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Penns Woods Bancorp
PWOD
#8452
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 2023-11-14

Penns Woods Bancorp - 10-Q quarterly report FY


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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, 2023. 
☐Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from                    to                   .

No. 0-17077
(Commission File Number)

PENNS WOODS BANCORP INC.
(Exact name of Registrant as specified in its charter) 
Pennsylvania300 Market Street, P.O. Box 96723-2226454
(State or other jurisdiction ofWilliamsport(I.R.S. Employer Identification No.)
incorporation or organization)Pennsylvania17703-0967
(Address of principal executive offices)(Zip Code)

(570) 322-1111
Registrant’s telephone number, including area code


Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $5.55 par valuePWODThe Nasdaq Global Select Market

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated 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, 2023 there were 7,163,550 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
   
33
   
49
   
49
   
 
   
50
   
50
   
50
   
50
   
50
   
50
   
51
   
52
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)20232022
ASSETS: 
Noninterest-bearing balances$26,651 $27,390 
Interest-bearing balances in other financial institutions8,939 12,943 
Total cash and cash equivalents35,590 40,333 
Investment debt securities, available for sale, at fair value184,667 193,673 
Investment equity securities, at fair value1,072 1,142 
Restricted investment in bank stock25,289 19,171 
Loans held for sale4,083 3,298 
Loans1,818,461 1,639,731 
Allowance for credit losses(12,890)(15,637)
Loans, net1,805,571 1,624,094 
Premises and equipment, net30,746 31,844 
Accrued interest receivable10,500 9,481 
Bank-owned life insurance33,695 34,452 
Investment in limited partnerships8,275 8,656 
Goodwill16,450 16,450 
Intangibles235 327 
Operating lease right-of-use asset2,562 2,651 
Deferred tax asset6,961 6,868 
Other assets10,772 7,640 
TOTAL ASSETS$2,176,468 $2,000,080 
LIABILITIES:  
Interest-bearing deposits$1,095,760 $1,037,397 
Noninterest-bearing deposits471,507 519,063 
Total deposits1,567,267 1,556,460 
Short-term borrowings193,746 153,349 
Long-term borrowings217,645 102,783 
Accrued interest payable2,716 603 
Operating lease liability2,619 2,708 
Other liabilities17,935 16,512 
TOTAL LIABILITIES2,001,928 1,832,415 
SHAREHOLDERS’ EQUITY:  
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued
— — 
Common stock, par value $5.55, 22,500,000 shares authorized; 7,620,250 and 7,566,810 shares issued; 7,110,025 and 7,056,585 outstanding
42,335 42,039 
Additional paid-in capital55,890 54,252 
Retained earnings104,067 98,147 
Accumulated other comprehensive loss:  
Net unrealized loss on available for sale securities(10,886)(9,819)
Defined benefit plan(4,051)(4,139)
Treasury stock at cost, 510,225 shares
(12,815)(12,815)
TOTAL SHAREHOLDERS' EQUITY174,540 167,665 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,176,468 $2,000,080 

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)2023202220232022
INTEREST AND DIVIDEND INCOME:    
Loans, including fees$21,720 $15,051 $59,571 $41,709 
Investment securities:    
Taxable1,365 949 3,870 2,550 
Tax-exempt114 236 410 594 
Dividend and other interest income722 628 1,827 1,470 
TOTAL INTEREST AND DIVIDEND INCOME23,921 16,864 65,678 46,323 
INTEREST EXPENSE:    
Deposits6,463 693 14,686 2,191 
Short-term borrowings2,412 26 6,084 29 
Long-term borrowings1,714 613 3,892 1,871 
TOTAL INTEREST EXPENSE10,589 1,332 24,662 4,091 
NET INTEREST INCOME13,332 15,532 41,016 42,232 
Provision for loan credit losses1,331 855 726 1,335 
Provision (recovery) for off balance sheet credit exposures41 — (463)— 
TOTAL PROVISION FOR CREDIT LOSSES1,372 855 263 1,335 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES11,960 14,677 40,753 40,897 
NON-INTEREST INCOME:    
Service charges545 559 1,557 1,563 
Net debt securities losses, available for sale(45)(156)(125)(168)
Net equity securities losses(36)(55)(35)(158)
Bank-owned life insurance170 170 892 501 
Gain on sale of loans257 294 732 905 
Insurance commissions136 109 416 386 
Brokerage commissions142 142 448 500 
Loan broker commissions241 438 728 1,350 
Debit card income320 344 995 1,080 
Other145 238 546 673 
TOTAL NON-INTEREST INCOME1,875 2,083 6,154 6,632 
NON-INTEREST EXPENSE:    
Salaries and employee benefits6,290 6,016 18,778 18,421 
Occupancy784 730 2,422 2,380 
Furniture and equipment867 816 2,503 2,454 
Software amortization237 188 593 660 
Pennsylvania shares tax280 334 807 1,119 
Professional fees719 626 2,313 1,746 
Federal Deposit Insurance Corporation deposit insurance425 260 1,122 690 
Marketing167 151 594 435 
Intangible amortization25 34 92 119 
Other1,378 1,165 4,275 3,723 
TOTAL NON-INTEREST EXPENSE11,172 10,320 33,499 31,747 
INCOME BEFORE INCOME TAX PROVISION2,663 6,440 13,408 15,782 
INCOME TAX PROVISION439 1,190 2,355 2,869 
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS'$2,224 $5,250 $11,053 $12,913 
EARNINGS PER SHARE - BASIC$0.31 $0.74 $1.56 $1.83 
EARNINGS PER SHARE - DILUTED$0.31 $0.74 $1.53 $1.83 
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,072,440 7,051,228 7,064,336 7,060,871 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED7,228,940 7,051,228 7,220,836 7,060,871 
See accompanying notes to the unaudited consolidated financial statements.
4



PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
 Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Net Income$2,224 $5,250 $11,053 $12,913 
Other comprehensive (loss) income:    
Net unrealized loss on available for sale securities(1,480)(6,362)(1,476)(17,254)
Tax effect311 1,336 310 3,623 
Net realized loss on available for sale securities included in net income45 156 125 168 
Tax effect(9)(33)(26)(35)
   Amortization of unrecognized pension loss37 17 111 52 
        Tax effect(8)(3)(23)(11)
Total other comprehensive loss(1,104)(4,889)(979)(13,457)
Comprehensive income (loss)$1,120 $361 $10,074 $(544)
 
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 STOCKTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)SHARESAMOUNT
Balance, June 30, 20237,573,713 $42,077 $54,869 $104,104 $(13,833)$(12,815)$174,402 
Net income2,224 2,224 
Other comprehensive loss(1,104)(1,104)
Stock-based compensation 229 229 
Dividends declared ($0.32 per share)
(2,261)(2,261)
Common shares issued for employee stock purchase plan1,436 8 26 34 
Director Compensation Plan2,341 13 50 63 
Registered at-the-market shares issuance, net proceeds34,411 191 562 753 
Dividend reinvestment plan8,349 46 154 200 
Balance, September 30, 20237,620,250 $42,335 $55,890 $104,067 $(14,937)$(12,815)$174,540 

COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS 		TREASURY STOCKTOTAL
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 compensation236 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 


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 STOCKTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)SHARESAMOUNT
Balance, December 31, 20227,566,810 $42,039 $54,252 $98,147 $(13,958)$(12,815)$167,665 
Cumulative effect of adoption of ASU 2016-131,647 1,647 
Net income   11,053   11,053 
Other comprehensive loss    (979) (979)
Stock-based compensation 715 715 
Dividends declared ($0.96 per share)
   (6,780)  (6,780)
Common shares issued for employee stock purchase plan3,120 17 56    73 
Director Compensation Plan7,560 42 151193 
Registered at-the-market shares issuance, net proceeds34,411 191 562753 
Dividend reinvestment plan8,349 46 154200 
Balance, September 30, 20237,620,250 $42,335 $55,890 $104,067 $(14,937)$(12,815)$174,540 

COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS 		TREASURY STOCKTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)SHARESAMOUNT
Balance, December 31, 20217,550,272 $41,945 $53,795 $89,761 $(1,112)$(12,115)$172,274 
Net income   12,913   12,913 
Other comprehensive loss  (13,457) (13,457)
Stock-based compensation1,004 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 57 183 240 
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 


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)20232022
OPERATING ACTIVITIES:  
Net Income$11,053 $12,913 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization2,469 2,660 
Loss on sale of premises and equipment— 275 
Amortization of intangible assets92 119 
Provision for credit losses263 1,335 
Stock based compensation715 1,004 
Accretion and amortization of investment security discounts and premiums361 932 
Net debt securities losses, available for sale125 168 
Originations of loans held for sale(27,183)(30,644)
Proceeds of loans held for sale27,130 32,789 
Gain on sale of loans(732)(905)
Net equity securities losses35 158 
Security trades payable— (111)
Earnings on bank-owned life insurance(892)(501)
Decrease (increase) in deferred tax asset191 (653)
Other, net570 (905)
Net cash provided by operating activities14,197 18,634 
INVESTING ACTIVITIES:  
Proceeds from sales of available for sale securities24,701 4,151 
Proceeds from calls and maturities of available for sale securities18,824 13,116 
Proceeds from sales of equity securities35 — 
Purchases of available for sale securities(36,356)(57,239)
Net increase in loans(181,784)(168,950)
Acquisition of premises and equipment(396)(263)
Proceeds from the sale of premises and equipment— 137 
Proceeds from the sale of foreclosed assets— 46 
Purchase of bank-owned life insurance(7)(21)
Proceeds from bank-owned life insurance death benefit1,656 2 
Investment in limited partnership— (554)
Proceeds from redemption of regulatory stock32,292 6,692 
Purchases of regulatory stock(38,410)(6,700)
Net cash used for investing activities(179,445)(209,583)
FINANCING ACTIVITIES:  
Net increase (decrease) in interest-bearing deposits58,363 (73,943)
Net (decrease) increase in noninterest-bearing deposits(47,556)43,043 
Proceeds from long-term borrowings140,000 — 
Repayment of long-term borrowings(25,000)(23,000)
Net increase in short-term borrowings40,397 25,154 
Finance lease principal payments(138)(134)
Dividends paid(6,780)(6,778)
Issuance of common stock1,219 307 
Purchases of treasury stock— (700)
Net cash provided by (used for) financing activities160,505 (36,051)
NET DECREASE IN CASH AND CASH EQUIVALENTS(4,743)(227,000)
CASH AND CASH EQUIVALENTS, BEGINNING40,333 263,862 
CASH AND CASH EQUIVALENTS, ENDING$35,590 $36,862 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
Interest paid$22,549 $4,315 
Cash settlement of options— 1,074 
Income taxes paid2,950 2,371 
Non-cash investing and financing activities:
Transfer of loans to foreclosed real estate770 97 
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, 2022.

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

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

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

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

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

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

Loans Evaluated Collectively: Management believes that internal credit ratings are the most relevant credit quality indicator for these types of loans, however; the Company does not assign internal credit ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, and consumer automobile loans. For these loans, the most relevant credit quality indicator is delinquency status and management evaluates credit quality based on the aging status of the loan. In order to determine the ACL:
•
Loans aggregated into pools based on similar risk characteristics.
•
The probability of default "PD" and loss given default rate "LGD" CECL model components are determined based on loss estimates driven by historical experience at the input level.
•
The PD model component uses "through the economic cycle transition" matrices based on the Company's historical loan and transaction data across each pool of loans.
9

•
The LGD model component calculates a lifetime LGD estimate across each pool of loans utilizing a nonparametric loss curve modeling approach.
•
Reasonable and supportable forecasts are incorporated into the PD model component.
•
Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate.
•
A constant prepayment rate is calculated for each loan pool in the CECL model.
Loans Evaluated Individually: Loans evaluated individually for expected credit losses include loans determined to be collateral-dependant.

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

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

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

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

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

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

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

10

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

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

Note 2.  Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component shown net of tax and parenthesis indicating debits, as of September 30, 2023 and 2022 were as follows:
Three Months Ended September 30, 2023Three Months Ended September 30, 2022
(In Thousands)Net Unrealized (Loss) Gain on Available
for Sale Securities		Defined
Benefit 
Plan		TotalNet Unrealized (Loss) Gain on Available
for Sale Securities		Defined
Benefit 
Plan		Total
Beginning balance$(9,753)$(4,080)$(13,833)$(6,222)$(3,458)$(9,680)
Other comprehensive loss before reclassifications(1,169)— (1,169)(5,026)— (5,026)
Amounts reclassified from accumulated other comprehensive gain36 29 65 123 14 137 
Net current-period other comprehensive (loss) income(1,133)29 (1,104)(4,903)14 (4,889)
Ending balance$(10,886)$(4,051)$(14,937)$(11,125)$(3,444)$(14,569)

11

 Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
(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$(9,819)$(4,139)$(13,958)$2,373 $(3,485)$(1,112)
Other comprehensive loss before reclassifications(1,166)— (1,166)(13,631)— (13,631)
Amounts reclassified from accumulated other comprehensive gain99 88 187 133 41 174 
Net current-period other comprehensive (loss) income(1,067)88 (979)(13,498)41 (13,457)
Ending balance$(10,886)$(4,051)$(14,937)$(11,125)$(3,444)$(14,569)

The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of September 30, 2023 and 2022 were as follows:
Details about Accumulated Other Comprehensive Loss ComponentsAmount Reclassified from Accumulated Other Comprehensive LossAffected Line Item
 in the Consolidated 
Statement of Income
Three Months Ended September 30, 2023Three Months Ended September 30, 2022
Net unrealized loss on available for sale securities$(45)$(156)Net debt securities losses, available for sale
Income tax effect9 33 Income tax provision
Total reclassifications for the period$(36)$(123)
Net unrecognized pension costs$(37)$(17)Other non-interest expense
Income tax effect8 3 Income tax provision
Total reclassifications for the period$(29)$(14)
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, 2023Nine months ended September 30, 2022
Net unrealized losses on available for sale securities$(125)$(168)Net debt securities losses, available for sale
Income tax effect26 35 Income tax provision
Total reclassifications for the period$(99)$(133)
Net unrecognized pension costs$(111)$(52)Other non-interest expense
Income tax effect23 11 Income tax provision
Total reclassifications for the period$(88)$(41)
Note 3.  Recent Accounting Pronouncements

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

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

As a result of adopting this standard, the Company recorded a decrease in its allowance effective January 1, 2023, of $2,086,000. As a result, the Company recorded a decrease in its loan allowance as of January 1, 2023, of $3,789,000; as well as
12

an increase in its allowance for off-balance sheet credit exposures of $1,703,000. These estimates are subject to further refinements based on ongoing evaluations of our model, methodologies, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.

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

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

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance 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. This Update did not have a significant impact on the Company’s financial statements.

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

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

13

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This amendment clarifies the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. It also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The amendments will be applied prospectively, with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

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

In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement-Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation-Stock Compensation (Topic 718), which amends or supersedes various SEC paragraphs within the Codification to conform to past SEC announcements and guidance issued by the SEC. The ASU does not provide any new guidance so there is no transition or effective date associated with it. This ASU did not have a significant impact on the Company’s financial statements.

In August 2023, the FASB issued ASU 2023-04, Liabilities (Topic 405), which adds various SEC paragraphs to the Codification to reflect guidance included in SEC Staff Accounting Bulletin 121 on safeguarding crypto assets. The standard does not provide any new guidance so there is no transition or effective date associated with it. This ASU did not have a significant impact on the Company’s financial statements.


Note 4. Per Share Data

There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 1,000,000 stock options, with an average exercise price of $25.55, outstanding on September 30, 2023. A portion of these options were included, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $25.08 for the periods being greater than the strike price. There were a total of 917,000 stock options, with an average exercise price of $25.35 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 $23.78 being less than the strike price for the period ending September 30, 2022.
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Weighted average common shares issued7,582,665 7,561,453 7,574,561 7,557,250 
Weighted average treasury stock shares(510,225)(510,225)(510,225)(496,379)
Weighted average common shares outstanding - basic7,072,440 7,051,228 7,064,336 7,060,871 
Dilutive effect of outstanding stock options156,500 — 156,500 — 
Weighted average common shares outstanding - diluted7,228,940 7,051,228 7,220,836 7,060,871 








 
14

Note 5. Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at September 30, 2023 and December 31, 2022 are as follows:
 September 30, 2023
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
U.S. Government and agency securities$4,001 $— $(137)$3,864 
Mortgage-backed securities12,101 — (705)11,396 
State and political securities129,024 — (9,177)119,847 
Other debt securities53,321 — (3,761)49,560 
Total debt securities$198,447 $— $(13,780)$184,667 
Investment equity securities:
Equity securities$1,300 $— $(228)$1,072 
 December 31, 2022
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
U.S. Government and agency securities$3,002 $— $(106)$2,896 
Mortgage-backed securities1,496 — (214)1,282 
State and political securities151,426 157 (8,774)142,809 
Other debt securities50,178 58 (3,550)46,686 
Total debt securities$206,102 $215 $(12,644)$193,673 
Investment equity securities:
Equity securities$1,350 $— $(208)$1,142 

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, 2023 and December 31, 2022.
 September 30, 2023
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
U.S. Government and agency securities$967 $(33)$2,897 $(104)$3,864 $(137)
Mortgage-backed securities10,263 (454)1,125 (251)11,388 (705)
State and political securities19,050 (1,013)97,522 (8,164)116,572 (9,177)
Other debt securities10,596 (348)35,841 (3,413)46,437 (3,761)
Total debt securities$40,876 $(1,848)$137,385 $(11,932)$178,261 $(13,780)
15

 December 31, 2022
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
U.S. Government and agency securities$2,896 $(106)$— $— $2,896 $(106)
Mortgage-backed securities— — 1,282 (214)1,282 (214)
State and political securities95,444 (4,797)36,283 (3,977)131,727 (8,774)
Other debt securities16,896 (664)25,144 (2,886)42,040 (3,550)
Total debt securities$115,236 $(5,567)$62,709 $(7,077)$177,945 $(12,644)
 
At September 30, 2023, there were a total of 43 securities in a continuous unrealized loss position for less than twelve months and 184 individual securities that were in a continuous unrealized loss position for twelve months or greater. No credit losses occurred for the period ended September 30, 2023.

The Company reviews its position quarterly and has determined that, at September 30, 2023, the declines outlined in the above table represent temporary non-credit declines and the Company does not intend to sell, and does not believe it will be required to sell, these securities before recovery of their cost basis, which may be at maturity.  The Company has concluded that the unrealized losses disclosed above are not credit-related but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at September 30, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands)Amortized CostFair Value
Due in one year or less$39,163 $38,246 
Due after one year to five years88,544 82,446 
Due after five years to ten years65,437 59,047 
Due after ten years5,303 4,928 
Total$198,447 $184,667 

Total gross proceeds from sales of debt securities available for sale for the nine months ended September 30, 2023 was $24,701,000, compared to $4,151,000 for the corresponding 2022 period.

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)2023202220232022
Available for sale (AFS):
Gross realized gains:    
State and political securities$1 $— $146 $14 
Other debt securities— — — — 
Total gross realized gains$1 $— $146 $14 
Gross realized losses:    
State and political securities$(46)$(156)$(271)$(182)

Investment securities with a carrying value of approximately $114,938,000 and $154,946,000 at September 30, 2023 and December 31, 2022, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

16

At September 30, 2023 and December 31, 2022, we had $1,072,000 and $1,142,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Net losses recognized in equity securities during the period$(37)$(55)$(36)$(158)
Less: Net losses realized on the sale of equity securities during the period(1)— (1)— 
Unrealized losses recognized in equity securities held at reporting date$(36)$(55)$(35)$(158)


Note 6. Loans

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

The following table presents the related aging categories of loans, by class, as of September 30, 2023 and December 31, 2022:
 September 30, 2023
 Past DuePast Due 90
 30 To 89Past Due 90Days Or More
(In Thousands)DaysDays Or MoreCurrent& Still AccruingTotal
Commercial, financial, and agricultural$255 $33 $211,185 $8 $211,473 
Real estate mortgage: 
Residential5,013 1,151 767,618 1,434 773,782 
Commercial775 92 524,799 59 525,666 
Construction472 32 55,329 — 55,833 
Consumer automobile loans1,121 144 238,503 141 239,768 
Other consumer installment loans157 4 10,660 36 10,821 
 $7,793 $1,456 $1,808,094 $1,678 $1,817,343 
Net deferred loan fees and discounts 1,118 
Allowance for credit losses (12,890)
Loans, net $1,805,571 
17

 December 31, 2022
 Past DuePast Due 90  
 30 To 89Days Or MoreNon- 
(In Thousands)Days& Still AccruingAccrualCurrentTotal
Commercial, financial, and agricultural$94 $— $432 $189,935 $190,461 
Real estate mortgage:     
Residential5,472 1,120 524 701,093 708,209 
Commercial2,564 60 2,659 495,349 500,632 
Construction511 — — 42,797 43,308 
Consumer automobile loans2,089 80 — 183,943 186,112 
Other consumer installment loans152 15 — 10,194 10,361 
 $10,882 $1,275 $3,615 $1,623,311 1,639,083 
Net deferred loan fees and discounts   648 
Allowance for loan losses   (15,637)
Loans, net   $1,624,094 

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

The following table presents the components of the ACL as of September 30, 2023:
September 30,
(In Thousands)2023
ACL - loans$12,890 
ACL - off balance sheet credit exposure1,240 
Total ACL$14,130 
 
Non-Accrual Loans
 September 30, 2023December 31, 2022
 Non-accrual Loans
(In Thousands)With a Related ACLWithout a Related ACLTotalTotal Non-accrual loans
Commercial, financial, and agricultural$— $543 $543 $432 
Real estate mortgage:
Residential24 265 289 524 
Commercial947 226 1,173 2,659 
Construction— — — — 
Consumer automobile— — — — 
Other consumer installment loans— — — — 
$971 $1,034 $2,005 $3,615 

Total interest income recorded on non-accrual loans at September 30, 2023 totaled $104,000.


18

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


The following table presents outstanding loan balances of collateral-dependent loans by class as of September 30, 2023:

(In Thousands)Real estateUnsecured*Total
Real estate mortgage:
Residential$238 $— $238 
Commercial92 332 424 
Total$330 $332 $662 
* Loan considered unsecured due to lien position on property









19

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:
 Three Months Ended September 30,
 2022
(In Thousands)Average
Investment in
Impaired Loans		Interest Income
Recognized on an
Accrual Basis on
Impaired Loans		Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural$711 $5 $— 
Real estate mortgage:   
Residential4,586 47 — 
Commercial7,227 50 — 
Construction— — — 
Consumer automobile7 — — 
Other consumer installment loans10 — — 
 $12,541 $102 $— 
 Nine Months Ended September 30,
 2022
(In Thousands)Average
Investment in
Impaired Loans		Interest Income
Recognized on an
Accrual Basis on
Impaired Loans		Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural$782 $15 $— 
Real estate mortgage:   
Residential4,765 141 — 
Commercial7,492 151 — 
Construction42 1 — 
Consumer automobile3 1 — 
Other consumer installment loans15 — — 
$13,099 $309 $— 

Loan Modifications

On January 1, 2023, the Corporation adopted ASU 2022-02. Loan modifications reported below do not include modifications with insignificant payment delays. ASU 2022-02 lists the following factors when considering if the loan modification has insignificant payment delays: (1) the amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due, and (2) the delay in timing of the restructured payment period is insignificant relative to the frequency of payments due under the debt, the debt’s original contractual maturity or the debt’s original expected duration.

The ACL incorporates an estimate of lifetime expected credit losses and is recorded upon asset origination or acquisition. The starting point for the estimate of the ACL is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Corporation uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

There were no loan modifications completed during the three and nine months ended September 30, 2023.

There were no loan modifications considered to be TDRs completed during the three and nine months ended September 30, 2022.

20

There were no loan modifications made during the twelve months prior to September 30, 2023 that defaulted during the nine months ended September 30, 2023. There were no loan modifications considered to be a TDR made during the twelve months previous to September 30, 2022 that defaulted during the nine months ended September 30, 2022.

Loans considered modifications amounted to $5,233,000 and $7,468,000 as of September 30, 2023 and December 31, 2022, respectively.

The amount of foreclosed residential real estate held at September 30, 2023 and December 31, 2022, totaled $588,000 and $950,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 2023 and December 31, 2022, totaled $328,000 and $890,000, respectively.

Internal Credit Ratings

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

To help ensure that credit ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 2023 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.



























21

The following table presents the credit quality categories identified above as of September 30, 2023 and December 31, 2022:
September 30, 2023
(In Thousands)20232022202120202019PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial, financial, and agricultural
Pass$34,288 $53,560 $42,363 $33,239 $9,224 $6,756 $29,212 $114 $208,756 
Special Mention— 201 42 — — 168 223 — 634 
Substandard or Lower— — — 85 — 755 490 753 2,083 
$34,288 $53,761 $42,405 $33,324 $9,224 $7,679 $29,925 $867 $211,473 
 
Current period gross write offs$— $— $— $— $— $— $— $— $— 
Real estate mortgage:
Residential
Pass$117,468 $218,678 $120,137 $70,364 $45,930 $17,038 $51,814 $129,802 $771,231 
Special Mention— 409 274 — — — — — 683 
Substandard or Lower— — — — — 1,798 — 70 1,868 
$117,468 $219,087 $120,411 $70,364 $45,930 $18,836 $51,814 $129,872 $773,782 
Current period gross write offs$— $— $— $— $— $9 $72 $— $81 
Commercial
Pass$43,594 $105,217 $134,960 $50,535 $25,913 $147,471 $10,827 $691 $519,208 
Special Mention— — 1,065 — — 48 — — 1,113 
Substandard or Lower— — — — 63 5,282 — — 5,345 
$43,594 $105,217 $136,025 $50,535 $25,976 $152,801 $10,827 $691 $525,666 
Current period gross write offs$59 $— $— $— $— $3 $— $— $62 
Construction
Pass$21,093 $13,072 $15,045 $1,417 $402 $4,452 $261 $— $55,742 
Special Mention— — — — — — — — — 
Substandard or Lower— — — — — 91 — — 91
$21,093 $13,072 $15,045 $1,417 $402 $4,543 $261 $— $55,833 
Current period gross write offs$— $— $— $— $— $— $— $— $— 
Consumer Automobile
Pass$101,214 $85,276 $21,969 $17,486 $8,716 $5,107 $— $— $239,768 
Special Mention— — — — — — — — — 
Substandard or Lower— — — — — — — — — 
$101,214 $85,276 $21,969 $17,486 $8,716 $5,107 $— $— $239,768 
Current period gross write offs$— $247 $136 $112 $6 $7 $— $— $508 
Installment loans to individuals
Pass$2,609 $2,406 $1,291 $558 $427 $3,486 $— $44 $10,821 
Special Mention— — — — — — — — — 
Substandard or Lower— — — — — — — — — 
$2,609 $2,406 $1,291 $558 $427 $3,486 $— $44 $10,821 
Current period gross write offs$179 $28 $20 $6 $6 $19 $13 $11 $282 

22

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

Allowance for Credit Losses

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

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

Historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualitative factors.  A historical charge-off factor is calculated utilizing the charge-off and recovery data over the past ten years.  Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

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

















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Activity in the allowance is presented for the three and nine months ended September 30, 2023 and 2022:

 Three Months Ended September 30, 2023
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$3,019 $1,078 $4,191 $178 $2,446 $680 $— $11,592 
Charge-offs— — — — (130)(86)— (216)
Recoveries106 22 1 — 27 27 — 183 
Provision788 68 131 20 241 83 — 1,331 
Ending Balance$3,913 $1,168 $4,323 $198 $2,584 $704 $— $12,890 
 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 

 
tNine Months Ended September 30, 2023
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,914 $5,061 $6,110 $188 $1,617 $109 $638 $15,637 
Impact of adopting ASC 3262,656 (3,893)(2,660)(96)240 602 (638)(3,789)
Charge-offs— (81)(62)— (507)(283)— (933)
Recoveries1,067 25 26 — 66 65 — 1,249 
Provision(1,724)56 909 106 1,168 211 — 726 
Ending Balance$3,913 $1,168 $4,323 $198 $2,584 $704 $— $12,890 
 Nine 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 

The shift in allocation and the changes in the provision for credit losses are primarily due to changes in the credit metrics within the loan portfolio coupled with the adoption of CECL on January 1, 2023. The decrease in provision for consumer automobile loans for the three month period was driven by increased net recoveries that offset the impact of increased loan volume, while the increase in provision for the nine month period ended September 30, 2023 was driven by loan volume coupled with increased net charge-offs. The increase in provision for commercial, financial, and agricultural for the three month period was primarily the result of loan volume, while the decrease in provision for the nine month period ended September 30, 2023 was the result of improving credit metrics coupled with a large recovery during the three month period ended June 30, 2023 which effected the historical loss rate calculations. The provision for commercial real estate remained steady for the three month period and increased for the nine month period ended September 30, 2023 primarily due to growth within this segment of the loan portfolio.

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.
24

The Company has a concentration of the following to gross loans at September 30, 2023 and 2022: 
 September 30,
 20232022
Owners of residential rental properties18.99 %19.95 %
Owners of commercial rental properties14.62 %16.09 %


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


Note 7. Net Periodic Benefit Cost-Defined Benefit Plans

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2022.

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, 2023 and 2022, respectively:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Interest cost$198 $138 $594 $414 
Expected return on plan assets(326)(412)(978)(1,237)
Amortization of net loss37 17 111 52 
Net periodic benefit$(91)$(257)$(273)$(771)

Employer Contributions

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2022, that it does not expect to contribute to its defined benefit plan in 2023.  As of September 30, 2023, there were no contributions made to the pension plan.







25


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, 2023 and 2022, there were 3,120 and 2,960 shares issued under the Plan, respectively, for total proceeds of $73,000 and $67,000.

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, 2023, the Company has issued a total of 42,191 shares of common stock to non-employee directors under the Director Plan in lieu of otherwise payable cash compensation with 7,560 and 9,968 shares issued, respectively, with an associated expense of $193,000 and $240,000 during the nine months ended September 30, 2023 and 2022.

Note 9. Off-Balance Sheet Risk

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

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

Financial instruments whose contract amounts represent credit risk are as follows at September 30, 2023 and December 31, 2022:
(In Thousands)September 30, 2023December 31, 2022
Commitments to extend credit$161,270 $169,365 
Standby letters of credit9,467 9,915 
Credit exposure from the sale of assets with recourse7,274 7,358 
$178,011 $186,638 
Allowance for credit losses$1,240 $143 

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

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





26


Note 10. Fair Value Measurements

The following disclosures show the hierarchical 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, 2023 and December 31, 2022, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 September 30, 2023
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
U.S. Government and agency securities$— $3,864 $— $3,864 
Mortgage-backed securities— 11,396 — 11,396 
State and political securities— 119,847 — 119,847 
Other debt securities— 49,560 — 49,560 
Investment equity securities:
  Equity securities1,072 — — 1,072 

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

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, 2023 and December 31, 2022, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 
 September 30, 2023
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Collateral dependent loans$— $— $331 $331 
Other real estate owned— — 853 853 
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 December 31, 2022
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$— $— $1,923 $1,923 
Other real estate owned— — 83 83 

The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of September 30, 2023 and December 31, 2022: 
 September 30, 2023
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Collateral dependent loans$331 
Appraisal of collateral (1)
Appraisal adjustments (1)
(15)% to (24)%
(20)%
Other real estate owned$853 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
 December 31, 2022
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans$1,923 
Appraisal of collateral (1)
Appraisal adjustments (1)
0% to (34)%
(14)%
Other real estate owned$83 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

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

Note 11. Fair Value of Financial Instruments

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

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.




28

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, 2023 and December 31, 2022:
 CarryingFairFair Value Measurements at September 30, 2023
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Loans held for sale (1)$4,083 $4,083 $4,083 $— $— 
Loans, net1,805,571 1,761,944 — — 1,761,944 
Financial liabilities:     
Time deposits & brokered deposits356,244 350,456 — — 350,456 
Short-term borrowings 193,746 193,746 193,746 — — 
Long-term borrowings217,645 238,977 — — 238,977 
(1) The financial instrument is carried at cost at, September 30, 2023 which approximate the fair value of the instruments
 CarryingFairFair Value Measurements at December 31, 2022
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Loans held for sale (1)$3,298 $3,298 $3,298 $— $— 
Loans, net1,624,094 1,594,073 — — 1,594,073 
Financial liabilities:     
Time deposits & brokered deposits146,282 137,559 — — 137,559 
Short-term borrowings153,349 153,349 153,349 — — 
Long-term borrowings102,783 99,118 — — 99,118 
(1) The financial instrument is carried at cost at, December 31, 2022 which approximate the fair value of the instruments

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

Note 12. Stock Options

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

As of January 1, 2023, the Company had a total of 914,000 stock options outstanding. During the nine months ended as of September 30, 2023, the Company issued 89,000 stock options with a strike price of $27.77 to a group of employees. The options granted in 2023 all expire ten years from the grant date. Of the 89,000 grants awarded in 2023, 59,500 of the options vest in three years while the 29,500 remaining options vest in five years.















29

Stock options outstanding as of September 30, 2023 are presented below:

Stock Options Granted
DateSharesForfeitedCash SettlementOutstandingStrike PriceVesting PeriodExpiration
January 20, 202359,500 — — 59,500 $27.77 3 years10 years
January 20, 202329,500 — — 29,500 27.77 5 years10 years
January 18, 2022156,000 — — 156,000 24.10 3 years10 years
January 18, 202278,000 — — 78,000 24.10 5 years10 years
April 9, 2021156,500 — — 156,500 24.23 3 years10 years
April 9, 202178,000 — — 78,000 24.23 5 years10 years
March 11, 2020119,300 — — 119,300 25.34 3 years10 years
March 11, 2020119,200 — — 119,200 25.34 5 years10 years
March 15, 2019120,900 (19,800)— 101,100 28.01 3 years10 years
March 15, 2019119,100 (19,200)— 99,900 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 for the nine months ended September 30, 2023 is presented below:
September 30, 2023
SharesWeighted Average Exercise Price
Outstanding, beginning of year914,000 $25.34 
Granted89,000 27.77 
Forfeited(3,000)28.01 
Expired— — 
Outstanding, end of period1,000,000 $25.55 
Exercisable, end of period223,400 $26.58 

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

The fair value of stock options is estimated using the Black-Scholes option pricing model. The following is a summary of the assumptions used in this model for stock options granted for the nine months ended September 30, 2023:

Nine months ended September 30,
2023
Risk-free interest rate3.76 %
Expected volatility31 %
Expected Annual dividend$1.28 
Expected life6.84 years
Weighted average grant date fair value per option$6.11 

Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense related to stock options was $229,000 and $715,000 for the three and nine months ended September 30, 2023 compared to $236,000 and $1,004,000 for the same periods of 2022. As of September 30, 2023, a total of 223,400 stock options were exercisable and the weighted average years to expiration of these options was 5.94 years. Total unrecognized compensation cost for non-vested options was $1,437,000 and will be recognized over their weighted average remaining vesting period of 1.08 years.
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Note 13.  Reclassification of Comparative Amounts

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity
31

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 effects of external events, including natural disasters, national or global health emergencies, and events of armed conflict in other countries; or (vi) the effect of changes in the business cycle and downturns in the local, regional or national economies, including the effects of inflation,; and (vii) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and in other filings made by the Company under the Securities Exchange Act of 1934.

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

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

EARNINGS SUMMARY

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

Summary Results

Net income for the three and nine months ended September 30, 2023 was $2.2 million and $11.1 million, compared to $5.3 million and $12.9 million for the same periods of 2022. Results for the three and nine months ended September 30, 2023 compared to 2022 were impacted by a decrease in net interest income of $2.2 million and $1.2 million as interest expense increased significantly due to the velocity and magnitude of the rate increases enacted by the Federal Open Market Committee ("FOMC"). In addition, results were impacted by a decrease in after-tax securities losses of $77,000 (from a loss of $167,000 to a loss of $90,000) for the three month period and a decrease in after-tax securities losses of $106,000 (from a loss of $258,000 to a loss of $152,000) for the nine month period. Bank-owned life insurance income increased due to a gain on death benefit of $380,000 during the nine months ended September 30, 2023, while an after-tax loss of $201,000 related to a branch closure negatively impacted the nine months ended September 30, 2022. The provision for credit losses increased $517,000 for the three months ended September 30, 2023 and decreased $1.1 million for the nine months ended September 30, 2023 due to a provision of $1.4 million and $263,000, respectively, for the 2023 periods compared to a provision of $835,000 and $1.3 million for the 2022 periods. The decrease for the nine month periods was due primarily to a recovery on a commercial loan during the second quarter of 2023. The increase in the provision for credit losses for the 2023 three month period was due primarily to loan portfolio growth as loan portfolio credit metrics continue to improve and loan net charge-offs remain at a low level. Basic earnings per share for the three and nine months ended September 30, 2023 were $0.31 and $1.56, while the diluted earnings per share were $0.31 and $1.53 for the periods. Basic and diluted earnings per share for the three and nine months ended September 30, 2022 were $0.74 and $1.83. Annualized return on average assets was 0.41% for three months ended September 30, 2023, compared to 1.09% for the corresponding period of 2022. Annualized return on average assets was 0.70% for the nine months ended September 30, 2023, compared to 0.89% for the corresponding period of 2022. Annualized return on average equity was 5.06% for the three months ended September 30, 2023, compared to 12.61% for the corresponding period of 2022. Annualized return on average equity was 8.58% for the nine months ended September 30, 2023, compared to 10.48% for the corresponding period of 2022. Net income from core operations (“core earnings”), which is a non-generally accepted accounting principles (GAAP) measure of net income excluding net securities gains or losses, was $2.3 million and $11.2 million for the three and nine months ended September 30, 2023 compared to $5.4 million and $13.2 million for the same periods of 2022. Basic core earnings per share for the three and nine months ended September 30, 2023 was $0.32 and $1.58, while the diluted core earnings per share was $0.32 and $1.55, compared to $0.77 and $1.87 basic and diluted core earnings per share for the same periods of 2022.

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

Reconciliation of GAAP and Non-GAAP Financial Measures
(Dollars in Thousands, Except Per Share Data)Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
GAAP net income$2,224 $5,250 $11,053 $12,913 
Net securities losses, net of tax64 167 126 258 
Non-GAAP core earnings$2,288 $5,417 $11,179 $13,171 
33

Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
GAAP Return on average assets (ROA)0.41 %1.09 %0.70 %0.89 %
Net securities losses, net of tax0.01 %0.03 %80.01 %0.02 %
Non-GAAP core ROA0.42 %1.12 %0.71 %0.91 %
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
GAAP Return on average equity (ROE)5.06 %12.61 %8.58 %10.48 %
Net securities losses, net of tax0.14 %0.41 %0.09 %0.21 %
Non-GAAP core ROE.5.20 %13.02 %8.67 %10.69 %
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
GAAP Basic earnings per share (EPS)$0.31 $0.74 $1.56 $1.83 
Net securities losses, net of tax0.01 0.03 0.02 0.04 
Non-GAAP core operating EPS$0.32 $0.77 $1.58 $1.87 
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
GAAP Diluted EPS$0.31 $0.74 $1.53 $1.83 
Net securities losses, net of tax0.01 0.03 0.02 0.04 
Non-GAAP diluted core EPS$0.32 $0.77 $1.55 $1.87 
 
Interest and Dividend Income

Interest and dividend income for the three and nine months ended September 30, 2023 increased $7,057,000 and $19,355,00 compared to the same periods of 2022. The increase in loan portfolio income was due to an increase in the average loan portfolio balance coupled with an increase in average rate earned on the portfolio.  Investment securities income has been impacted primarily by an increase in the average rate earned on the portfolio as lower yielding legacy investments matured. The increase in dividend and other interest income is due primarily to an increase in dividends received on FHLB restricted stock.

Interest and dividend income composition for the three and nine months ended September 30, 2023 and 2022 was as follows:
 Three Months Ended
 September 30, 2023September 30, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$21,720 90.80 %$15,051 89.25 %$6,669 44.31 %
Investment securities:      
Taxable1,365 5.71 949 5.63 416 43.84 
Tax-exempt114 0.48 236 1.40 (122)(51.69)
Dividend and other interest income722 3.01 628 3.72 94 14.97 
Total interest and dividend income$23,921 100.00 %$16,864 100.00 %$7,057 41.85 %
34

 Nine Months Ended
 September 30, 2023September 30, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$59,571 90.70 %$41,709 90.04 %$17,862 42.83 %
Investment securities:      
Taxable3,870 5.89 2,550 5.50 1,320 51.76 
Tax-exempt410 0.62 594 1.28 (184)(30.98)
Dividend and other interest income1,827 2.79 1,470 3.18 357 24.29 
Total interest and dividend income$65,678 100.00 %$46,323 100.00 %$19,355 41.78 %

Interest Expense

Interest expense for the three and nine months ended September 30, 2023 increased $9,257,000 and $20,571,000 compared to the same periods of 2022. Interest-bearing deposit interest expense increased significantly due a time deposit gathering campaign that generated funding for the increase in the loan portfolio. In addition, competition for deposits along with the impact of the rising rate environment contributed to the increase in deposit interest expense. Brokered deposits have also been utilized as a funding source to supplement in market deposit gathering efforts. Short and long-term borrowing interest expenses increased as borrowings were utilized to fund a portion of the growth in the loan portfolio.

Interest expense composition for the three and nine months ended September 30, 2023 and 2022 was as follows:
 Three Months Ended
 September 30, 2023September 30, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$6,463 61.04 %$693 52.03 %$5,770 832.61 %
Short-term borrowings2,412 22.78 26 1.95 2,386 n/m
Long-term borrowings1,714 16.18 613 46.02 1,101 179.61 
Total interest expense$10,589 100.00 %$1,332 100.00 %$9,257 694.97 %
 Nine Months Ended
 September 30, 2023September 30, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$14,686 59.55 %$2,191 53.56 %$12,495 570.29 %
Short-term borrowings6,084 24.67 29 0.71 6,055 n/m
Long-term borrowings3,892 15.78 1,871 45.73 2,021 108.02 
Total interest expense$24,662 100.00 %$4,091 100.00 %$20,571 502.84 %

Net Interest Margin

The net interest margin for the three and nine months ended September 30, 2023 was 2.65% and 2.82%, compared to 3.47% and 3.17% for the corresponding periods of 2022. The decrease in the net interest margin for the three and nine month periods was driven by an increase in the rate paid on interest-bearing liabilities of 239 and 189 basis points ("bps"), respectively. The FOMC rate increases during 2022 and 2023 contributed to the increases in rate paid on interest-bearing liabilities as the rate paid on short-term borrowings increased 429 bps and 467 bps for the three and nine month periods ended September 30, 2023 compared to the same periods of 2022. Short-term borrowings increased in volume and rate paid as this funding source was utilized to provide funding for the growth in the loan portfolio, resulting in an increase of $2.4 million and $6.1 million in expense for the three and nine month periods ended September 30, 2023 compared to the same periods of 2022. The rate paid on interest-bearing deposits increased 207 and 154 bps for the three and nine month periods ended September 30, 2023 compared to the corresponding periods of 2022 due to the FOMC rate actions and an increase in competition for deposits. The rates paid on time deposits significantly contributed to the increase in funding costs as rates paid for the three and nine month periods ended September 30, 2023 compared to the same periods of 2022 increased 328 bps and 259 bps, respectively, as deposit gathering campaigns initiated in the latter part of 2022 continued throughout 2023. In addition, the rate paid on brokered deposits increased 384 bps and 328 bps for the three and nine months ended September 30, 2023 compared to the same periods of 2022. The average balance of brokered deposits increased $97,366,000 and $50,212,000 over the three and nine month periods as they have been utilized to assist with the funding of the loan portfolio growth. Partially offsetting the
35

increase in funding cost was an increase in the yield on interest-earning assets and growth in the average balance of the earning asset portfolio compared to the same periods in 2022. The average loan portfolio balance increased $276.8 million and $278.2 million for the three and nine month periods, respectively, as the average yield on the portfolio increased 87 and 76 bps for the same periods. The three and nine month periods ended September 30, 2023 were impacted by an increase of 113 and 101 bps in the yield earned on the securities portfolio as legacy securities matured with the funds reinvested at higher rates.

The following is a schedule of average balances and associated yields for the three and nine months ended September 30, 2023 and 2022:
 AVERAGE BALANCES AND INTEREST RATES
 Three Months Ended September 30, 2023Three Months Ended September 30, 2022
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)
$68,243 $462 2.69 %$58,735 $394 2.66 %
All other loans1,730,669 21,355 4.90 %1,463,330 14,740 4.00 %
Total loans (2)
1,798,912 21,817 4.81 %1,522,065 15,134 3.94 %
Federal funds sold— — — %33,641 218 2.57 %
Taxable securities193,019 1,945 4.09 %159,721 1,158 2.94 %
Tax-exempt securities (3)
20,777 144 2.81 %49,177 299 2.47 %
Total securities213,796 2,089 3.96 %208,898 1,457 2.83 %
Interest-bearing balances in other financial institutions11,868 142 4.75 %34,202 201 2.33 %
Total interest-earning assets2,024,576 24,048 4.72 %1,798,806 17,010 3.76 %
Other assets131,451   130,576   
Total assets$2,156,027   $1,929,382   
Liabilities and shareholders’ equity:      
Savings$225,357 181 0.32 %$249,083 26 0.04 %
Super Now deposits244,387 1,174 1.91 %405,173 287 0.28 %
Money market deposits294,006 1,862 2.51 %287,660 200 0.28 %
Time deposits342,450 3,246 3.76 %148,968 180 0.48 %
Total interest-bearing deposits1,106,200 6,463 2.32 %1,090,884 693 0.25 %
Short-term borrowings173,364 2,412 5.52 %8,062 26 1.23 %
Long-term borrowings204,901 1,714 3.32 %109,269 613 2.23 %
Total borrowings378,265 4,126 4.33 %117,331 639 2.16 %
Total interest-bearing liabilities1,484,465 10,589 2.83 %1,208,215 1,332 0.44 %
Demand deposits471,494   533,681   
Other liabilities24,193   21,008   
Shareholders’ equity175,875   166,478   
Total liabilities and shareholders’ equity$2,156,027   $1,929,382   
Interest rate spread (3)
  1.89 %  3.32 %
Net interest income/margin (3)
 $13,459 2.65 % $15,678 3.47 %
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.

36

 AVERAGE BALANCES AND INTEREST RATES
 Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)$66,372 $1,371 2.76 %$53,269 $1,033 2.59 %
All other loans1,668,596 58,488 4.69 %1,403,504 40,893 3.90 %
Total loans (2)1,734,968 59,859 4.61 %1,456,773 41,926 3.85 %
Federal funds sold— — — %43,938 465 1.41 %
Taxable securities188,477 5,331 3.78 %152,937 3,126 2.76 %
Tax-exempt securities (3)
25,837 519 2.69 %45,357 752 2.24 %
Total securities214,314 5,850 3.65 %198,294 3,878 2.64 %
Interest-bearing balances in other financial institutions10,619 366 4.61 %97,520 429 0.59 %
Total interest-earning assets1,959,901 66,075 4.41 %1,796,525 46,698 3.48 %
Other assets132,133   129,048   
Total assets$2,092,034  $1,925,573   
Liabilities and shareholders’ equity:    
Savings$233,784 456 0.26 %$246,063 72 0.04 %
Super Now deposits293,636 3,026 1.38 %388,149 721 0.25 %
Money market deposits292,490 4,807 2.20 %296,998 596 0.27 %
Time deposits264,855 6,397 3.23 %167,876 802 0.64 %
Total interest-bearing deposits1,084,765 14,686 1.81 %1,099,086 2,191 0.27 %
Short-term borrowings155,136 6,084 5.26 %6,308 29 0.59 %
Long-term borrowings169,276 3,892 3.07 %112,457 1,871 2.22 %
Total borrowings324,412 9,976 4.12 %118,765 1,900 2.14 %
Total interest-bearing liabilities1,409,177 24,662 2.34 %1,217,851 4,091 0.45 %
Demand deposits484,662   519,599   
Other liabilities26,334   23,814   
Shareholders’ equity171,861   164,309   
Total liabilities and shareholders’ equity$2,092,034   $1,925,573   
Interest rate spread (3)
  2.07 %  3.03 %
Net interest income/margin (3)
 $41,413 2.82 % $42,607 3.17 %
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, 2023 and 2022:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Total interest income$23,921 $16,864 $65,678 $46,323 
Total interest expense10,589 1,332 24,662 4,091 
Net interest income (GAAP)13,332 15,532 41,016 42,232 
Tax equivalent adjustment127 146 397 375 
Net interest income (fully taxable equivalent) (NON-GAAP)$13,459 $15,678 $41,413 $42,607 
 
37

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, 2023 and 2022:
 Three Months Ended September 30,Nine months ended September 30,
 2023 vs. 20222023 vs. 2022
 Increase (Decrease) Due toIncrease (Decrease) Due to
(In Thousands)VolumeRateNetVolumeRateNet
Interest income:      
Tax-exempt loans$64 $4 $68 $267 $71 $338 
All other loans2,964 3,651 6,615 8,490 9,105 17,595 
Federal funds sold(218)— (218)(465)— (465)
Taxable investment securities274 513 787 851 1,354 2,205 
Tax-exempt investment securities(193)38 (155)(297)64 (233)
Interest bearing deposits(182)123 (59)(325)262 (63)
Total interest-earning assets2,709 4,329 7,038 8,521 10,856 19,377 
Interest expense:      
Savings deposits(2)157 155 (1)385 384 
Super Now deposits(155)1,042 887 (104)2,409 2,305 
Money market deposits4 1,658 1,662 (3)4,214 4,211 
Time deposits489 2,577 3,066 699 4,896 5,595 
Short-term borrowings2,041 345 2,386 4,533 1,522 6,055 
Long-term borrowings706 395 1,101 1,150 872 2,022 
Total interest-bearing liabilities3,083 6,174 9,257 6,274 14,298 20,572 
Change in net interest income$(374)$(1,845)$(2,219)$2,247 $(3,442)$(1,195)

Provision for Credit Losses

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

The allowance for credit losses is determined by applying loss factors to outstanding loans by type.  A historical charge-off factor is calculated utilizing the charge-off and recovery data over the past ten years. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.

Although management believes it uses the best information available to make such determinations and that the allowance for credit losses is adequate at September 30, 2023, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations.  A downturn in the local economy, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance.  The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

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

The allowance for credit losses decreased from $15,637,000 at December 31, 2022 to $12,890,000 at September 30, 2023. The decrease in allowance was primarily due to the adoption of CECL on January 1, 2023 coupled with net recoveries of $316,000 for the nine months ended September 30, 2023. At September 30, 2023 and December 31, 2022, the allowance for credit losses to total loans was 0.71% and 0.95%, respectively.

38

The three and nine months ended September 30, 2023 had a provision for credit losses of $1,372,000 and $263,000, respectively, compared to a provision for credit losses of $855,000 and $1,335,000 for the corresponding 2022 periods. The decrease in the provision for credit losses for the nine month period was the result of improving credit metrics, net recoveries during 2023, and the adoption of CECL offset by loan portfolio growth. The increase for the three month period was primarily due to loan portfolio growth.

Nonperforming loans decreased to $3,683,000 at September 30, 2023 from $4,890,000 at December 31, 2022. The majority of nonperforming loans involve loans that are either in a secured position and have sureties with a strong underlying financial position or have been classified as impaired and have a specific allocation recorded within the allowance for credit losses. The ratio of nonperforming loans to total loans ratio decreased to 0.20% at September 30, 2023 from 0.37% at September 30, 2022 and as nonperforming loans have decreased to $3,683,000 from $5,743,000 at September 30, 2022. Net loan recoveries of $316,000 for the nine months ended September 30, 2023 impacted the allowance for credit losses, which was 0.71% of total loans at September 30 2023 compared to 0.97% at September 30, 2022.

The following is a table showing total nonperforming loans as of:
 Total Nonperforming Loans
(In Thousands)90 Days Past DueNon-accrualTotal
September 30, 2023$1,678 $2,005 $3,683 
June 30, 20231,120 3,156 4,276 
March 31, 20231,215 3,551 4,766 
December 31, 20221,275 3,615 4,890 
September 30, 20221,161 4,582 5,743 

Additional allowance for credit losses and net (charge-offs) recoveries information is presented by loan portfolio segment in the tables below. The nine months ending September 30, 2023 was impacted by the CECL adoption reclassification entry disclosed in Note 6. Loans.
September 30, 2023
Amount of Allowance for Credit Losses AllocatedTotal loansAllowance for Credit Losses to Total Loans RatioNet (Charge-Offs) RecoveriesAverage LoansRatio of Net (Charge-Offs) Recoveries to Average Loans
(In Thousands)
Commercial, financial, and agricultural$3,913$211,473 1.85 %$1,067 $202,709 0.53 %
Real estate mortgage:
Residential1,168773,782 0.15 %(56)737,749 (0.01)%
Commercial4,323525,666 0.82 %(36)513,035 (0.01)%
Construction19855,833 0.35 %— 49,358 — %
Consumer automobiles2,584239,768 1.08 %(441)221,802 (0.20)%
Other consumer installment loans70410,821 6.51 %(218)10,315 (2.11)%
$12,890$1,817,343 0.71 %$316 $1,734,968 0.02 %
Total non-accrual loans outstanding$2,005
Non-accrual loans to total loans outstanding0.11 %
Allowance for credit losses to non-accrual loans642.89 %
39

December 31, 2022
Amount of Allowance for Loan Losses AllocatedTotal loansAllowance for Loan Losses to Total Loans RatioNet (Charge-Offs) RecoveriesAverage LoansRatio of Net (Charge-Offs) Recoveries to Average Loans
(In Thousands)
Commercial, financial, and agricultural$1,914$190,461 1.00 %$165 $173,433 0.10 %
Real estate mortgage:
Residential5,061708,209 0.71 %26 649,989 — %
Commercial6,110500,632 1.22 %(150)466,526 (0.03)%
Construction18843,308 0.43 %29 44,968 0.06 %
Consumer automobiles1,617186,112 0.87 %(328)150,261 (0.22)%
Other consumer installment loans10910,361 1.05 %(191)9,737 (1.96)%
Unallocated638
$15,637$1,639,083 0.95 %$(449)$1,494,914 (0.03)%
Total non-accrual loans outstanding$3,615
Non-accrual loans to total loans outstanding0.22 %
Allowance for loan losses to non-accrual loans432.56 %

Non-interest Income

Total non-interest income for the three and nine months ended September 30, 2023 compared to the same periods in 2022 decreased $208,000 and $478,000. Excluding net securities losses, non-interest income for the three and nine months ended September 30, 2023 decreased $338,000 and $644,000 compared to the same periods in 2022. Gain on sale of loans and loan broker commissions decreased as the volume of loan sales has declined as a reduction in housing inventory and higher rates has reduced mortgage activity. Bank-owned life insurance for the nine month period increased due to a gain on death benefit of $380,000 recognized during the first quarter of 2023. Debit card income declined due to volume.

Non-interest income composition for the three and nine months ended September 30, 2023 and 2022 was as follows:
 Three Months Ended
 September 30, 2023September 30, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$545 29.07 %$559 26.84 %$(14)(2.50)%
Net debt securities losses, available for sale(45)(2.40)(156)(7.49)111 71.15 
Net equity securities losses(36)(1.92)(55)(2.64)19 34.55 
Bank-owned life insurance170 9.07 170 8.16 — — 
Gain on sale of loans257 13.71 294 14.11 (37)(12.59)
Insurance commissions136 7.25 109 5.23 27 24.77 
Brokerage commissions142 7.57 142 6.82 — — 
Loan broker commissions241 12.85 438 21.03 (197)(44.98)
Debit card income320 17.07 344 16.51 (24)(6.98)
Other145 7.73 238 11.42 (93)(39.08)
Total non-interest income$1,875 100.00 %$2,083 100.00 %$(208)(9.99)%

40

 Nine Months Ended
 September 30, 2023September 30, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$1,557 25.30 %$1,563 23.57 %$(6)(0.38)%
Net debt securities losses, available for sale(125)(2.03)(168)(2.53)43 25.60 
Net equity securities losses(35)(0.57)(158)(2.38)123 77.85 
Bank-owned life insurance892 14.49 501 7.55 391 78.04 
Gain on sale of loans732 11.89 905 13.65 (173)(19.12)
Insurance commissions416 6.76 386 5.82 30 7.77 
Brokerage commissions448 7.28 500 7.54 (52)(10.40)
Loan broker commissions728 11.83 1,350 20.36 (622)(46.07)
Debit card income995 16.17 1,080 16.28 (85)(7.87)
Other546 8.88 673 10.14 (127)(18.87)
Total non-interest income$6,154 100.00 %$6,632 100.00 %$(478)(7.21)%

Non-interest Expense

Total non-interest expense increased $852,000 and $1,752,000 for the three and nine months ended September 30, 2023 compared to the same periods of 2022. The increase in salaries and employee benefits is attributable to the current employment environment and routine annual wage increases. Furniture and equipment expenses in addition to occupancy expenses have increased slightly as increased maintenance costs have been offset by a decrease in the level of depreciation. Software amortization decreases for the nine month period are due to changes in software licensing costs. Marketing costs increased as a time deposit gathering campaign was initiated during the latter part of 2022 and throughout 2023. Pennsylvania shares tax decreased as tax credits were purchased and charitable contributions were made to organizations that resulted in the obtainment of tax credits. Professional fees increased primarily due to legal fees. FDIC insurance expense increased due an increase in the assessment rate.

Non-interest expense composition for the three and nine months ended September 30, 2023 and 2022 was as follows:
 Three Months Ended
 September 30, 2023September 30, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$6,290 56.30 %$6,016 58.29 %$274 4.55 %
Occupancy784 7.02 730 7.07 54 7.40 
Furniture and equipment867 7.76 816 7.91 51 6.25 
Software amortization237 2.12 188 1.82 49 26.06 
Pennsylvania shares tax280 2.51 334 3.24 (54)(16.17)
Professional fees719 6.44 626 6.07 93 14.86 
Federal Deposit Insurance Corporation deposit insurance425 3.80 260 2.52 165 63.46 
Marketing167 1.49 151 1.46 16 10.60 
Intangible amortization25 0.22 34 0.33 (9)(26.47)
Other1,378 12.34 1,165 11.29 213 18.28 
Total non-interest expense$11,172 100.00 %$10,320 100.00 %$852 8.26 %
41

 Nine Months Ended
 September 30, 2023September 30, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$18,778 56.06 %$18,421 58.02 %$357 1.94 %
Occupancy2,422 7.23 2,380 7.50 42 1.76 
Furniture and equipment2,503 7.47 2,454 7.73 49 2.00 
Software amortization593 1.77 660 2.08 (67)(10.15)
Pennsylvania shares tax807 2.41 1,119 3.52 (312)(27.88)
Professional fees2,313 6.90 1,746 5.50 567 32.47 
Federal Deposit Insurance Corporation deposit insurance1,122 3.35 690 2.17 432 62.61 
Marketing594 1.77 435 1.37 159 36.55 
Intangible amortization92 0.27 119 0.37 (27)(22.69)
Other4,275 12.77 3,723 11.74 552 14.83 
Total non-interest expense$33,499 100.00 %$31,747 100.00 %$1,752 5.52 %

Provision for Income Taxes

Income taxes decreased $751,000 and decreased $514,000 for the three and nine months ended September 30, 2023 compared to the same periods of 2022. The effective tax rate for the three and nine months ended September 30, 2023 was 16.49% and 17.56% compared to 18.48% and 18.18% for the same periods of 2022. The Company currently is in a deferred tax asset position. A valuation allowance was established on the $1,810,000 of capital loss carryforwards as of December 31, 2022, which remained unchanged during the third quarter of 2023.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents decreased $4,743,000 from $40,333,000 at December 31, 2022 to $35,590,000 at September 30, 2023, primarily as a result of the following activity during the nine months ended September 30, 2023.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds being less than loan originations, less $732,000 in realized gains, by $785,000 for the nine months ended September 30, 2023.

Loans

Gross loans increased $178,730,000 since December 31, 2022 due primarily to an increase in both residential and commercial real estate mortgage categories in addition to consumer automobile loans.

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The allocation of the loan portfolio, by category, as of September 30, 2023 and December 31, 2022 is presented below:
 September 30, 2023December 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Commercial, financial, and agricultural$211,473 11.63 %$190,461 11.62 %$21,012 11.03 %
Real estate mortgage:      
Residential773,782 42.55 708,209 43.19 65,573 9.26 %
Commercial525,666 28.91 500,632 30.53 25,034 5.00 %
Construction55,833 3.07 43,308 2.64 12,525 28.92 %
Consumer automobile loans239,768 13.19 186,112 11.35 53,656 28.83 %
Other consumer installment loans10,821 0.60 10,361 0.63 460 4.44 %
Net deferred loan fees and discounts1,118 0.05 648 0.04 470 72.53 %
Gross loans$1,818,461 100.00 %$1,639,731 100.00 %$178,730 10.90 %
 
Investments

The fair value of the investment debt securities portfolio at September 30, 2023 decreased $9,006,000 since December 31, 2022, while the amortized cost of the portfolio decreased $7,655,000.  The decrease in the investment portfolio amortized value occurred within the state and political segment of the portfolio as principal cash flow was partially reinvested with the majority of the cash flow funding loan portfolio growth. The mortgage-backed segment increased as bonds were purchased to provide future cash flow. The other debt segment balances increased slightly as bank subordinated debt was purchased and consists primarily of corporate bonds. 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 81.26% 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 $1,300,000 for September 30, 2023 and December 31, 2022 while the fair value decreased $70,000 over the same time period.











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The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at September 30, 2023 follows:
 A- to AAAB- to BBB+C- to CCC+Not RatedTotal
(In Thousands)Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Available for sale (AFS):        
U.S. Government and agency securities$4,001$3,864$—$—$—$—$—$—$4,001$3,864
Mortgage-backed securities 12,1017 11,396——————12,10111,396
State and political securities124,922115,817————4,1024,030129,024119,847
Other debt securities20,22718,6047,3806,717——25,71424,23953,32149,560
Total debt securities AFS$161,251$149,681$7,380$6,717$—$—$29,816$28,269$198,447$184,667
 
Financing Activities

Deposits

Total deposits decreased $10,807,000 from December 31, 2022 to September 30, 2023. Time deposits increased $111,601,000 over this period to a total of $249,550,000 as deposit gathering efforts focused on time deposits as customers sought a higher return on their deposit balances. Brokered deposits increased by $98,361,000 as usage provided an alternative to FHLB borrowings and supplemented funding for loan portfolio growth. Core deposits (deposits less time deposits) declined as deposit balances flowed from noninterest-bearing and lower rate products into higher rate products such as time deposit accounts. Emphasis has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking products has increased due to these efforts coupled with a change in consumer behavior over the past several years.

Deposit balances and their changes for the periods being discussed follow:
 September 30, 2023December 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Demand deposits$471,507 30.08 %$519,063 33.35 %$(47,556)(9.16)%
NOW accounts220,730 14.08 372,574 23.94 (151,844)(40.76)
Money market deposits291,889 18.62 270,589 17.38 21,300 7.87 
Savings deposits226,897 14.48 247,952 15.93 (21,055)(8.49)
Time deposits249,550 15.92 137,949 8.86 111,601 80.90 
Brokered deposits106,694 6.82 8,333 0.54 98,361 6.32 
 Total deposits$1,567,267 100.00 %$1,556,460 100.00 %$10,807 0.69 %

As of September 30, 2023 and December 31, 2022 the Company had $435,931,000 and $617,515,000, respectively, in uninsured deposits. Included in the total uninsured deposits is a concentration of public funds which were collateralized by the Banks in the amount of $83,144,000 and $180,252,000 at September 30, 2023 and December 31, 2022, respectively. Total uninsured deposits less collateralized public funds was $352,787,000 at September 30, 2023 and $437,263,000 at December 31, 2022.

Borrowed Funds

Total borrowed funds increased 60.62%, or $155,259,000, to $411,391,000 at September 30, 2023 compared to $256,132,000 at December 31, 2022. The increase in long term borrowings occurred as fixed rate borrowings were initiated to lock in interest rates and to provide matched funding for segments of the loan portfolio. Short term FHLB borrowings were utilized to provide short term funding for the loan portfolio growth. Securities sold under agreements to repurchase have decreased as customers balances have decreased.

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 September 30, 2023December 31, 2022Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Short-term borrowings:      
FHLB repurchase agreements$159,233 38.71 %$148,195 57.86 %$11,038 7.45 
Short-term FHLB borrowings30,000 7.29 — — 30,000 n/a
Securities sold under agreement to repurchase4,513 1.10 5,154 2.01 (641)(12.44)
Total short-term borrowings193,746 47.10 153,349 59.87 40,397 26.34 
Long-term borrowings:
Long-term FHLB borrowings210,000 51.04 95,000 37.09 115,000 121.05 
Long-term finance lease7,645 1.86 7,783 3.04 (138)(1.77)
Total long-term borrowings217,645 52.90 102,783 40.13 114,862 111.75 
Total borrowed funds$411,391 100.00 %$256,132 100.00 %$155,259 60.62 %

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, 2023December 31, 2022
Investment debt securities pledged, fair value$8,671 $7,165 
Repurchase agreements4,513 5,154 

Capital

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

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

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









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The Company's capital ratios as of September 30, 2023 and December 31, 2022 were as follows:
 September 30, 2023December 31, 2022
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$173,291 9.505 %$165,346 9.973 %
For Capital Adequacy Purposes82,042 4.500 74,607 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date127,621 7.000 116,056 7.000 
To Be Well Capitalized118,505 6.500 107,766 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$187,600 10.290 %$181,127 10.925 %
For Capital Adequacy Purposes145,850 8.000 132,633 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date191,429 10.500 174,081 10.500 
To Be Well Capitalized182,313 10.000 165,791 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$173,291 9.505 %$165,346 9.973 %
For Capital Adequacy Purposes109,389 6.000 99,476 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date154,968 8.500 140,925 8.500 
To Be Well Capitalized145,852 8.000 132,635 8.000 
Tier I Capital (to Average Assets)   
Actual$173,291 8.160 %$165,346 8.636 %
For Capital Adequacy Purposes84,947 4.000 76,585 4.000 
To Be Well Capitalized106,183 5.000 95,731 5.000 
 
Jersey Shore State Bank's capital ratios as of September 30, 2023 and December 31, 2022 were as follows:
 September 30, 2023December 31, 2022
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$124,883 9.396 %$119,783 9.781 %
For Capital Adequacy Purposes59,810 4.500 55,109 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date93,038 7.000 85,725 7.000 
To Be Well Capitalized86,392 6.500 79,602 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$136,641 10.281 %$131,379 10.728 %
For Capital Adequacy Purposes106,325 8.000 97,971 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date139,552 10.500 128,587 10.500 
To Be Well Capitalized132,906 10.000 122,464 10.000 
Tier I Capital (to Risk-weighted Assets)- - 
Actual$124,883 9.396 %$119,783 9.781 %
For Capital Adequacy Purposes79,746 6.000 73,479 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date112,974 8.500 104,095 8.500 
To Be Well Capitalized106,329 8.000 97,972 8.000 
Tier I Capital (to Average Assets)   
Actual$124,883 7.995 %$119,783 8.383 %
For Capital Adequacy Purposes62,481 4.000 57,155 4.000 
To Be Well Capitalized78,101 5.000 71,444 5.000 





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Luzerne Bank's capital ratios as of September 30, 2023 and December 31, 2022 were as follows:
 September 30, 2023December 31, 2022
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$47,865 9.687 %$43,364 9.877 %
For Capital Adequacy Purposes22,235 4.500 19,757 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date34,588 7.000 30,733 7.000 
To Be Well Capitalized32,118 6.500 28,538 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$50,416 10.204 %$47,549 10.830 %
For Capital Adequacy Purposes39,526 8.000 35,124 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date51,878 10.500 46,100 10.500 
To Be Well Capitalized49,408 10.000 43,905 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$47,865 9.687 %$43,364 9.877 %
For Capital Adequacy Purposes29,647 6.000 26,342 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date42,000 8.500 37,318 8.500 
To Be Well Capitalized39,529 8.000 35,123 8.000 
Tier I Capital (to Average Assets)   
Actual$47,865 8.040 %$43,364 8.260 %
For Capital Adequacy Purposes23,813 4.000 21,000 4.000 
To Be Well Capitalized29,767 5.000 26,249 5.000 

During the three months ended September 30, 2023, the Company sold 34,411 shares of common stock in a registered at-the-market offering pursuant to the terms of an equity distribution agreement, dated September 13, 2023 (the “Distribution Agreement”), between D.A. Davidson & Co. (the “Distribution Agent”) and the Company. Under the terms of the Distribution Agreement, the Company paid the Distribution Agent a fee in the amount of 2.75% of the gross proceeds from the sale of such shares, and realized net proceeds of $753,000 from the sales of shares under the Distribution Agreement for the quarter ended September 30, 2023.

Liquidity; Interest Rate Sensitivity and Market Risk

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

The following liquidity measures are monitored for compliance and were within the limits cited, with the exception of net loans to total deposits that was 115%, at September 30, 2023:

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

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

The Banks, like other financial institutions, must have sufficient funds available to meet liquidity needs for deposit withdrawals, loan commitments and originations, and expenses. In order to control cash flow, the Banks estimate future cash flows from deposits, loan payments, and investment security payments. The primary sources of funds are deposits, principal and interest
47

payments on loans and investment securities, FHLB borrowings, and brokered deposits. Management believes the Banks have adequate resources to meet their normal funding requirements.

Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating 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 $830,316,000. 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 $399,234,000 as of September 30, 2023.

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

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

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

Interest Rate Sensitivity

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

The following is a rate shock forecast for the twelve month period ending September 30, 2024 assuming a static balance sheet as of September 30, 2023.
 Parallel Rate Shock in Basis Points
(In Thousands)-300-200-100Static+100+200+300+400
Net interest income$60,604 $62,477 $64,050 $65,448 $66,448 $67,194 $67,910 $68,645 
Change from static(4,844)(2,971)(1,398)— 1,000 1,746 2,462 3,197 
Percent change from static-7.40 %-4.54 %-2.14 %— 1.53 %2.67 %3.76 %4.88 %
 
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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.

Inflation

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk.  Interest rate risk and liquidity risk management is performed at both the level of the Company and the Banks.  The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party.  There have been no substantial changes in the Company’s gap analysis or simulation analysis compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 2022.  Additional information and details are provided in the “Liquidity, Interest Rate Sensitivity, and Market Risk” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of that document.

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023.

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, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II.  OTHER INFORMATION
Item 1.                           Legal Proceedings

None.

Item 1A.  Risk Factors

Certain risk factors are set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as supplemented by the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023 and June 20, 2023, and as follows:

If we are unable to raise additional capital or generate earnings at current levels, our growth may be constrained and certain distributions, including discretionary dividend payments, by our subsidiary Banks to the holding company may be restricted.

Our gross loans increased $178,730,000 since December 31, 2022 to $1,818,461,000 at September 30, 2023, as we continue to emphasize commercial loan growth coupled with growth in indirect auto lending. We expect to continue to emphasize growth in our commercial and consumer loan portfolios, and additional regulatory capital generated through retained earnings and other sources will be necessary to support any such continued growth. At September 30, 2023, each of Jersey Shore State Bank and Luzerne Bank were “well capitalized” as defined by applicable bank regulatory standards. Applicable regulatory capital requirements also require each Bank to maintain a “capital conservation buffer,” consisting solely of tier 1 common equity, of 2.5% above the regulatory minimum capital requirements for each of the tier 1 common equity (“CET1”), tier 1 (“Tier 1”), and total capital (“Total Capital”) ratios. As a result of the capital conservation buffer requirements, if a bank does not maintain CET1, Tier 1 and Total Capital ratios of at least 7%, 8.5%, and 10.5%, respectively, determined as of the end of each calendar quarter, the bank’s ability to make certain discretionary payments, including discretionary dividend payments, are subject to a maximum payout ratio limitation unless the FDIC approves the distribution or payment. At September 30, 2023, each of Jersey Shore State Bank and Luzerne Bank exceeded the capital conservation buffer requirements for applicable capital ratios, except that the Total Capital to risk-weighted assets ratio for each Bank was slightly below the required 10.5% (10.281% for Jersey Shore State Bank and 10.204% for Luzerne Bank). After giving effect to the maximum payout ratio at September 30, 2023, each of Jersey Shore State Bank and Luzerne Bank was permitted to make discretionary dividend payments of up to approximately $6,532,000 and $2,776,000, respectively. As previously indicated, during the three months ended September 30, 2023, the Company sold 34,411 shares of common stock in a registered at-the-market offering resulting in net proceeds of $753,000, substantially all of which proceeds were contributed to the Banks as additional Tier 1 capital to support their lending activities and continued growth, and increase or maintain CET1, Tier 1, and Total Capital Levels to or at amounts required to exceed the 2.5% capital conservation buffer. If we are unable to generate retained earnings or raise capital in amounts necessary to avoid limitations on discretionary dividend payments by the Banks, our continued growth could be adversely affected.


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, 2023.
PeriodTotal
Number of
Shares (or
Units) Purchased		Average
Price Paid
per Share
(or Units) Purchased		Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced Plans or Programs		Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased Under the Plans or Programs
Month #1 (July 1 - July 31, 2023)— $— — 353,000 
Month #2 (August 1 - August 31, 2023)— — — 353,000 
Month #3 (September 1 - September 30, 2023)— — — 353,000 

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

Item 6.                           Exhibits
 
 Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3(i) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2022).
 Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020).
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
 Section 1350 Certification of Chief Executive Officer.
 Section 1350 Certification of Chief Financial Officer.
101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at September 30, 2023 and December 31, 2022; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, 2023 and 2022; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, 2023 and 2022; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2023 and 2022 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.
104Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101).
51

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 14, 2023/s/ Richard A. Grafmyre
 Richard A. Grafmyre, Chief Executive Officer
 (Principal Executive Officer)
  
  
Date:November 14, 2023/s/ Brian L. Knepp
 Brian L. Knepp, President and Chief Financial Officer
 (Principal Financial Officer and Principal Accounting
 Officer)
52

What is the market capitalization of a company?

The market capitalization sometimes referred as Marketcap, is the value of a publicly listed company.
In most cases it can be easily calculated by multiplying the share price with the amount of outstanding shares.

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