$(9,680)$4,085 $(5,523)$(1,438)
Other comprehensive loss before reclassifications(5,026)— (5,026)(542)— (542)
Amounts reclassified from accumulated other comprehensive (loss) gain123 14 137 (39)37 (2)
Net current-period other comprehensive (loss) income(4,903)14 (4,889)(581)37 (544)
Ending balance$(11,125)$(3,444)$(14,569)$3,504 $(5,486)$(1,982)
 Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
(In Thousands)Net Unrealized Gain (Loss) on Available for Sale SecuritiesDefined
Benefit 
Plan		TotalNet Unrealized Gain (Loss) on Available
for Sale Securities		Defined
Benefit 
Plan		Total
Beginning balance$2,373 $(3,485)$(1,112)$4,714 $(5,596)$(882)
Other comprehensive loss before reclassifications(13,631)— (13,631)(954)— (954)
Amounts reclassified from accumulated other comprehensive gain (loss)133 41 174 (256)110 (146)
Net current-period other comprehensive (loss) income(13,498)41 (13,457)(1,210)110 (1,100)
Ending balance$(11,125)$(3,444)$(14,569)$3,504 $(5,486)$(1,982)




9

The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of September 30, 2022 and 2021 were as follows:
Details about Accumulated Other Comprehensive Loss ComponentsAmount Reclassified from Accumulated Other Comprehensive LossAffected Line Item
 in the Consolidated 
Statement of Income
Three Months Ended September 30, 2022Three Months Ended September 30, 2021
Net unrealized (loss) gain on available for sale securities$(156)$48 Net debt securities (losses) gains, available for sale
Income tax effect33 (9)Income tax provision
Total reclassifications for the period$(123)$39 
Net unrecognized pension costs$(17)$(45)Other non-interest expense
Income tax effect3 8 Income tax provision
Total reclassifications for the period$(14)$(37)
Details about Accumulated Other Comprehensive Loss ComponentsAmount Reclassified from Accumulated Other Comprehensive LossAffected Line Item
 in the Consolidated 
Statement of Income
Nine months ended September 30, 2022Nine months ended September 30, 2021
Net unrealized (losses) gain on available for sale securities$(168)$323 Net debt securities (losses) gains, available for sale
Income tax effect35 (67)Income tax provision
Total reclassifications for the period$(133)$256 
Net unrecognized pension costs$(52)$(138)Other non-interest expense
Income tax effect11 28 Income tax provision
Total reclassifications for the period$(41)$(110)

Note 3.  Recent Accounting Pronouncements

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

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

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives, and Hedging (Topic 815); and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-04 makes clarifying amendments to certain financial instrument standards. For entities that have not yet adopted ASU 2016-13, the
10

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

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

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

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

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.
11


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

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

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

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

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This amendment clarifies the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. It also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The amendments will be applied
12

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

Note 4. Per Share Data

There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 917,000 stock options, with an average exercise price of $25.35, outstanding on September 30, 2022. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $23.78 being less than the exercise price of the options issued. There were a total of 1,045,475 stock options, with an average exercise price of $27.25 that were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $23.70 being less than the strike price for the period ending September 30, 2021.
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Weighted average common shares issued7,561,453 7,544,219 7,557,250 7,539,850 
Weighted average treasury stock shares(510,225)(480,225)(496,379)(480,225)
Weighted average common shares outstanding - basic and diluted7,051,228 7,063,994 7,060,871 7,059,625 
 

Note 5. Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at September 30, 2022 and December 31, 2021 are as follows:
 September 30, 2022
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
U.S. Government and agency securities$3,003 $— $(101)$2,902 
Mortgage-backed securities1,508 — (226)1,282 
State and political securities151,663 18 (10,001)141,680 
Other debt securities46,104 4 (3,776)42,332 
Total debt securities$202,278 $22 $(14,104)$188,196 
Investment equity securities:
Equity securities$1,350 $— $(220)$1,130 
 December 31, 2021
  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:
Equity securities$1,350 $— $(62)$1,288 

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The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at September 30, 2022 and December 31, 2021.
 September 30, 2022
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
U.S. Government and agency securities$2,902 $(101)$— $— $2,902 $(101)
Mortgage-backed securities1,282 (226)— — 1,282 (226)
State and political securities110,153 (6,288)29,874 (3,713)140,027 (10,001)
Other debt securities25,956 (1,817)15,272 (1,959)41,228 (3,776)
Total debt securities$140,293 $(8,432)$45,146 $(5,672)$185,439 $(14,104)
 December 31, 2021
 Less than Twelve 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 September 30, 2022, there were a total of 184 securities in a continuous unrealized loss position for less than twelve months and 78 individual securities that were in a continuous unrealized loss position for twelve months or greater.

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

The amortized cost and fair value of debt securities at September 30, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands)Amortized CostFair Value
Due in one year or less$19,949 $19,629 
Due after one year to five years109,208 102,580 
Due after five years to ten years66,429 59,814 
Due after ten years6,692 6,173 
Total$202,278 $188,196 

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

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The following table represents gross realized gains and losses from the sales of debt securities available for sale:
 Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Available for sale (AFS):
Gross realized gains:    
U.S. Government and agency securities$— $— $— $— 
Mortgage-backed securities— — — — 
State and political securities— 1 14 1 
Other debt securities— 48 — 323 
Total gross realized gains$— $49 $14 $324 
Gross realized losses:    
State and political securities$156 $1 $182 $1 
Other debt securities— — — — 
Total gross realized losses$156 $1 $182 $1 

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

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

At September 30, 2022 and December 31, 2021, we had $1,130,000 and $1,288,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Net losses recognized in equity securities during the period$(55)$(8)$(158)$(24)
Less: Net gains realized on the sale of equity securities during the period— — — — 
Unrealized (losses) gains recognized in equity securities held at reporting date$(55)$(8)$(158)$(24)




















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Note 6. Loans

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

The following table presents the related aging categories of loans, by segment, as of September 30, 2022 and December 31, 2021:
 September 30, 2022
  Past DuePast Due 90  
  30 To 89Days Or MoreNon- 
(In Thousands)CurrentDays& Still AccruingAccrualTotal
Commercial, financial, and agricultural$172,765 $147 $— $453 $173,365 
Real estate mortgage:     
Residential679,611 1,948 1,099 584 683,242 
Commercial481,399 594 — 3,545 485,538 
Construction48,694 — — — 48,694 
Consumer automobile loans158,676 950 55 — 159,681 
Other consumer installment loans9,706 98 7 — 9,811 
 1,550,851 $3,737 $1,161 $4,582 1,560,331 
Net deferred loan fees and discounts369    369 
Allowance for loan losses(15,211)   (15,211)
Loans, net$1,536,009    $1,545,489 
 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
16

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

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

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

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of September 30, 2022 and December 31, 2021:
September 30, 2022
RecordedUnpaid PrincipalRelated
(In Thousands)InvestmentBalanceAllowance
With no related allowance recorded:   
Commercial, financial, and agricultural$302 $302 $— 
Real estate mortgage:   
Residential3,436 3,436 — 
Commercial2,655 2,655 — 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 6,393 6,393 — 
With an allowance recorded:   
Commercial, financial, and agricultural422 422 5 
Real estate mortgage:   
Residential1,026 1,026 388 
Commercial4,504 4,504 813 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 5,952 5,952 1,206 
Total:   
Commercial, financial, and agricultural724 724 5 
Real estate mortgage:   
Residential4,462 4,462 388 
Commercial7,159 7,159 813 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 $12,345 $12,345 $1,206 
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 December 31, 2021
 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 and nine months ended September 30, 2022 and 2021:
 Three Months Ended September 30,
 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$711 $5 $— $2,052 $13 $— 
Real estate mortgage:      
Residential4,586 47 — 5,218 53 — 
Commercial7,227 50 — 10,530 61 — 
Construction— — — 115 1 — 
Consumer automobile7 — — — — — 
Other consumer installment loans10 — — 20 — — 
 $12,541 $102 $— $17,935 $128 $— 
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 Nine Months Ended September 30,
 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$782 $15 $— $1,458 $43 $— 
Real estate mortgage:      
Residential4,765 141 — 5,650 151 — 
Commercial7,492 151 — 9,848 126 — 
Construction42 1 — 119 4 — 
Consumer automobile3 1 — 38 — — 
Other consumer installment loans15 — — 10 9 — 
$13,099 $309 $— $17,123 $333 $— 

Troubled Debt Restructurings

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

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

Three Months Ended September 30,
2021
(In Thousands, Except Number of Contracts)Number
of
Contracts		Pre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural— $— $— 
Real estate mortgage:
Residential— — — 
Commercial— — — 
Construction— — — 
 — $— $— 
19

 Nine Months Ended September 30,
 2021
(In Thousands, Except Number of Contracts)Number
of
Contracts		Pre-Modification
Outstanding
Recorded
Investment		Post-Modification
Outstanding
Recorded
Investment
Commercial, financial, and agricultural1 $949 $949 
Real estate mortgage:   
Residential2 865 865 
Commercial2 855 855 
Construction— — — 
 5 $2,669 $2,669 
There was no loan modification considered to be a TDR made during the twelve months prior to September 30, 2022 that defaulted during the nine months ended September 30, 2022. There were two loan modifications considered to be a TDRs made during the twelve months previous to September 30, 2021 that defaulted during the nine months ended September 30, 2021. The defaulted loan type and recorded investments at September 30, 2021 were as follows: two residential real estate loan with a recorded investment of $706,000.

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

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

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

Internal Risk Ratings

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

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  An external semi-annual loan review of large commercial relationships is
20

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

The following table presents the credit quality categories identified above as of September 30, 2022 and December 31, 2021:
 September 30, 2022
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment loans 
(In Thousands)ResidentialCommercialConstructionTotals
Pass$171,416 $680,296 $475,341 $48,593 $159,681 $9,811 $1,545,138 
Special Mention152 234 4,360 — — — 4,746 
Substandard1,797 2,712 5,837 101 — — 10,447 
$173,365 $683,242 $485,538 $48,694 $159,681 $9,811 $1,560,331 
 December 31, 2021
 Commercial, Financial, and 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.

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

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

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

Activity in the allowance is presented for the three and nine months ended September 30, 2022 and 2021:
 Three Months Ended September 30, 2022
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$2,108 $4,818 $5,395 $199 $1,307 $110 $456 $14,393 
Charge-offs(18)— — — (57)(85)— (160)
Recoveries93 1 1 — 10 18 — 123 
Provision(114)376 140 11 325 75 42 855 
Ending Balance$2,069 $5,195 $5,536 $210 $1,585 $118 $498 $15,211 
 Three Months Ended September 30, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,846 $4,619 $4,436 $212 $1,824 $44 $1,457 $14,438 
Charge-offs(10)(29)— — (12)(116)— (167)
Recoveries8 — 84 5 107 7 — 211 
Provision277 175 (500)11 (226)194 144 75 
Ending Balance$2,121 $4,765 $4,020 $228 $1,693 $129 $1,601 $14,557 
 
tNine Months Ended September 30, 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(18)(15)(155)— (234)(188)— (610)
Recoveries138 46 3 28 32 63 — 310 
Provision3 463 352 3 376 132 6 1,335 
Ending Balance$2,069 $5,195 $5,536 $210 $1,585 $118 $498 $15,211 
 Nine Months Ended September 30, 2021
 Commercial, Financial, and 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(45)(172)— — (235)(173)— (625)
Recoveries22 112 109 10 139 47 — 439 
Provision208 365 276 84 (117)(6)130 940 
Ending Balance$2,121 $4,765 $4,020 $228 $1,693 $129 $1,601 $14,557 

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

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

The Company has a concentration of the following to gross loans at September 30, 2022 and 2021: 
 September 30,
 20222021
Owners of residential rental properties19.95 %18.84 %
Owners of commercial rental properties16.09 %14.03 %
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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2022 and December 31, 2021:
 September 30, 2022
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer AutomobileOther consumer installmentUnallocated 
(In Thousands)ResidentialCommercialConstructionTotals
Allowance for Loan Losses:       
Ending allowance balance attributable to loans:       
Individually evaluated for impairment$5 $388 $813 $— $— $— $— $1,206 
Collectively evaluated for impairment2,064 4,807 4,723 210 1,585 118 498 14,005 
Total ending allowance balance$2,069 $5,195 $5,536 $210 $1,585 $118 $498 $15,211 
Loans:       
Individually evaluated for impairment$724 $4,462 $7,159 $— $— $— $12,345 
Collectively evaluated for impairment172,641 678,780 478,379 48,694 159,681 9,811 1,547,986 
Total ending loans balance$173,365 $683,242 $485,538 $48,694 $159,681 $9,811 $1,560,331 

 December 31, 2021
 Commercial, Financial, and 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 and nine months ended September 30, 2022 and 2021, respectively:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Interest cost$138 $127 $414 $381 
Expected return on plan assets(412)(386)(1,237)(1,158)
Amortization of net loss17 45 52 138 
Net periodic benefit$(257)$(214)$(771)$(639)


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Employer Contributions

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

Note 8.  Stock Purchase Plans

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

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

Note 9.  Off-Balance Sheet Risk

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

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

Financial instruments whose contract amounts represent credit risk are as follows at September 30, 2022 and December 31, 2021:
(In Thousands)September 30, 2022December 31, 2021
Commitments to extend credit$180,752 $184,364 
Standby letters of credit9,795 7,027 
Credit exposure from the sale of assets with recourse10,454 10,248 
$201,001 $201,639 

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

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  These instruments are issued primarily to support bid or performance related contracts.  The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. 
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Fees earned from the issuance of these letters are recognized upon expiration of the coverage period.  For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

Note 10.  Fair Value Measurements

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
   
Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
   
Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of September 30, 2022 and December 31, 2021, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 September 30, 2022
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
U.S. Government and agency securities$— $2,902 $— $2,902 
Mortgage-backed securities— 1,282 — 1,282 
State and political securities— 141,680 — 141,680 
Other debt securities— 42,332 — 42,332 
Investment equity securities:
  Equity securities1,130 — — 1,130 

 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:
  Equity securities1,288 — — 1,288 









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The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of September 30, 2022 and December 31, 2021, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 
 September 30, 2022
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$— $— $2,006 $2,006 
Other real estate owned— — 127 127 
 December 31, 2021
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$— $— $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 September 30, 2022 and December 31, 2021: 
 September 30, 2022
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans$2,006 
Appraisal of collateral (1)
Appraisal adjustments (1)
(10)% to (34)%
(14)%
Other real estate owned$127 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(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 loans$2,360 
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.
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Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments.  The Company’s fair values are set forth below for the Company’s other financial instruments.

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

The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at September 30, 2022 and December 31, 2021:
 CarryingFairFair Value Measurements at September 30, 2022
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Loans held for sale (1)$2,485 $2,485 $2,485 $— $— 
Loans, net1,545,489 1,503,285 — — 1,503,285 
Financial liabilities:     
Time deposits142,808 135,457 — — 135,457 
Short-term borrowings 30,901 30,901 30,901 — — 
Long-term borrowings102,829 99,100 — — 99,100 
(1) The financial instrument is carried at cost at, September 30, 2022 which approximate the fair value of the instruments
 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 is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables.

Note 12.  Stock Options

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

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



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Stock options outstanding as of September 30, 2022 are presented below:
Stock Options Granted
DateSharesForfeitedCash SettlementOutstandingStrike 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 (16,800)— 104,100 28.01 3 years10 years
March 15, 2019119,100 (16,200)— 102,900 28.01 5 years10 years
August 27, 201558,125 (26,250)(28,875)3,000 28.02 5 years10 years

A summary of stock option activity is presented below:
September 30, 2022
SharesWeighted Average Exercise Price
Outstanding, beginning of year1,034,525 $27.23 
Granted234,000 24.10 
Cash settlement(346,725)30.07 
Forfeited(4,800)28.59 
Expired— — 
Outstanding, end of period917,000 $25.35 
Exercisable, end of period107,100 $28.01 

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

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

Nine months ended September 30,
2022
Risk-free interest 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 $1,004,000 for the nine months ended September 30, 2022 compared to $754,000 for the same period of 2021. The expense level for the nine months ended September 30, 2022 was impacted by the voluntary cash settlement of 346,725 stock options which resulted in $183,000 in additional compensation expense and a reduction in additional paid-in capital of $1,074,000. As of September 30, 2022, a total
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of 107,100 stock options were exercisable and the weighted average years to expiration of these options was 6.96 years. Total unrecognized compensation cost for non-vested options was $1,848,000 and will be recognized over their weighted average remaining vesting period of 1.26 years.

Note 13.  Leases

The following table shows finance lease right of use assets and finance lease liabilities as of:
(In Thousands)Statement of Financial Condition classificationSeptember 30, 2022December 31, 2021
Finance lease right of use assetsPremises and equipment, net$7,113 $7,435 
Finance lease liabilitiesLong-term borrowings7,829 7,963 

The following table shows the components of finance and operating lease expense for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Finance Lease Cost:
Amortization of right-of-use asset$107 $108 $322 $367 
Interest expense61 62 184 195 
Operating lease cost71 73 214 223 
Variable lease cost— — — — 
Total Lease Cost$239 $243 $720 $785 

A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
(In Thousands)OperatingFinance
2022$72 $105 
2023265 421 
2024255 427 
2025257 929 
2026260 387 
2027 and thereafter2,568 9,277 
Total undiscounted cash flows3,677 11,546 
Discount on cash flows(924)(3,717)
Total lease liability$2,753 $7,829 

The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of September 30, 2022.
OperatingFinance
Weighted-average term (years)17.223.6
Weighted-average discount rate3.54 %3.20 %

Note 14.  Reclassification of Comparative Amounts

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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

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

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

EARNINGS SUMMARY

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

Summary Results

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

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

Reconciliation of GAAP and Non-GAAP Financial Measures
(Dollars in Thousands, Except Per Share Data)Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
GAAP net income$5,250 $4,125 $12,913 $11,154 
Less: net securities (losses) gains, net of tax(167)32 (258)236 
Non-GAAP core earnings$5,417 $4,093 $13,171 $10,918 
Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
GAAP Return on average assets (ROA)1.09 %0.86 %0.89 %0.79 %
Less: net securities (losses) gains, net of tax(0.03)%— %(0.02)%0.02 %
Non-GAAP core ROA1.12 %0.86 %0.91 %0.77 %
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Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
GAAP Return on average equity (ROE)12.61 %9.85 %10.48 %9.17 %
Less: net securities (losses) gains, net of tax(0.41)%0.07 %(0.21)%0.19 %
Non-GAAP core ROE.13.02 %9.78 %10.69 %8.98 %
Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
GAAP Basic earnings per share (EPS)$0.74 $0.58 $1.83 $1.58 
Less: net securities (losses) gains, net of tax(0.03)— (0.04)0.03 
Non-GAAP core operating EPS$0.77 $0.58 $1.87 $1.55 
Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
GAAP Diluted EPS$0.74 $0.58 $1.83 $1.58 
Less: net securities (losses) gains, net of tax(0.03)— (0.04)0.03 
Non-GAAP diluted core EPS$0.77 $0.58 $1.87 $1.55 
 
Interest and Dividend Income

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

Interest and dividend income composition for the three and nine months ended September 30, 2022 and 2021 was as follows:
 Three Months Ended
 September 30, 2022September 30, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$15,051 89.25 %$13,382 90.95 %$1,669 12.47 %
Investment securities:      
Taxable949 5.63 834 5.67 115 13.79 
Tax-exempt236 1.40 160 1.09 76 47.50 
Dividend and other interest income628 3.72 338 2.29 290 85.80 
Total interest and dividend income$16,864 100.00 %$14,714 100.00 %$2,150 14.61 %
 Nine Months Ended
 September 30, 2022September 30, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$41,709 90.04 %$39,826 91.10 %$1,883 4.73 %
Investment securities:      
Taxable2,550 5.50 2,491 5.70 59 2.37 
Tax-exempt594 1.28 495 1.13 99 20.00 
Dividend and other interest income1,470 3.18 903 2.07 567 62.79 
Total interest and dividend income$46,323 100.00 %$43,715 100.00 %$2,608 5.97 %
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Interest Expense

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

Interest expense composition for the three and nine months ended September 30, 2022 and 2021 was as follows:
 Three Months Ended
 September 30, 2022September 30, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$693 52.03 %$1,308 62.83 %$(615)(47.02)%
Short-term borrowings26 1.95 3 0.14 23 766.67 
Long-term borrowings613 46.02 771 37.03 (158)(20.49)
Total interest expense$1,332 100.00 %$2,082 100.00 %$(750)(36.02)%
 Nine Months Ended
 September 30, 2022September 30, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$2,191 53.56 %$4,481 64.77 %$(2,290)(51.10)%
Short-term borrowings29 0.71 7 0.10 22 314.29 
Long-term borrowings1,871 45.73 2,430 35.13 (559)(23.00)
Total interest expense$4,091 100.00 %$6,918 100.00 %$(2,827)(40.86)%

Net Interest Margin

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


















33



The following is a schedule of average balances and associated yields for the three and nine months ended September 30, 2022 and 2021:
 AVERAGE BALANCES AND INTEREST RATES
 Three Months Ended September 30, 2022Three Months Ended September 30, 2021
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)
$58,735 $394 2.66 %$46,193 $307 2.64 %
All other loans1,463,330 14,740 4.00 %1,296,790 13,139 4.02 %
Total loans (2)
1,522,065 15,134 3.94 %1,342,983 13,446 3.97 %
Federal funds sold33,641 218 2.57 %40,000 72 0.71 %
Taxable securities159,721 1,158 2.94 %150,308 1,022 2.76 %
Tax-exempt securities (3)
49,177 299 2.47 %37,069 203 2.22 %
Total securities208,898 1,457 2.83 %187,377 1,225 2.65 %
Interest-bearing deposits34,202 201 2.33 %205,715 78 0.15 %
Total interest-earning assets1,798,806 17,010 3.76 %1,776,075 14,821 3.32 %
Other assets130,576   132,820   
Total assets$1,929,382   $1,908,895   
Liabilities and shareholders’ equity:      
Savings$249,083 26 0.04 %$228,255 22 0.04 %
Super Now deposits405,173 287 0.28 %308,591 219 0.28 %
Money market deposits287,660 200 0.28 %306,177 238 0.31 %
Time deposits148,968 180 0.48 %248,649 829 1.32 %
Total interest-bearing deposits1,090,884 693 0.25 %1,091,672 1,308 0.48 %
Short-term borrowings8,062 26 1.23 %8,696 3 0.14 %
Long-term borrowings109,269 613 2.23 %133,536 771 2.29 %
Total borrowings117,331 639 2.16 %142,232 774 2.16 %
Total interest-bearing liabilities1,208,215 1,332 0.44 %1,233,904 2,082 0.67 %
Demand deposits533,681   490,500   
Other liabilities21,008   17,027   
Shareholders’ equity166,478   167,464   
Total liabilities and shareholders’ equity$1,929,382   $1,908,895   
Interest rate spread (3)
  3.32 %  2.65 %
Net interest income/margin (3)
 $15,678 3.47 % $12,739 2.85 %
1.    Information on this table has been calculated using average daily balance sheets to obtain average balances.
2.    Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.
3.    Income and rates on fully taxable equivalent basis include an adjustment for the difference between annual income     
from tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% and are reconciled to the equivalent GAAP         
measurement below the tables.
34

 AVERAGE BALANCES AND INTEREST RATES
 Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)$53,269 $1,033 2.59 %$46,217 $991 2.87 %
All other loans1,403,504 40,893 3.90 %1,292,028 39,043 4.04 %
Total loans (2)1,456,773 41,926 3.85 %1,338,245 40,034 4.00 %
Federal funds sold43,938 465 1.41 %21,993 117 0.71 %
Taxable securities152,937 3,126 2.76 %147,942 3,105 2.84 %
Tax-exempt securities (3)
45,357 752 2.24 %36,638 627 2.31 %
Total securities198,294 3,878 2.64 %184,580 3,732 2.73 %
Interest-bearing deposits97,520 429 0.59 %206,895 172 0.11 %
Total interest-earning assets1,796,525 46,698 3.48 %1,751,713 44,055 3.37 %
Other assets129,048   128,567   
Total assets$1,925,573  $1,880,280   
Liabilities and shareholders’ equity:    
Savings$246,063 72 0.04 %$222,889 94 0.06 %
Super Now deposits388,149 721 0.25 %294,570 694 0.31 %
Money market deposits296,998 596 0.27 %307,309 761 0.33 %
Time deposits167,876 802 0.64 %253,130 2,932 1.55 %
Total interest-bearing deposits1,099,086 2,191 0.27 %1,077,898 4,481 0.56 %
Short-term borrowings6,308 29 0.59 %7,152 7 0.13 %
Long-term borrowings112,457 1,871 2.22 %138,669 2,430 2.34 %
Total borrowings118,765 1,900 2.14 %145,821 2,437 2.23 %
Total interest-bearing liabilities1,217,851 4,091 0.45 %1,223,719 6,918 0.76 %
Demand deposits519,599   473,088   
Other liabilities23,814   21,327   
Shareholders’ equity164,309   162,146   
Total liabilities and shareholders’ equity$1,925,573   $1,880,280   
Interest rate spread (3)
  3.03 %  2.61 %
Net interest income/margin (3)
 $42,607 3.17 % $37,137 2.84 %
1.    Information on this table has been calculated using average daily balance sheets to obtain average balances.
2.    Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.
3.    Income and rates on fully taxable equivalent basis include an adjustment for the difference between annual income     
from tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% and are reconciled to the equivalent GAAP
measure below the tables.

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2022202120222021
Total interest income$16,864 $14,714 $46,323 $43,715 
Total interest expense1,332 2,082 4,091 6,918 
Net interest income (GAAP)15,532 12,632 42,232 36,797 
Tax equivalent adjustment146 107 375 340 
Net interest income (fully taxable equivalent) (NON-GAAP)$15,678 $12,739 $42,607 $37,137 
 
35

The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2022 and 2021:
 Three Months Ended September 30,Three months ended September 30,
 2022 vs. 20212022 vs. 2021
 Increase (Decrease) Due toIncrease (Decrease) Due to
(In Thousands)VolumeRateNetVolumeRateNet
Interest income:      
Tax-exempt loans$85 $2 $87 $104 $(62)$42 
All other loans1,666 (65)1,601 2,600 (750)1,850 
Federal funds sold(13)159 146 175 173 348 
Taxable investment securities66 70 136 75 (54)21 
Tax-exempt investment securities71 25 96 134 (9)125 
Interest bearing deposits(114)237 123 (60)317 257 
Total interest-earning assets1,761 428 2,189 3,028 (385)2,643 
Interest expense:      
Savings deposits4 — 4 5 (27)(22)
Super Now deposits68 — 68 126 (99)27 
Money market deposits(14)(24)(38)(26)(139)(165)
Time deposits(251)(398)(649)(776)(1,354)(2,130)
Short-term borrowings— 23 23 (1)023 22 
Long-term borrowings(138)(20)(158)(439)0(120)(559)
Total interest-bearing liabilities(331)(419)(750)(1,111)(1,716)(2,827)
Change in net interest income$2,092 $847 $2,939 $4,139 $1,331 $5,470 

Provision for Loan Losses

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

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

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at September 30, 2022, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations.  A downturn in the local economy, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance.  The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

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

The allowance for loan losses increased from $14,176,000 at December 31, 2021 to $15,211,000 at September 30, 2022. The increase in allowance was due to growth in the loan portfolio. At September 30, 2022 and December 31, 2021, the allowance for loan losses to total loans was 0.97% and 1.02%, respectively.

36

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

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

The following is a table showing total nonperforming loans as of:
 Total Nonperforming Loans
(In Thousands)90 Days Past DueNon-accrualTotal
September 30, 2022$1,161 $4,582 $5,743 
June 30, 2022421 4,679 5,100 
March 31, 2022364 4,917 5,281 
December 31, 2021861 5,389 6,250 
September 30, 2021854 6,909 7,763 

Additional allowance for loan losses and net (chargte-offs) recoveries information is presented by loan portfolio segment in the tables below.
September 30, 2022
Amount of Allowance for Loan Losses 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$2,069$173,365 1.19 %$120 $169,822 0.07 %
Real estate mortgage:
Residential5,195683,242 0.76 %31 634,031 — %
Commercial5,536485,538 1.14 %(152)458,523 (0.03)%
Construction21048,694 0.43 %28 44,161 0.06 %
Consumer automobiles1,585159,681 0.99 %(202)140,595 (0.14)%
Other consumer installment loans1189,811 1.20 %(125)9,641 (1.30)%
Unallocated498
$15,211$1,560,331 0.97 %$(300)$1,456,773 (0.02)%
Total non-accrual loans outstanding$4,582
Non-accrual loans to total loans outstanding0.29 %
Allowance for loan losses to non-accrual loans331.97 %
37

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

Non-interest income composition for the three and nine months ended September 30, 2022 and 2021 was as follows:
 Three Months Ended
 September 30, 2022September 30, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$559 26.84 %$456 15.45 %$103 22.59 %
Net debt securities (losses) gains, available for sale(156)(7.49)48 1.63 (204)425.00 
Net equity securities losses(55)(2.64)(8)(0.27)(47)(587.50)
Bank-owned life insurance170 8.16 279 9.45 (109)(39.07)
Gain on sale of loans294 14.11 456 15.45 (162)(35.53)
Insurance commissions109 5.23 129 4.37 (20)(15.50)
Brokerage commissions142 6.82 237 8.03 (95)(40.08)
Loan broker commissions438 21.03 772 26.16 (334)(43.26)
Debit card income344 16.51 388 13.15 (44)(11.34)
Other238 11.43 194 6.57 44 22.68 
Total non-interest income$2,083 100.00 %$2,951 100.00 %$(868)(29.41)%
38

 Nine Months Ended
 September 30, 2022September 30, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$1,563 23.57 %$1,218 14.37 %$345 28.33 %
Net debt securities (losses) gains, available for sale(168)(2.53)323 3.81 (491)152.01 
Net equity securities losses(158)(2.38)(24)(0.28)(134)(558.33)
Bank-owned life insurance501 7.55 614 7.25 (113)(18.40)
Gain on sale of loans905 13.65 2,034 24.00 (1,129)(55.51)
Insurance commissions386 5.82 436 5.15 (50)(11.47)
Brokerage commissions500 7.54 663 7.82 (163)(24.59)
Loan broker commissions1,350 20.36 1,449 17.10 (99)(6.83)
Debit card income1,080 16.28 1,166 13.76 (86)(7.38)
Other673 10.14 595 7.02 78 13.11 
Total non-interest income$6,632 100.00 %$8,474 100.00 %$(1,842)(21.74)%

Non-interest Expense

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

Non-interest expense composition for the three and nine months ended September 30, 2022 and 2021 was as follows:
 Three Months Ended
 September 30, 2022September 30, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$6,016 58.29 %$5,837 55.87 %$179 3.07 %
Occupancy730 7.07 745 7.13 (15)(2.01)
Furniture and equipment816 7.91 883 8.45 (67)(7.59)
Software amortization188 1.82 226 2.16 (38)(16.81)
Pennsylvania shares tax334 3.24 373 3.57 (39)(10.46)
Professional fees626 6.07 615 5.89 11 1.79 
Federal Deposit Insurance Corporation deposit insurance260 2.52 220 2.11 40 18.18 
Marketing151 1.46 231 2.21 (80)(34.63)
Intangible amortization34 0.33 44 0.42 (10)(22.73)
Other1,165 11.29 1,273 12.19 (108)(8.48)
Total non-interest expense$10,320 100.00 %$10,447 100.00 %$(127)(1.22)%
39

 Nine Months Ended
 September 30, 2022September 30, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$18,421 58.02 %$17,107 55.82 %$1,314 7.68 %
Occupancy2,380 7.50 2,438 7.96 (58)(2.38)
Furniture and equipment2,454 7.73 2,663 8.69 (209)(7.85)
Software amortization660 2.08 632 2.06 28 4.43 
Pennsylvania shares tax1,119 3.52 1,097 3.58 22 2.01 
Professional fees1,746 5.50 1,882 6.14 (136)(7.23)
Federal Deposit Insurance Corporation deposit insurance690 2.17 705 2.30 (15)(2.13)
Marketing435 1.37 434 1.42 1 0.23 
Intangible amortization119 0.37 147 0.48 (28)(19.05)
Other3,723 11.74 3,541 11.55 182 5.14 
Total non-interest expense$31,747 100.00 %$30,646 100.00 %$1,101 3.59 %

Provision for Income Taxes

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

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

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

Loans Held for Sale

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

Loans

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

40

The allocation of the loan portfolio, by category, as of September 30, 2022 and December 31, 2021 is presented below:
 September 30, 2022December 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Commercial, financial, and agricultural$173,365 11.11 %$163,285 11.73 %$10,080 6.17 %
Real estate mortgage:      
Residential683,242 43.78 595,847 42.80 87,395 14.67 %
Commercial485,538 31.11 446,734 32.09 38,804 8.69 %
Construction48,694 3.12 37,295 2.68 11,399 30.56 %
Consumer automobile loans159,681 10.23 139,408 10.01 20,273 14.54 %
Other consumer installment loans9,811 0.63 9,277 0.67 534 5.76 %
Net deferred loan fees and discounts369 0.02 301 0.02 68 22.59 %
Gross loans$1,560,700 100.00 %$1,392,147 100.00 %$168,553 12.11 %

The following table shows the amount of accrual and non-accrual TDRs at September 30, 2022 and December 31, 2021:
 September 30, 2022December 31, 2021
(In Thousands)AccrualNon-accrualTotalAccrualNon-accrualTotal
Commercial, financial, and agricultural$271 $452 $723 $314 $574 $888 
Real estate mortgage:      
Residential3,735 174 3,909 3,999 178 4,177 
Commercial1,600 2,237 3,837 1,836 2,509 4,345 
 $5,606 $2,863 $8,469 $6,149 $3,261 $9,410 
 
Investments

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

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

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

The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at $1,350,000 for September 30, 2022 and December 31, 2021 while the fair value decreased $158,000 over the same time period.
41


The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at September 30, 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):        
U.S. Government and agency securities$3,003 $2,902 $— $— $— $— $— $— $3,003 $2,902 
Mortgage-backed securities 1,508 7 1,282 — — — — — — 1,508 1,282 
State and political securities151,088 141,138 80 80 — — 495 462 151,663 141,680 
Other debt securities25,007 22,785 5,664 5,130 — — 15,433 14,417 46,104 42,332 
Total debt securities AFS$180,606 $168,107 $5,744 $5,210 $— $— $15,928 $14,879 $202,278 $188,196 
 
Financing Activities

Deposits

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

Deposit balances and their changes for the periods being discussed follow:
 September 30, 2022December 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Demand deposits$537,403 33.79 %$494,360 30.49 %$43,043 8.71 %
NOW accounts392,140 24.66 366,399 22.60 25,741 7.03 
Money market deposits268,532 16.88 318,877 19.67 (50,345)(15.79)
Savings deposits249,532 15.69 236,312 14.58 13,220 5.59 
Time deposits142,808 8.98 205,367 12.66 (62,559)(30.46)
 Total deposits$1,590,415 100.00 %$1,621,315 100.00 %$(30,900)(1.91)%

Borrowed Funds

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

 September 30, 2022December 31, 2021Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Short-term borrowings:      
FHLB repurchase agreements$25,852 19.33 %$— — %$25,852 100.00 %
Securities sold under agreement to repurchase5,049 3.78 5,747 4.36 (698)(12.15)
Total short-term borrowings30,901 23.11 5,747 4.36 25,154 437.69 
Long-term borrowings:
Long-term FHLB borrowings95,000 71.03 118,000 89.59 (23,000)(19.49)
Long-term finance lease7,829 5.85 7,963 6.05 (134)(1.68)
Total long-term borrowings102,829 76.89 125,963 95.64 (23,134)(18.37)
Total borrowed funds$133,730 100.00 %$131,710 100.00 %$2,020 1.53 %
42



Short-Term Borrowings

The following table provides further information in regards to secured borrowings that have been accounted for as repurchase agreements.
Remaining Contractual Maturity Overnight and Continuous
(In Thousands)September 30, 2022December 31, 2021
Investment debt securities pledged, fair value$6,941 $8,881 
Repurchase agreements5,049 5,747 

Capital

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

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

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






















43



The Company's capital ratios as of September 30, 2022 and December 31, 2021 were as follows:
 September 30, 2022December 31, 2021
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$162,230 10.178 %$156,439 10.791 %
For Capital Adequacy Purposes71,727 4.500 65,237 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date111,575 7.000 101,480 7.000 
To Be Well Capitalized103,605 6.500 94,232 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$177,572 11.141 %$170,708 11.776 %
For Capital Adequacy Purposes127,509 8.000 115,970 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date167,355 10.500 152,211 10.500 
To Be Well Capitalized159,386 10.000 144,963 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$162,230 10.178 %$156,439 10.791 %
For Capital Adequacy Purposes95,636 6.000 86,983 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date135,484 8.500 123,226 8.500 
To Be Well Capitalized127,514 8.000 115,977 8.000 
Tier I Capital (to Average Assets)   
Actual$162,230 8.548 %$156,439 8.397 %
For Capital Adequacy Purposes75,915 4.000 74,521 4.000 
To Be Well Capitalized94,894 5.000 93,152 5.000 
 
Jersey Shore State Bank's capital ratios as of September 30, 2022 and December 31, 2021 were as follows:
 September 30, 2022December 31, 2021
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$116,369 9.887 %$110,682 10.337 %
For Capital Adequacy Purposes52,965 4.500 48,183 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date82,389 7.000 74,952 7.000 
To Be Well Capitalized76,504 6.500 69,598 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$127,706 10.850 %$121,094 11.309 %
For Capital Adequacy Purposes94,161 8.000 85,662 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date123,586 10.500 112,431 10.500 
To Be Well Capitalized117,701 10.000 107,078 10.000 
Tier I Capital (to Risk-weighted Assets)- - 
Actual$116,369 9.887 %$110,682 10.337 %
For Capital Adequacy Purposes70,619 6.000 64,244 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date100,044 8.500 91,013 8.500 
To Be Well Capitalized94,159 8.000 85,659 8.000 
Tier I Capital (to Average Assets)   
Actual$116,369 8.355 %$110,682 8.326 %
For Capital Adequacy Purposes55,712 4.000 53,174 4.000 
To Be Well Capitalized69,640 5.000 66,468 5.000 



44



Luzerne Bank's capital ratios as of September 30, 2022 and December 31, 2021 were as follows:
 September 30, 2022December 31, 2021
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$43,380 10.406 %$42,291 11.164 %
For Capital Adequacy Purposes18,759 4.500 17,047 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date29,181 7.000 26,517 7.000 
To Be Well Capitalized27,097 6.500 24,623 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$47,385 11.367 %$46,148 12.182 %
For Capital Adequacy Purposes33,349 8.000 30,306 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date43,771 10.500 39,776 10.500 
To Be Well Capitalized41,686 10.000 37,882 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$43,380 10.406 %$42,291 11.164 %
For Capital Adequacy Purposes25,012 6.000 22,729 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date35,434 8.500 32,199 8.500 
To Be Well Capitalized33,350 8.000 30,305 8.000 
Tier I Capital (to Average Assets)   
Actual$43,380 7.973 %$42,291 7.537 %
For Capital Adequacy Purposes21,763 4.000 22,444 4.000 
To Be Well Capitalized27,204 5.000 28,056 5.000 

Liquidity; Interest Rate Sensitivity and Market Risk

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

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

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

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

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

Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by
45

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

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

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

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

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

Interest Rate Sensitivity

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

The following is a rate shock forecast for the twelve month period ending September 30, 2023 assuming a static balance sheet as of September 30, 2022.
 Parallel Rate Shock in Basis Points
(In Thousands)-200-100Static+100+200+300+400
Net interest income$66,551 $69,113 $71,694 $74,346 $76,969 $79,559 $82,072 
Change from static(5,143)(2,581)— 2,652 5,275 7,865 10,378 
Percent change from static-7.17 %-3.60 %— 3.70 %7.36 %10.97 %14.48 %
 
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities.  Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change.  In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change.  Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

46

Inflation

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
47

Part II.  OTHER INFORMATION
Item 1.                           Legal Proceedings

None.

Item 1A.  Risk Factors

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

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

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

Item 3.                           Defaults Upon Senior Securities
 
None.
 
Item 4.                           Mine Safety Disclosures
 
Not applicable.
 
Item 5.                           Other Information
 
None.
 
48
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).
10.1Amendment to Employment Agreement, dated July 15, 2022, between Penns Woods Bancorp, Inc. and Richard A. Grafmyre (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on July 21, 2022)
10.2Amendment to Employment Agreement, dated July 15, 2022, between Penns Woods Bancorp, Inc. and Brian L. Knepp (incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K filed on July 21, 2022)
 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 September 30, 2022 and December 31, 2021; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, 2022 and 2021; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2022 and 2021 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.
104Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101).
49

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 PENNS WOODS BANCORP, INC.
 (Registrant)
  
Date:    November 9, 2022/s/ Richard A. Grafmyre
 Richard A. Grafmyre, Chief Executive Officer
 (Principal Executive Officer)
  
  
Date:November 9, 2022/s/ Brian L. Knepp
 Brian L. Knepp, President and Chief Financial Officer
 (Principal Financial Officer and Principal Accounting
 Officer)
50

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