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~~June 30, ~~2022.~~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)


Pennsylvania	300 Market Street, P.O. Box 967	23-2226454
(State or other jurisdiction of	Williamsport	(I.R.S. Employer Identification No.)
incorporation or organization)	Pennsylvania	17703-0967
	(Address of principal executive offices)	(Zip Code)

(570) 322-1111

Registrant’s telephone number, including area code

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $5.55 par value

PWOD

The Nasdaq Global Select Market

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

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

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

On ~~November~~August 1, ~~2022~~2023 there were ~~7,056,199~~7,066,486 shares of the Registrant’s common stock outstanding.

Table of Contents

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q


		Page
		Number

Part I	Financial Information

Item 1.	Financial Statements	3

Consolidated Balance Sheet (Unaudited) as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022		3

Consolidated Statement of Income (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September 30,~~June 31, 2023 and 2022 ~~and 2021~~		4

Consolidated Statement of Comprehensive Income (Loss) ~~Income~~ (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022		5

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022		6

Consolidated Statement of Cash Flows (Unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022		8

Notes to Consolidated Financial Statements (Unaudited)		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3132

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4748

Item 4.	Controls and Procedures	4748

Part II	Other Information

Item 1.	Legal Proceedings	4849

Item 1A.	Risk Factors	4849

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4849

Item 3.	Defaults Upon Senior Securities	4849

Item 4.	Mine Safety Disclosures	4849

Item 5.	Other Information	4849

Item 6.	Exhibits	4950

Signatures		5051

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


		September 30,		December 31,			June 30,		December 31,
(In Thousands, Except Share And Per Share Data)	(In Thousands, Except Share And Per Share Data)	2022		2021		(In Thousands, Except Share And Per Share Data)	2023		2022
ASSETS:	ASSETS:					ASSETS:
Noninterest-bearing balances	Noninterest-bearing balances	$	24,418	$	19,233	Noninterest-bearing balances	$	32,265	$	27,390
Interest-bearing balances in other financial institutions	Interest-bearing balances in other financial institutions	12,444		194,629		Interest-bearing balances in other financial institutions	12,596		12,943
Federal funds sold		—		50,000

Total cash and cash equivalents	Total cash and cash equivalents	36,862		263,862		Total cash and cash equivalents	44,861		40,333

Investment debt securities, available for sale, at fair value	Investment debt securities, available for sale, at fair value	188,196		166,410		Investment debt securities, available for sale, at fair value	186,626		193,673
Investment equity securities, at fair value	Investment equity securities, at fair value	1,130		1,288		Investment equity securities, at fair value	1,143		1,142

Restricted investment in bank stock	Restricted investment in bank stock	14,539		14,531		Restricted investment in bank stock	24,438		19,171
Loans held for sale	Loans held for sale	2,485		3,725		Loans held for sale	3,049		3,298
Loans	Loans	1,560,700		1,392,147		Loans	1,769,403		1,639,731
Allowance for loan losses		(15,211)		(14,176)
Allowance for credit losses						Allowance for credit losses	(11,592)		(15,637)
Loans, net	Loans, net	1,545,489		1,377,971		Loans, net	1,757,811		1,624,094
Premises and equipment, net	Premises and equipment, net	32,227		34,025		Premises and equipment, net	31,180		31,844
Accrued interest receivable	Accrued interest receivable	8,647		8,048		Accrued interest receivable	9,498		9,481
Bank-owned life insurance	Bank-owned life insurance	34,288		33,768		Bank-owned life insurance	33,524		34,452
Investment in limited partnerships	Investment in limited partnerships	4,771		4,607		Investment in limited partnerships	8,402		8,656
Goodwill	Goodwill	17,104		17,104		Goodwill	16,450		16,450
Intangibles	Intangibles	361		480		Intangibles	260		327
Operating lease right-of-use asset	Operating lease right-of-use asset	2,699		2,851		Operating lease right-of-use asset	2,586		2,651
Deferred tax asset	Deferred tax asset	7,187		2,946		Deferred tax asset	6,332		6,868
Other assets	Other assets	9,131		9,193		Other assets	9,159		7,640
TOTAL ASSETS	TOTAL ASSETS	$	1,905,116	$	1,940,809	TOTAL ASSETS	$	2,135,319	$	2,000,080

LIABILITIES:	LIABILITIES:					LIABILITIES:
Interest-bearing deposits	Interest-bearing deposits	$	1,053,012	$	1,126,955	Interest-bearing deposits	$	1,077,820	$	1,037,397
Noninterest-bearing deposits	Noninterest-bearing deposits	537,403		494,360		Noninterest-bearing deposits	475,937		519,063
Total deposits	Total deposits	1,590,415		1,621,315		Total deposits	1,553,757		1,556,460

Short-term borrowings	Short-term borrowings	30,901		5,747		Short-term borrowings	180,410		153,349
Long-term borrowings	Long-term borrowings	102,829		125,963		Long-term borrowings	202,692		102,783
Accrued interest payable	Accrued interest payable	427		651		Accrued interest payable	2,129		603
Operating lease liability	Operating lease liability	2,753		2,898		Operating lease liability	2,642		2,708
Other liabilities	Other liabilities	13,302		11,961		Other liabilities	19,287		16,512
TOTAL LIABILITIES	TOTAL LIABILITIES	1,740,627		1,768,535		TOTAL LIABILITIES	1,960,917		1,832,415

SHAREHOLDERS’ EQUITY:	SHAREHOLDERS’ EQUITY:					SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued	Preferred stock, no par value, 3,000,000 shares authorized; no shares issued	—		—		Preferred stock, no par value, 3,000,000 shares authorized; no shares issued	—		—
Common stock, par value $5.55, 22,500,000 shares authorized; 7,563,200 and 7,550,272 shares issued; 7,052,975 and 7,070,047 outstanding		42,019		41,945
Common stock, par value $5.55, 22,500,000 shares authorized; 7,573,713 and 7,566,810 shares issued; 7,063,488 and 7,056,585 outstanding						Common stock, par value $5.55, 22,500,000 shares authorized; 7,573,713 and 7,566,810 shares issued; 7,063,488 and 7,056,585 outstanding	42,077		42,039
Additional paid-in capital	Additional paid-in capital	53,958		53,795		Additional paid-in capital	54,869		54,252
Retained earnings	Retained earnings	95,896		89,761		Retained earnings	104,104		98,147
Accumulated other comprehensive loss:	Accumulated other comprehensive loss:					Accumulated other comprehensive loss:
Net unrealized (loss) gain on available for sale securities		(11,125)		2,373
Net unrealized loss on available for sale securities						Net unrealized loss on available for sale securities	(9,753)		(9,819)
Defined benefit plan	Defined benefit plan	(3,444)		(3,485)		Defined benefit plan	(4,080)		(4,139)
Treasury stock at cost, 510,225 and 480,225		(12,815)		(12,115)
Treasury stock at cost, 510,225 shares						Treasury stock at cost, 510,225 shares	(12,815)		(12,815)

TOTAL SHAREHOLDERS' EQUITY	TOTAL SHAREHOLDERS' EQUITY	164,489		172,274		TOTAL SHAREHOLDERS' EQUITY	174,402		167,665
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,905,116	$	1,940,809	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,135,319	$	2,000,080

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, Except Share And Per Share Data)	(In Thousands, Except Share And Per Share Data)	2022		2021		2022		2021		(In Thousands, Except Share And Per Share Data)	2023		2022		2023		2022
INTEREST AND DIVIDEND INCOME:	INTEREST AND DIVIDEND INCOME:									INTEREST AND DIVIDEND INCOME:
Loans, including fees	Loans, including fees	$	15,051	$	13,382	$	41,709	$	39,826	Loans, including fees	$	19,846	$	13,620	$	37,851	$	26,658
Investment securities:	Investment securities:									Investment securities:
Taxable	Taxable	949		834		2,550		2,491		Taxable	1,287		864		2,505		1,601
Tax-exempt	Tax-exempt	236		160		594		495		Tax-exempt	118		194		296		358
Dividend and other interest income	Dividend and other interest income	628		338		1,470		903		Dividend and other interest income	642		506		1,105		842
TOTAL INTEREST AND DIVIDEND INCOME	TOTAL INTEREST AND DIVIDEND INCOME	16,864		14,714		46,323		43,715		TOTAL INTEREST AND DIVIDEND INCOME	21,893		15,184		41,757		29,459
INTEREST EXPENSE:	INTEREST EXPENSE:									INTEREST EXPENSE:
Deposits	Deposits	693		1,308		2,191		4,481		Deposits	4,851		710		8,223		1,498
Short-term borrowings	Short-term borrowings	26		3		29		7		Short-term borrowings	2,232		2		3,672		3
Long-term borrowings	Long-term borrowings	613		771		1,871		2,430		Long-term borrowings	1,424		625		2,178		1,258
TOTAL INTEREST EXPENSE	TOTAL INTEREST EXPENSE	1,332		2,082		4,091		6,918		TOTAL INTEREST EXPENSE	8,507		1,337		14,073		2,759
NET INTEREST INCOME	NET INTEREST INCOME	15,532		12,632		42,232		36,797		NET INTEREST INCOME	13,386		13,847		27,684		26,700
PROVISION FOR LOAN LOSSES		855		75		1,335		940
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		14,677		12,557		40,897		35,857
(Recovery) provision losses on loans										(Recovery) provision losses on loans	(614)		330		(605)		480
(Recovery) provision for off balance sheet credit exposures										(Recovery) provision for off balance sheet credit exposures	(566)		—		(504)		—
TOTAL (RECOVERY) PROVISION FOR CREDIT LOSSES										TOTAL (RECOVERY) PROVISION FOR CREDIT LOSSES	(1,180)		330		(1,109)		480
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES										NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	14,566		13,517		28,793		26,220
NON-INTEREST INCOME:	NON-INTEREST INCOME:									NON-INTEREST INCOME:
Service charges	Service charges	559		456		1,563		1,218		Service charges	516		509		1,012		1,004
Net debt securities (losses) gains, available for sale		(156)		48		(168)		323
Net equity securities losses		(55)		(8)		(158)		(24)
Net debt securities losses, available for sale										Net debt securities losses, available for sale	(19)		(10)		(80)		(12)
Net equity securities (losses) gains										Net equity securities (losses) gains	(20)		(44)		1		(103)

Bank-owned life insurance	Bank-owned life insurance	170		279		501		614		Bank-owned life insurance	166		161		722		331
Gain on sale of loans	Gain on sale of loans	294		456		905		2,034		Gain on sale of loans	244		266		475		611
Insurance commissions	Insurance commissions	109		129		386		436		Insurance commissions	115		107		280		277
Brokerage commissions	Brokerage commissions	142		237		500		663		Brokerage commissions	141		158		306		358
Loan broker commissions	Loan broker commissions	438		772		1,350		1,449		Loan broker commissions	317		371		487		912
Debit card income	Debit card income	344		388		1,080		1,166		Debit card income	340		391		675		736
Other	Other	238		194		673		595		Other	222		228		401		435
TOTAL NON-INTEREST INCOME	TOTAL NON-INTEREST INCOME	2,083		2,951		6,632		8,474		TOTAL NON-INTEREST INCOME	2,022		2,137		4,279		4,549
NON-INTEREST EXPENSE:	NON-INTEREST EXPENSE:									NON-INTEREST EXPENSE:
Salaries and employee benefits	Salaries and employee benefits	6,016		5,837		18,421		17,107		Salaries and employee benefits	6,312		6,141		12,488		12,405
Occupancy	Occupancy	730		745		2,380		2,438		Occupancy	772		740		1,638		1,650
Furniture and equipment	Furniture and equipment	816		883		2,454		2,663		Furniture and equipment	790		746		1,636		1,638
Software amortization	Software amortization	188		226		660		632		Software amortization	173		219		356		472
Pennsylvania shares tax	Pennsylvania shares tax	334		373		1,119		1,097		Pennsylvania shares tax	279		396		527		785
Professional fees	Professional fees	626		615		1,746		1,882		Professional fees	906		582		1,594		1,120
Federal Deposit Insurance Corporation deposit insurance	Federal Deposit Insurance Corporation deposit insurance	260		220		690		705		Federal Deposit Insurance Corporation deposit insurance	452		228		697		430

Marketing	Marketing	151		231		435		434		Marketing	272		220		427		284
Intangible amortization	Intangible amortization	34		44		119		147		Intangible amortization	32		41		67		85
Other	Other	1,165		1,273		3,723		3,541		Other	1,441		1,107		2,897		2,558
TOTAL NON-INTEREST EXPENSE	TOTAL NON-INTEREST EXPENSE	10,320		10,447		31,747		30,646		TOTAL NON-INTEREST EXPENSE	11,429		10,420		22,327		21,427
INCOME BEFORE INCOME TAX PROVISION	INCOME BEFORE INCOME TAX PROVISION	6,440		5,061		15,782		13,685		INCOME BEFORE INCOME TAX PROVISION	5,159		5,234		10,745		9,342
INCOME TAX PROVISION	INCOME TAX PROVISION	1,190		932		2,869		2,516		INCOME TAX PROVISION	988		1,003		1,916		1,679
CONSOLIDATED NET INCOME		$	5,250	$	4,129	$	12,913	$	11,169
Less: Net income attributable to noncontrolling interest		—		4		—		15
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.		$	5,250	$	4,125	$	12,913	$	11,154

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS'										NET INCOME AVAILABLE TO COMMON SHAREHOLDERS'	$	4,171	$	4,231	$	8,829	$	7,663
EARNINGS PER SHARE - BASIC	EARNINGS PER SHARE - BASIC	$	0.74	$	0.58	$	1.83	$	1.58	EARNINGS PER SHARE - BASIC	$	0.59	$	0.60	$	1.25	$	1.08
EARNINGS PER SHARE - DILUTED	EARNINGS PER SHARE - DILUTED	$	0.74	$	0.58	$	1.83	$	1.58	EARNINGS PER SHARE - DILUTED	$	0.59	$	0.60	$	1.25	$	1.08
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	7,051,228		7,063,994		7,060,871		7,059,625		WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	7,062,018		7,059,045		7,060,218		7,065,772
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	7,051,228		7,063,994		7,060,871		7,059,625		WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	7,062,018		7,059,045		7,060,218		7,065,772

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) ~~INCOME~~

(UNAUDITED)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2022		2021		2022		2021		(In Thousands)	2023		2022		2023		2022
Net Income	Net Income	$	5,250	$	4,125	$	12,913	$	11,154	Net Income	$	4,171	$	4,231	$	8,829	$	7,663
Other comprehensive loss:
Unrealized loss on available for sale securities		(6,362)		(687)		(17,254)		(1,208)
Other comprehensive (loss) income:										Other comprehensive (loss) income:
Net unrealized (loss) gain on available for sale securities										Net unrealized (loss) gain on available for sale securities	(2,329)		(3,995)		4		(10,892)
Tax effect	Tax effect	1,336		145		3,623		254		Tax effect	489		839		(1)		2,287
Net realized loss (gain) on available for sale securities included in net income		156		(48)		168		(323)
Net realized loss on available for sale securities included in net income										Net realized loss on available for sale securities included in net income	19		10		80		12
Tax effect	Tax effect	(33)		9		(35)		67		Tax effect	(4)		(2)		(17)		(2)
Amortization of unrecognized pension loss	Amortization of unrecognized pension loss	17		45		52		138		Amortization of unrecognized pension loss	37		18		74		35
Tax effect	Tax effect	(3)		(8)		(11)		(28)		Tax effect	(7)		(4)		(15)		(8)
Total other comprehensive loss		(4,889)		(544)		(13,457)		(1,100)
Total other comprehensive (loss) income										Total other comprehensive (loss) income	(1,795)		(3,134)		125		(8,568)
Comprehensive income (loss)	Comprehensive income (loss)	$	361	$	3,581	$	(544)	$	10,054	Comprehensive income (loss)	$	2,376	$	1,097	$	8,954	$	(905)

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

Three months ended:


		COMMON STOCK			ADDITIONAL PAID-IN CAPITAL				RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK				NON-CONTROLLING INTEREST			TOTAL SHAREHOLDERS’ EQUITY					COMMON STOCK					ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS				ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK				TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)	(In Thousands, Except Share And Per Share Data)	SHARES	AMOUNT										(In Thousands, Except Share And Per Share Data)				SHARES							AMOUNT														TOTAL SHAREHOLDERS’ EQUITY
Balance, June 30, 2022		7,559,165	$	41,995			$	53,651					$	92,903				$	(9,680)		$	(12,815)			$	—		$	166,054
Balance, March 31, 2023																								Balance, March 31, 2023			7,570,086			$	42,057		$	54,572		$	102,194				$	(12,038)			$	(12,815)			$	173,970

Net income	Net income								5,250													5,250		Net income											4,171												4,171

Other comprehensive loss	Other comprehensive loss										(4,889)											(4,889)		Other comprehensive loss															(1,795)								(1,795)
Stock-based compensation	Stock-based compensation				236																	236		Stock-based compensation								233															233

Dividends declared ($0.32 per share)	Dividends declared ($0.32 per share)								(2,257)													(2,257)		Dividends declared ($0.32 per share)											(2,261)												(2,261)
Common shares issued for employee stock purchase plan	Common shares issued for employee stock purchase plan	1,057	6		17																	23		Common shares issued for employee stock purchase plan			830			4		14															18
Director Compensation Plan	Director Compensation Plan	2,978	18		54																	72		Director Compensation Plan			2,797			16		50															66

Balance, September 30, 2022		7,563,200	$	42,019	$	53,958			$	95,896	$	(14,569)			$	(12,815)			$	—		$	164,489
Balance, June 30, 2023																								Balance, June 30, 2023			7,573,713			$	42,077	$	54,869		$	104,104			$	(13,833)			$	(12,815)			$	174,402


		COMMON STOCK			ADDITIONAL PAID-IN CAPITAL				RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK				NON-CONTROLLING INTEREST			TOTAL SHAREHOLDERS’ EQUITY					COMMON STOCK					ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS				ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK				TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)	(In Thousands, Except Share And Per Share Data)	SHARES	AMOUNT										(In Thousands, Except Share And Per Share Data)				SHARES							AMOUNT														TOTAL SHAREHOLDERS’ EQUITY
Balance, June 30, 2021		7,541,627	$	41,897			$	53,205					$	85,281				$	(1,438)		$	(12,115)			$	5		$	166,835
Balance, March 31, 2022																								Balance, March 31, 2022			7,554,567			$	41,969		$	54,191		$	90,928				$	(6,546)			$	(12,115)			$	168,427
Net income	Net income								4,125										4			4,129		Net income											4,231												4,231

Other comprehensive loss	Other comprehensive loss										(544)											(544)		Other comprehensive loss															(3,134)								(3,134)
Stock-based compensation	Stock-based compensation				227																	227		Stock-based compensation								453															453
Cash settlement of options																								Cash settlement of options								(1,074)															(1,074)
Dividends declared ($0.32 per share)	Dividends declared ($0.32 per share)								(2,260)													(2,260)		Dividends declared ($0.32 per share)											(2,256)												(2,256)
Common shares issued for employee stock purchase plan	Common shares issued for employee stock purchase plan	889	5		15																	20		Common shares issued for employee stock purchase plan			1,023			6		17															23
Director Compensation Plan	Director Compensation Plan	3,406	19		61																	80		Director Compensation Plan			3,575			20		64															84
Distributions to noncontrolling interest																			(6)			(6)

Balance, September 30, 2021		7,545,922	$	41,921	$	53,508			$	87,146	$	(1,982)			$	(12,115)			$	3		$	168,481
Purchase of treasury stock (30,000 shares)																								Purchase of treasury stock (30,000 shares)																			(700)				(700)
Balance, June 30, 2022																								Balance, June 30, 2022			7,559,165			$	41,995	$	53,651		$	92,903			$	(9,680)			$	(12,815)			$	166,054

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

Six months ended:


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS		TREASURY STOCK		TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)	SHARES	AMOUNT
Balance, December 31, 2022	7,566,810	$	42,039	$	54,252	$	98,147	$	(13,958)	$	(12,815)	$	167,665
Cumulative effect of adoption of ASU 2016-13						1,647						1,647
Net income						8,829						8,829

Other comprehensive income								125				125
Stock-based compensation				486								486

Dividends declared ($0.64 per share)						(4,519)						(4,519)
Common shares issued for employee stock purchase plan	1,684	9		30								39
Director Compensation Plan	5,219	29		101								130

Balance, June 30, 2023	7,573,713	$	42,077	$	54,869	$	104,104	$	(13,833)	$	(12,815)	$	174,402

~~Nine~~ ~~months ended:~~

COMMON STOCK ADDITIONAL
PAID-IN CAPITAL RETAINED EARNINGS ACCUMULATED OTHER
COMPREHENSIVE LOSS TREASURY STOCK NON-CONTROLLING INTEREST TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data) SHARES AMOUNT
Balance, December 31, 2021 7,550,272 $ 41,945 $ 53,795 $ 89,761 $ (1,112) $ (12,115) $ — $ 172,274
Net income 12,913 12,913
Other comprehensive loss (13,457) (13,457)
Stock-based compensation 1,004 1,004
Cash settlement of options (1,074) (1,074)
Dividends declared ($0.96 per share) (6,778) (6,778)
Common shares issued for employee stock purchase plan 2,960 17 50 67
Director Compensation Plan 9,968 57 183 240
Purchase of treasury stock (30,000 shares) (700) (700)
Balance, September 30, 2022 7,563,200 $ 42,019 $ 53,958 $ 95,896 $ (14,569) $ (12,815) $ — $ 164,489


		COMMON STOCK			ADDITIONAL PAID-IN CAPITAL				RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK				NON-CONTROLLING INTEREST			TOTAL SHAREHOLDERS’ EQUITY					COMMON STOCK					ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS				ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK				TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Share And Per Share Data)	(In Thousands, Except Share And Per Share Data)	SHARES	AMOUNT										(In Thousands, Except Share And Per Share Data)				SHARES							AMOUNT														TOTAL SHAREHOLDERS’ EQUITY
Balance, December 31, 2020		7,532,576	$	41,847			$	52,523					$	82,769				$	(882)		$	(12,115)			$	4		$	164,146
Balance, December 31, 2021																								Balance, December 31, 2021			7,550,272			$	41,945		$	53,795		$	89,761				$	(1,112)			$	(12,115)			$	172,274
Net income	Net income								11,154										15			11,169		Net income											7,663												7,663

Other comprehensive loss	Other comprehensive loss										(1,100)											(1,100)		Other comprehensive loss															(8,568)								(8,568)
Stock-based compensation	Stock-based compensation				754																	754		Stock-based compensation								768															768
Dividends declared ($0.96 per share)									(6,777)													(6,777)
Cash settlement of options																								Cash settlement of options								(1,074)															(1,074)
Dividends declared ($0.64 per share)																								Dividends declared ($0.64 per share)											(4,521)												(4,521)
Common shares issued for employee stock purchase plan	Common shares issued for employee stock purchase plan	2,873	16		49																	65		Common shares issued for employee stock purchase plan			1,903			11		33															44
Director Compensation Plan	Director Compensation Plan	10,473	58		182																	240		Director Compensation Plan			6,990			39		129															168
Purchase of treasury stock ( shares)																								Purchase of treasury stock ( shares)																			(700)				(700)

Distributions to noncontrolling interest																			(16)			(16)
Balance, September 30, 2021		7,545,922	$	41,921	$	53,508			$	87,146	$	(1,982)			$	(12,115)			$	3		$	168,481
Balance, June 30, 2022																								Balance, June 30, 2022			7,559,165			$	41,995	$	53,651		$	92,903			$	(9,680)			$	(12,815)			$	166,054

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


		Nine Months Ended September 30,					Six Months Ended June 30,
(In Thousands)	(In Thousands)	2022		2021		(In Thousands)	2023		2022
OPERATING ACTIVITIES:	OPERATING ACTIVITIES:					OPERATING ACTIVITIES:
Net Income	Net Income	$	12,913	$	11,169	Net Income	$	8,829	$	7,663
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	2,660		2,235		Depreciation and amortization	1,608		1,833
Loss (gain) on sale of premises and equipment		275		(18)
Write down of leasehold improvements						Write down of leasehold improvements	—		254
Amortization of intangible assets	Amortization of intangible assets	119		147		Amortization of intangible assets	67		85
Provision for loan losses		1,335		940
(Recovery) provision for credit losses						(Recovery) provision for credit losses	(1,109)		480
Stock based compensation	Stock based compensation	1,004		754		Stock based compensation	486		768
Accretion and amortization of investment security discounts and premiums	Accretion and amortization of investment security discounts and premiums	932		829		Accretion and amortization of investment security discounts and premiums	281		655
Net securities losses (gains), available for sale		168		(323)
Net securities losses, available for sale						Net securities losses, available for sale	80		12
Originations of loans held for sale	Originations of loans held for sale	(30,644)		(68,328)		Originations of loans held for sale	(16,843)		(21,248)
Proceeds of loans held for sale	Proceeds of loans held for sale	32,789		72,355		Proceeds of loans held for sale	17,567		21,727
Gain on sale of loans	Gain on sale of loans	(905)		(2,034)		Gain on sale of loans	(475)		(611)
Net equity securities losses		158		24
Net equity securities (gains) losses						Net equity securities (gains) losses	(1)		103

Security trades payable	Security trades payable	(111)		—		Security trades payable	520		896
Earnings on bank-owned life insurance	Earnings on bank-owned life insurance	(501)		(614)		Earnings on bank-owned life insurance	(722)		(331)
Increase in deferred tax asset		(653)		(1,201)
Decrease (increase) in deferred tax asset						Decrease (increase) in deferred tax asset	518		(458)

Other, net	Other, net	(905)		(3,548)		Other, net	4,199		(1,453)
Net cash provided by operating activities	Net cash provided by operating activities	18,634		12,387		Net cash provided by operating activities	15,005		10,375
INVESTING ACTIVITIES:	INVESTING ACTIVITIES:					INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities	Proceeds from sales of available for sale securities	4,151		13,689		Proceeds from sales of available for sale securities	22,725		—
Proceeds from calls and maturities of available for sale securities	Proceeds from calls and maturities of available for sale securities	13,116		15,898		Proceeds from calls and maturities of available for sale securities	8,429		7,500
Purchases of available for sale securities	Purchases of available for sale securities	(57,239)		(36,124)		Purchases of available for sale securities	(24,384)		(43,812)
Net increase in loans	Net increase in loans	(168,950)		(3,167)		Net increase in loans	(133,213)		(97,345)
Acquisition of premises and equipment	Acquisition of premises and equipment	(263)		(939)		Acquisition of premises and equipment	(334)		(157)
Proceeds from the sale of premises and equipment	Proceeds from the sale of premises and equipment	137		2		Proceeds from the sale of premises and equipment	—		137
Proceeds from the sale of foreclosed assets	Proceeds from the sale of foreclosed assets	46		335		Proceeds from the sale of foreclosed assets	—		46
Purchase of bank-owned life insurance	Purchase of bank-owned life insurance	(21)		(30)		Purchase of bank-owned life insurance	(6)		(18)
Proceeds from bank-owned life insurance death benefit	Proceeds from bank-owned life insurance death benefit	2		453		Proceeds from bank-owned life insurance death benefit	1,656		2
Investment in limited partnership	Investment in limited partnership	(554)		(1,070)		Investment in limited partnership	—		(554)
Proceeds from redemption of regulatory stock	Proceeds from redemption of regulatory stock	6,692		2,167		Proceeds from redemption of regulatory stock	18,783		4,385
Purchases of regulatory stock	Purchases of regulatory stock	(6,700)		(1,439)		Purchases of regulatory stock	(24,050)		(3,312)
Net cash used for investing activities	Net cash used for investing activities	(209,583)		(10,225)		Net cash used for investing activities	(130,394)		(133,128)
FINANCING ACTIVITIES:	FINANCING ACTIVITIES:					FINANCING ACTIVITIES:
Net (decrease) increase in interest-bearing deposits		(73,943)		66,058
Net increase in noninterest-bearing deposits		43,043		32,518

Net increase (decrease) in interest-bearing deposits						Net increase (decrease) in interest-bearing deposits	40,423		(61,664)
Net (decrease) increase in noninterest-bearing deposits						Net (decrease) increase in noninterest-bearing deposits	(43,126)		29,928
Proceeds from long-term borrowings						Proceeds from long-term borrowings	110,000		—
Repayment of long-term borrowings	Repayment of long-term borrowings	(23,000)		(30,000)		Repayment of long-term borrowings	(10,000)		(13,000)
Net increase in short-term borrowings		25,154		4,160
Net increase (decrease) in short-term borrowings						Net increase (decrease) in short-term borrowings	27,061		(283)
Finance lease principal payments	Finance lease principal payments	(134)		(121)		Finance lease principal payments	(91)		(89)
Dividends paid	Dividends paid	(6,778)		(6,777)		Dividends paid	(4,519)		(4,521)
Distributions to non-controlling interest		—		(16)

Issuance of common stock	Issuance of common stock	307		305		Issuance of common stock	169		212
Purchases of treasury stock	Purchases of treasury stock	(700)		—		Purchases of treasury stock	—		(700)
Net cash (used for) provided by financing activities		(36,051)		66,127
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(227,000)		68,289
Net cash provided by (used for) financing activities						Net cash provided by (used for) financing activities	119,917		(50,117)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	4,528		(172,870)
CASH AND CASH EQUIVALENTS, BEGINNING	CASH AND CASH EQUIVALENTS, BEGINNING	263,862		213,358		CASH AND CASH EQUIVALENTS, BEGINNING	40,333		263,862
CASH AND CASH EQUIVALENTS, ENDING	CASH AND CASH EQUIVALENTS, ENDING	$	36,862	$	281,647	CASH AND CASH EQUIVALENTS, ENDING	$	44,861	$	90,992


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:	SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:					SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	Interest paid	$	4,315	$	7,202	Interest paid	$	12,547	$	2,958
Cash settlement of options		1,074		—

Income taxes paid	Income taxes paid	2,371		3,175		Income taxes paid	2,048		1,121
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities		—		2,653

Transfer of loans to foreclosed real estate	Transfer of loans to foreclosed real estate	97		83		Transfer of loans to foreclosed real estate	—		97

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

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

The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

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

CECL Adoption and Updated Significant Accounting Policy

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

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

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

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

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

Loans Evaluated Collectively: Management believes that internal credit ratings are the most relevant credit quality indicator for these types of loans, however; the Company does not assign internal credit ratings to smaller balance, homogeneous loans, such as home equity, residential mortgage, and consumer automobile loans. For these loans, the most relevant credit quality indicator is delinquency status and management evaluates credit quality based on the aging status of the loan. In order to determine the ACL:

Loans aggregated into pools based on similar risk characteristics.

The probability of default "PD" and loss given default rate "LGD" CECL model components are determined based on loss estimates driven by historical experience at the input level.

The PD model component uses "through the economic cycle transition" matrices based on the Company's historical loan and transaction data across each pool of loans.

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The LGD model component calculates a lifetime LGD estimate across each pool of loans utilizing a nonparametric loss curve modeling approach.

Reasonable and supportable forecasts are incorporated into the PD model component.

Cash flow assumptions are established for each loan using maturity date, amortization schedule and interest rate.

A constant prepayment rate is calculated for each loan pool in the CECL model.

Loans Evaluated Individually: Loans evaluated individually for expected credit losses include loans determined to be collateral-dependant.

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

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

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

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

The following is a summary of the Company's internal credit rating categories:



•			Pass: These loans do not currently pose undue credit risk and can range from the highest to average quality, depending on the degree of potential risk.


•			Special Mention: These loans have a heightened credit risk, but not to the point of justifying a classification of Substandard. Loans in this category are currently acceptable, but are nevertheless potentially weak.


•			Substandard or Lower: There exists a well-defined weakness or weaknesses that jeopardize the normal repayment of the debt.

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

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

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

The impact from the adoption of CECL is shown below:


	January 1, 2023
(In Thousands)	Pre-adoption		Adoption impact		As Reported
Assets
ACL on loans
Commercial, financial, and agricultural	$	1,914	$	2,656	$	4,570
Real estate mortgage:
Residential	5,061		(3,893)		1,168
Commercial	6,110		(2,660)		3,450
Construction	188		(96)		92
Consumer automobile loans	1,617		240		1,857
Other consumer installment loans	109		602		711
Unallocated	638		(638)		—

Liabilities
ACL for unfunded commitments	143		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~~June 30, ~~2022~~2023 and ~~2021~~2022 were as follows:

Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
(In Thousands) Net Unrealized (Loss) Gain on Available
for Sale Securities Defined
Benefit
Plan Total Net Unrealized Gain (Loss) on Available
for Sale Securities Defined
Benefit
Plan Total
Beginning balance $ (6,222) $ (3,458) $ (9,680) $ 4,085 $ (5,523) $ (1,438)
Other comprehensive loss before reclassifications (5,026) — (5,026) (542) — (542)
Amounts reclassified from accumulated other comprehensive (loss) gain 123 14 137 (39) 37 (2)
Net current-period other comprehensive (loss) income (4,903) 14 (4,889) (581) 37 (544)
Ending balance $ (11,125) $ (3,444) $ (14,569) $ 3,504 $ (5,486) $ (1,982)


	Three Months Ended June 30, 2023						Three Months Ended June 30, 2022
(In Thousands)	Net Unrealized (Loss) Gain on Available for Sale Securities		Defined Benefit Plan		Total		Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total
Beginning balance	$	(7,928)	$	(4,110)	$	(12,038)	$	(3,074)	$	(3,472)	$	(6,546)
Other comprehensive loss before reclassifications	(1,840)		—		(1,840)		(3,156)		—		(3,156)
Amounts reclassified from accumulated other comprehensive loss	15		30		45		8		14		22
Net current-period other comprehensive (loss) income	(1,825)		30		(1,795)		(3,148)		14		(3,134)

Ending balance	$	(9,753)	$	(4,080)	$	(13,833)	$	(6,222)	$	(3,458)	$	(9,680)

Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
(In Thousands) Net Unrealized Gain (Loss) on Available for Sale Securities Defined
Benefit
Plan Total Net Unrealized Gain (Loss) on Available
for Sale Securities Defined
Benefit
Plan Total
Beginning balance $ 2,373 $ (3,485) $ (1,112) $ 4,714 $ (5,596) $ (882)
Other comprehensive loss before reclassifications (13,631) — (13,631) (954) — (954)
Amounts reclassified from accumulated other comprehensive gain (loss) 133 41 174 (256) 110 (146)
Net current-period other comprehensive (loss) income (13,498) 41 (13,457) (1,210) 110 (1,100)
Ending balance $ (11,125) $ (3,444) $ (14,569) $ 3,504 $ (5,486) $ (1,982)

911

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	Six Months Ended June 30, 2023						Six Months Ended June 30, 2022
(In Thousands)	Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total		Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total
Beginning balance	$	(9,819)	$	(4,139)	$	(13,958)	$	2,373	$	(3,485)	$	(1,112)
Other comprehensive income (loss) before reclassifications	3		—		3		(8,605)		—		(8,605)
Amounts reclassified from accumulated other comprehensive gain	63		59		122		10		27		37
Net current-period other comprehensive income (loss)	66		59		125		(8,595)		27		(8,568)

Ending balance	$	(9,753)	$	(4,080)	$	(13,833)	$	(6,222)	$	(3,458)	$	(9,680)

The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 were as follows:


Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss				Affected Line Item in the Consolidated Statement of Income
	Three Months Ended June 30, 2023		Three Months Ended June 30, 2022
Net unrealized loss on available for sale securities	$	(19)	$	(10)	Net debt securities (losses) gains, available for sale
Income tax effect	4		2		Income tax provision
Total reclassifications for the period	$	(15)	$	(8)

Net unrecognized pension costs	$	(37)	$	(18)	Other non-interest expense
Income tax effect	7		4		Income tax provision
Total reclassifications for the period	$	(30)	$	(14)

Details about Accumulated Other Comprehensive Loss Components Amount Reclassified from Accumulated Other Comprehensive Loss Affected Line Item
in the Consolidated
Statement of Income
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Net unrealized (loss) gain on available for sale securities $ (156) $ 48 Net debt securities (losses) gains, available for sale
Income tax effect 33 (9) Income tax provision
Total reclassifications for the period $ (123) $ 39
Net unrecognized pension costs $ (17) $ (45) Other non-interest expense
Income tax effect 3 8 Income tax provision
Total reclassifications for the period $ (14) $ (37)

Details about Accumulated Other Comprehensive Loss Components Amount Reclassified from Accumulated Other Comprehensive Loss Affected Line Item
in the Consolidated
Statement of Income
Nine months ended September 30, 2022 Nine months ended September 30, 2021
Net unrealized (losses) gain on available for sale securities $ (168) $ 323 Net debt securities (losses) gains, available for sale
Income tax effect 35 (67) Income tax provision
Total reclassifications for the period $ (133) $ 256
Net unrecognized pension costs $ (52) $ (138) Other non-interest expense
Income tax effect 11 28 Income tax provision
Total reclassifications for the period $ (41) $ (110)


Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss				Affected Line Item in the Consolidated Statement of Income
	Six months ended June 30, 2023		Six months ended June 30, 2022
Net unrealized losses on available for sale securities	$	(80)	$	(12)	Net debt securities losses, available for sale
Income tax effect	17		2		Income tax provision
Total reclassifications for the period	$	(63)	$	(10)

Net unrecognized pension costs	$	(74)	$	(35)	Other non-interest expense
Income tax effect	15		8		Income tax provision
Total reclassifications for the period	$	(59)	$	(27)

Note 3. Recent Accounting Pronouncements

In June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU~~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 ~~Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and~~standard, along with several other ~~financial instruments held by financial institutions and other organizations. The underlying premise of~~subsequent codification updates, replaces the ~~Update is~~incurred loss impairment methodology in current GAAP with a methodology that ~~financial assets measured at amortized cost should be presented at the net amount~~reflects expected ~~to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of~~ credit losses that are expected to occur over the remaining life of a financial ~~asset.~~asset and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The ~~income statement will~~amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be ~~affected for~~presented at the ~~measurement of credit losses for newly recognized financial assets, as well as the~~net amount expected ~~increases or decreases of~~to be collected. The new current expected credit losses ~~that have taken place during the period. With certain exceptions, transition to the new requirements~~model (“CECL”) will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has contracted with a third-party software vendor to assist with the development of our approach in determining the calculations under the new guidance. The Company is currently refining the expected credit losses calculation along with process documentation and data validation testing. We expect to recognize a one-time cumulative-effect adjustmentapply 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, ~~not~~of $3,789,000; as well as

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an increase in its allowance for off-balance sheet credit exposures of $1,703,000. These estimates are subject to ~~exceed 25%~~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 ~~for loan losses.~~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 April 2019, the FASB issued ASU 2019-04,~~ ~~Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives, and Hedging (Topic 815); and Financial Instruments (Topic 825),~~ which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-04 makes clarifying amendments to certain financial instrument standards. For entities that have not yet adopted ASU 2016-13, the

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

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

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

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

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

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

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

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

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

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

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

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.

Note 4. Per Share Data

There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of ~~917,000~~1,003,000 stock options, with an average exercise price of ~~$25.35,~~$25.56, outstanding on ~~September~~June 30, ~~2022.~~2023. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $25.10 for the period being less than the strike price. There were a total of 919,250 stock options, with an average exercise price of $25.36 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 exercise price of the options issued. There were a total of 1,045,475 stock options, with an average exercise price of $27.25 that were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $23.70 being less than the strike price for the period ending ~~September~~June 30, ~~2021.~~2022.


		Three Months Ended September 30,		Nine Months Ended September 30,			Three Months Ended June 30,		Six Months Ended June 30,
		2022	2021	2022	2021		2023	2022	2023	2022
Weighted average common shares issued	Weighted average common shares issued	7,561,453	7,544,219	7,557,250	7,539,850	Weighted average common shares issued	7,572,243	7,557,402	7,570,443	7,555,113
Weighted average treasury stock shares	Weighted average treasury stock shares	(510,225)	(480,225)	(496,379)	(480,225)	Weighted average treasury stock shares	(510,225)	(498,357)	(510,225)	(489,341)
Weighted average common shares outstanding - basic and diluted						Weighted average common shares outstanding - basic and diluted	7,062,018	7,059,045	7,060,218	7,065,772

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

Note 5. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:

September 30, 2022
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
Available for sale (AFS):
U.S. Government and agency securities $ 3,003 $ — $ (101) $ 2,902
Mortgage-backed securities 1,508 — (226) 1,282
State and political securities 151,663 18 (10,001) 141,680
Other debt securities 46,104 4 (3,776) 42,332
Total debt securities $ 202,278 $ 22 $ (14,104) $ 188,196
Investment equity securities:
Equity securities $ 1,350 $ — $ (220) $ 1,130

December 31, 2021
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
Available for sale (AFS):
Mortgage-backed securities $ 1,752 $ — $ (5) $ 1,747
State and political securities 113,852 3,500 (694) 116,658
Other debt securities 47,802 524 (321) 48,005
Total debt securities $ 163,406 $ 4,024 $ (1,020) $ 166,410
Investment equity securities:
Equity securities $ 1,350 $ — $ (62) $ 1,288


	June 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):
U.S. Government and agency securities	$	4,001	$	—	$	(116)	$	3,885
Mortgage-backed securities	9,710		—		(380)		9,330

State and political securities	135,251		22		(7,794)		127,479
Other debt securities	50,009		—		(4,077)		45,932
Total debt securities	$	198,971	$	22	$	(12,367)	$	186,626

Investment equity securities:

Equity securities	$	1,350	$	—	$	(207)	$	1,143

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	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):
U.S. Government and agency securities	$	3,002	$	—	$	(106)	$	2,896
Mortgage-backed securities	1,496		—		(214)		1,282

State and political securities	151,426		157		(8,774)		142,809
Other debt securities	50,178		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~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.


		September 30, 2022													June 30, 2023
		Less than Twelve Months				Twelve Months or Greater				Total					Less than Twelve Months				Twelve Months or Greater				Total
				Gross				Gross				Gross					Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	(In Thousands)	Value		Losses		Value		Losses		Value		Losses		(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):	Available for sale (AFS):													Available for sale (AFS):
U.S. Government and agency securities	U.S. Government and agency securities	$	2,902	$	(101)	$	—	$	—	$	2,902	$	(101)	U.S. Government and agency securities	$	2,940	$	(58)	$	945	$	(58)	$	3,885	$	(116)
Mortgage-backed securities	Mortgage-backed securities	1,282		(226)		—		—		1,282		(226)		Mortgage-backed securities	8,057		(173)		1,264		(207)		9,321		(380)

State and political securities	State and political securities	110,153		(6,288)		29,874		(3,713)		140,027		(10,001)		State and political securities	43,028		(1,456)		81,127		(6,338)		124,155		(7,794)
Other debt securities	Other debt securities	25,956		(1,817)		15,272		(1,959)		41,228		(3,776)		Other debt securities	5,363		(267)		40,569		(3,810)		45,932		(4,077)
Total debt securities	Total debt securities	$	140,293	$	(8,432)	$	45,146	$	(5,672)	$	185,439	$	(14,104)	Total debt securities	$	59,388	$	(1,954)	$	123,905	$	(10,413)	$	183,293	$	(12,367)


		December 31, 2021													December 31, 2022
		Less than Twelve Months				Twelve Months or Greater				Total					Less than Twelve Months				Twelve Months or Greater				Total
				Gross				Gross				Gross					Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	(In Thousands)	Value		Losses		Value		Losses		Value		Losses		(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):	Available for sale (AFS):													Available for sale (AFS):

U.S. Government and agency securities														U.S. Government and agency securities	$	2,896	$	(106)	$	—	$	—	$	2,896	$	(106)
Mortgage-backed securities	Mortgage-backed securities	$	1,747	$	(5)	$	—	$	—	$	1,747	$	(5)	Mortgage-backed securities	—		—		1,282		(214)		1,282		(214)

State and political securities	State and political securities	34,203		(398)		7,408		(296)		41,611		(694)		State and political securities	95,444		(4,797)		36,283		(3,977)		131,727		(8,774)
Other debt securities	Other debt securities	21,446		(301)		1,808		(20)		23,254		(321)		Other debt securities	16,896		(664)		25,144		(2,886)		42,040		(3,550)
Total debt securities	Total debt securities	$	57,396	$	(704)	$	9,216	$	(316)	$	66,612	$	(1,020)	Total debt securities	$	115,236	$	(5,567)	$	62,709	$	(7,077)	$	177,945	$	(12,644)

At ~~September~~June 30, ~~2022,~~2023, there were a total of ~~184~~62 securities in a continuous unrealized loss position for less than twelve months and 78171 individual securities that were in a continuous unrealized loss position for twelve months or greater. No credit losses occurred for the period ended June 30, 2023.

The Company reviews its position quarterly and has determined that, at ~~September~~June 30, ~~2022,~~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 ~~other than temporary~~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.

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The amortized cost and fair value of debt securities at ~~September~~June 30, ~~2022,~~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)	(In Thousands)	Amortized Cost		Fair Value		(In Thousands)	Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	19,949	$	19,629	Due in one year or less	$	32,438	$	31,949
Due after one year to five years	Due after one year to five years	109,208		102,580		Due after one year to five years	96,817		90,609
Due after five years to ten years	Due after five years to ten years	66,429		59,814		Due after five years to ten years	62,073		56,741
Due after ten years	Due after ten years	6,692		6,173		Due after ten years	7,643		7,327
Total	Total	$	202,278	$	188,196	Total	$	198,971	$	186,626

Total gross proceeds from sales of debt securities available for sale for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$4,151,000,~~$22,725,000, compared to ~~$13,689,000~~$0 for the corresponding ~~2021~~2022 period.

~~Table of Contents~~

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

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2022 2021 2022 2021
Available for sale (AFS):
Gross realized gains:
U.S. Government and agency securities $ — $ — $ — $ —
Mortgage-backed securities — — — —
State and political securities — 1 14 1
Other debt securities — 48 — 323
Total gross realized gains $ — $ 49 $ 14 $ 324
Gross realized losses:
State and political securities $ 156 $ 1 $ 182 $ 1
Other debt securities — — — —
Total gross realized losses $ 156 $ 1 $ 182 $ 1

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2023		2022		2023		2022
Available for sale (AFS):
Gross realized gains:



State and political securities	$	91	$	13	$	145	$	14



Gross realized losses:



State and political securities	$	(110)	$	(23)	$	(225)	$	(26)

Investment securities with a carrying value of approximately ~~$160,842,000~~$100,631,000 and ~~$139,435,000~~$154,946,000 at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, we had ~~$1,130,000~~$1,143,000 and ~~$1,288,000,~~$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~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2022		2021		2022		2021		(In Thousands)	2023		2022		2023		2022
Net losses recognized in equity securities during the period		$	(55)	$	(8)	$	(158)	$	(24)
Net (losses) gains recognized in equity securities during the period										Net (losses) gains recognized in equity securities during the period	$	(20)	$	(44)	$	1	$	(103)
Less: Net gains realized on the sale of equity securities during the period	Less: Net gains realized on the sale of equity securities during the period	—		—		—		—		Less: Net gains realized on the sale of equity securities during the period	—		—		—		—
Unrealized (losses) gains recognized in equity securities held at reporting date	Unrealized (losses) gains recognized in equity securities held at reporting date	$	(55)	$	(8)	$	(158)	$	(24)	Unrealized (losses) gains recognized in equity securities held at reporting date	$	(20)	$	(44)	$	1	$	(103)

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Note 6. Loans

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

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

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

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

~~Impaired Loans~~

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

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~~collateral~~The following table presents the related aging categories of loans, by class, as of June 30, 2023 and ~~the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral.~~December 31, 2022:


	June 30, 2023
	Past Due						Past Due 90
	30 To 89						Days Or More
(In Thousands)	Days		Current		Total		& Still Accruing
Commercial, financial, and agricultural	$	270	$	207,871	$	208,174	$	33
Real estate mortgage:
Residential	2,578		740,186		743,705		941
Commercial	2,513		515,200		517,713		—
Construction	15		53,471		53,486		—
Consumer automobile loans	1,832		232,985		234,956		139
Other consumer installment loans	126		9,988		10,121		7
	$	7,334	$	1,759,701	1,768,155		$	1,120
Net deferred loan fees and discounts					1,248
Allowance for credit losses					(11,592)
Loans, net					$	1,757,811


	December 31, 2022
	Past Due		Past Due 90
	30 To 89		Days Or More		Non-
(In Thousands)	Days		& Still Accruing		Accrual		Current		Total
Commercial, financial, and agricultural	$	94	$	—	$	432	$	189,935	$	190,461
Real estate mortgage:
Residential	5,472		1,120		524		701,093		708,209
Commercial	2,564		60		2,659		495,349		500,632
Construction	511		—		—		42,797		43,308
Consumer automobile loans	2,089		80		—		183,943		186,112
Other consumer installment loans	152		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

~~Management evaluates individual~~The Allowance for Credit Losses ("ACL") related to loans ~~in all~~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 ~~commercial segments~~loans as of the balance sheet date and is recorded as a reduction to net loans. The ACL for ~~possible impairment if~~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 ~~loan is greater than $100,000~~provision for credit losses, and ~~if the loan is either on non-accrual status or has a risk rating~~decreased by charge-offs, net of ~~substandard or worse. Management may also elect to measure an individual loans of less than $100,000 for impairment on a case-by-case basis.~~recoveries.

~~Mortgage loans on one-to-four family properties and consumer loans are measured for impairment collectively with~~The following table presents the exception of loans identified as troubled debt restructurings. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the lengthcomponents of the ~~delay, the borrower’s prior payment record, and the amount~~ACL as of ~~shortfall in relation to the principal and interest owed. Interest income for impaired loans is recorded consistent to the Banks' policy.~~June 30, 2023:


	June 30,
(In Thousands)	2023
ACL - loans	$	11,592
ACL - off balance sheet credit exposure	1,199
Total ACL	$	12,791

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Non-accrual Loans


	June 30, 2023						December 31, 2022
	Non-accrual Loans
(In Thousands)	With a Related ACL		Without a Related ACL		Total		Total Non-accrual loans
Commercial, financial, and agricultural	$	—	$	422	$	422	$	432
Real estate mortgage:
Residential	26		272		298		524
Commercial	975		1,461		2,436		2,659
Construction	—		—		—		—
Consumer automobile	—		—		—		—
Other consumer installment loans	—		—		—		—
	$	1,001	$	2,155	$	3,156	$	3,615

Total interest income recorded on non-accrual loans at June 30, 2023 totaled $66,000.

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


		September 30, 2022							December 31, 2022
		Recorded		Unpaid Principal		Related			Recorded		Unpaid Principal		Related
(In Thousands)	(In Thousands)	Investment		Balance		Allowance		(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:	With no related allowance recorded:							With no related allowance recorded:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	$	302	$	302	$	—	Commercial, financial, and agricultural	$	295	$	295	$	—
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	3,436		3,436		—		Residential	3,388		3,388		—
Commercial	Commercial	2,655		2,655		—		Commercial	2,588		2,588		—
Construction	Construction	—		—		—		Construction	—		—		—
Consumer automobile loans	Consumer automobile loans	—		—		—		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	—		—		—		Installment loans to individuals	—		—		—
		6,393		6,393		—			6,271		6,271		—
With an allowance recorded:	With an allowance recorded:							With an allowance recorded:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	422		422		5		Commercial, financial, and agricultural	403		403		4
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	1,026		1,026		388		Residential	933		933		111
Commercial	Commercial	4,504		4,504		813		Commercial	3,607		3,607		827
Construction	Construction	—		—		—		Construction	—		—		—
Consumer automobile loans	Consumer automobile loans	—		—		—		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	—		—		—		Installment loans to individuals	19		—		19
		5,952		5,952		1,206			4,962		4,943		961
Total:	Total:							Total:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	724		724		5		Commercial, financial, and agricultural	698		698		4
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	4,462		4,462		388		Residential	4,321		4,321		111
Commercial	Commercial	7,159		7,159		813		Commercial	6,195		6,195		827
Construction	Construction	—		—		—		Construction	—		—		—
Consumer automobile loans	Consumer automobile loans	—		—		—		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	—		—		—		Installment loans to individuals	19		—		19
		$	12,345	$	12,345	$	1,206		$	11,233	$	11,214	$	961

1718

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

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


(In Thousands)	Real estate		Other*		Unsecured**		Total

Real estate mortgage:
Residential	$	244	$	—	$	—	$	244
Commercial	95		1,225		332		1,652



Total	$	339	$	1,225	$	332	$	1,896

* 90% of loan balances guaranteed by USDA remaining 10% is unsecured

** Loan considered unsecured due to lien position on property

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


		Three Months Ended June 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			$	758	$	5	$	—
Real estate mortgage:
Residential			4,773		48		—
Commercial			7,446		49		—
Construction			32		—		—
Consumer automobile			7		1		—
Other consumer installment loans			19		—		—
			$	13,035	$	103	$	—


		Six Months Ended June 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		$	801	$	10	$	—
Real estate mortgage:
Residential		4,866		94		—
Commercial		7,605		101		—
Construction		56		1		—
Consumer automobile		5		1		—
Other consumer installment loans		19		—		—
		$	13,352	$	207	$	—

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 ~~2021:~~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.

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

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

~~Troubled Debt Restructurings~~There were no loan modifications completed during the three and six months ended June 30, 2023.

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

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

2022.

~~Three Months Ended September 30,~~

~~2021~~

~~(In Thousands, Except Number of Contracts)~~

Number
of
Contracts

~~Pre-Modification Outstanding Recorded Investment~~

~~Post-Modification Outstanding Recorded Investment~~

~~Commercial, financial, and agricultural~~

—

~~Real estate mortgage:~~

~~Residential~~

—

~~Commercial~~

—

~~Construction~~

—

~~Table of Contents~~

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

There ~~was~~were no loan ~~modification~~modifications made during the twelve months prior to June 30, 2023 that defaulted during the six months ended June 30, 2023. There were no loan modifications considered to be a TDR made during the twelve months ~~prior~~previous to ~~September~~June 30, 2022 that defaulted during the ~~nine~~six months ended ~~September 30,~~June 31, 2022. There were two loan modifications considered to be a TDRs made during the twelve months previous to September 30, 2021 that defaulted during the nine months ended September 30, 2021. The defaulted loan type and recorded investments at September 30, 2021 were as follows: two residential real estate loan with a recorded investment of $706,000.

~~Troubled debt restructurings~~Loans considered modifications amounted to ~~$8,469,000~~$7,087,000 and ~~$9,410,000~~$7,468,000 as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

The amount of foreclosed residential real estate held at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, totaled ~~$127,000~~$2,112,000 and ~~$339,000,~~$950,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, totaled ~~$521,000~~$456,000 and ~~$193,000,~~$890,000, respectively.

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

Internal ~~Risk~~Credit Ratings

Management uses a ten point internal ~~risk~~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 ~~risk~~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

~~Table of Contents~~

performed, as well as a sample of smaller transactions. The ~~2022~~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.

Table of Contents

The following table presents the credit quality categories identified above as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:


																												June 30, 2023
(In Thousands)																									(In Thousands)			2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial, financial, and agricultural																									Commercial, financial, and agricultural
Pass																									Pass			$	22,833	$	57,575	$	43,386	$	34,212	$	7,664	$	10,040	$	31,205	$	126	$	207,041
Special Mention																									Special Mention			—		—		—		—		—		58		—		—		58
Substandard or Lower																									Substandard or Lower			—		—		—		—		—		5		399		671		1,075

		September 30, 2022
		Commercial, Financial, and Agricultural				Real Estate Mortgages												Consumer automobile			Other consumer installment loans							$	22,833	$	57,575	$	43,386	$	34,212	$	7,664	$	10,103	$	31,604	$	797	$	208,174
(In Thousands)				Residential				Commercial				Construction								Totals

Current period gross write offs																									Current period gross write offs			$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Real estate mortgage:																									Real estate mortgage:
Residential																									Residential
Pass	Pass			$	171,416			$	680,296			$	475,341			$	48,593				$	159,681	$	9,811		$	1,545,138		Pass	$	72,751	$	219,710	$	122,575	$	72,789	$	47,250	$	38,553	$	49,094	$	118,722	$	741,444
Special Mention	Special Mention	152				234				4,360				—				—			—		4,746		Special Mention			—		—		—		—		—		—		—		—		—
Substandard		1,797				2,712				5,837				101				—			—		10,447
Substandard or Lower																									Substandard or Lower			—		—		—		—		—		2,186		—		75		2,261
		$	173,365			$	683,242			$	485,538			$	48,694			$	159,681		$	9,811	$	1,560,331

																												$	72,751	$	219,710	$	122,575	$	72,789	$	47,250	$	40,739	$	49,094	$	118,797	$	743,705

Current period gross write offs																									Current period gross write offs			$	—	$	—	$	—	$	—	$	—	$	9	$	72	$	—	$	81

Commercial																									Commercial
Pass																									Pass			$	29,431	$	102,217	$	137,700	$	52,157	$	26,535	$	153,447	$	8,465	$	620	$	510,572
Special Mention																									Special Mention			—		—		178		—		—		48		—		—		226
Substandard or Lower																									Substandard or Lower			—		—		—		—		63		6,815		—		37		6,915

																												$	29,431	$	102,217	$	137,878	$	52,157	$	26,598	$	160,310	$	8,465	$	657	$	517,713

Current period gross write offs																									Current period gross write offs			$	136	$	—	$	—	$	—	$	—	$	3	$	—	$	—	$	139

Construction																									Construction
Pass																									Pass			$	15,104	$	16,649	$	14,778	$	1,450	$	598	$	4,547	$	267	$	—	$	53,393
Special Mention																									Special Mention			—		—		—		—		—		—		—		—		—
Substandard or Lower																									Substandard or Lower			—		—		—		—		—		93		—		—		93

																												$	15,104	$	16,649	$	14,778	$	1,450	$	598	$	4,640	$	267	$	—	$	53,486

Current period gross write offs																									Current period gross write offs			$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer Automobile																									Consumer Automobile
Pass																									Pass			$	80,745	$	92,319	$	24,538	$	20,011	$	10,391	$	6,952	$	—	$	—	$	234,956
Special Mention																									Special Mention			—		—		—		—		—		—		—		—		—
Substandard or Lower																									Substandard or Lower			—		—		—		—		—		—		—		—		—

																												$	80,745	$	92,319	$	24,538	$	20,011	$	10,391	$	6,952	$	—	$	—	$	234,956

Current period gross write offs																									Current period gross write offs			$	58	$	125	$	65	$	76	$	—	$	6	$	—	$	—	$	330

Installment loans to individuals																									Installment loans to individuals
Pass																									Pass			$	1,677	$	2,707	$	1,460	$	623	$	465	$	3,143	$	—	$	46	$	10,121
Special Mention																									Special Mention			—		—		—		—		—		—		—		—		—
Substandard or Lower																									Substandard or Lower			—		—		—		—		—		—		—		—		—

																												$	1,677	$	2,707	$	1,460	$	623	$	465	$	3,143	$	—	$	46	$	10,121

Current period gross write offs																									Current period gross write offs			$	108	$	5	$	21	$	—	$	3	$	6	$	13	$	11	$	167

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

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The information presented in the table above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, internal credit ratings for the report loan segments as of December 31, 2022:


	December 31, 2022
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)			Residential		Commercial		Construction						Totals
Pass	$	184,783	$	705,515	$	488,993	$	43,209	$	186,112	$	10,361	$	1,618,973
Special Mention	125		266		4,526		—		—		—		4,917
Substandard	5,553		2,428		7,113		99		—		—		15,193
	$	190,461	$	708,209	$	500,632	$	43,308	$	186,112	$	10,361	$	1,639,083

Allowance for ~~Loan~~Credit Losses

~~An allowance~~Maintaining an appropriate Allowance for ~~loan losses (“ALL”~~Credit Losses ("ACL") is ~~maintained~~dependent on various factors, including the ability to ~~absorb losses from~~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 ~~portfolio. The ALL is~~review process provide a separate assessment of credit rating accuracy. Credit ratings may be changed based on ~~management’s continuing evaluation of~~ the ~~risk characteristics and~~ongoing monitoring procedures performed by loan officers or credit ~~quality~~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 ~~assessment of current economic conditions, diversification~~ and ~~size~~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 ~~portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.~~loan.

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

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

~~For the general allowances, historical~~Historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing ~~a twelve quarter moving average. However, management may adjust~~ the ~~moving average time frame by up to four quarters to adjust for variances in~~charge-off and recovery data over the ~~economic cycle.~~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; ~~levels of and trends in delinquency rates and non-accrual loans;~~ trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

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

~~Table of Contents~~

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

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Activity in the allowance is presented for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:

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


		Three Months Ended September 30, 2021																														Three Months Ended June 30, 2023
		Commercial, Financial, and Agricultural				Real Estate Mortgages												Consumer automobile			Other consumer installment											Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile			Other consumer installment
(In Thousands)	(In Thousands)			Residential				Commercial				Construction								Unallocated			Totals		(In Thousands)				Residential					Commercial		Construction						Unallocated			Totals
Beginning Balance	Beginning Balance			$	1,846			$	4,619			$	4,436			$	212				$	1,824	$	44		$	1,457			$	14,438		Beginning Balance	$	3,862	$	1,412	$	3,481	$	184		$	2,113	$	682	$	—	$	11,734
Charge-offs	Charge-offs	(10)				(29)				—				—				(12)			(116)		—			(167)		Charge-offs				—		(3)		(136)		—		(237)			(79)		—		(455)
Recoveries	Recoveries	8				—				84				5				107			7		—			211		Recoveries				856		1		22		—		27			21		—		927
Provision	Provision	277				175				(500)				11				(226)			194		144			75		Provision				(1,699)		(332)		824		(6)		543			56		—		(614)
Ending Balance	Ending Balance	$	2,121			$	4,765			$	4,020			$	228			$	1,693		$	129	$	1,601		$	14,557	Ending Balance				$	3,019	$	1,078	$	4,191	$	178	$	2,446		$	680	$	—	$	11,592


	Three Months Ended June 30, 2022
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,936	$	4,801	$	5,215	$	197	$	1,376	$	114	$	384	$	14,023
Charge-offs	—		(15)		—		—		(48)		(43)		—		(106)
Recoveries	41		42		1		28		13		21		—		146
Provision	131		(10)		179		(26)		(34)		18		72		330
Ending Balance	$	2,108	$	4,818	$	5,395	$	199	$	1,307	$	110	$	456	$	14,393


t	t	Nine Months Ended September 30, 2022																										t				Six Months Ended June 30, 2023
		Commercial, Financial, and Agricultural				Real Estate Mortgages												Consumer automobile			Other consumer installment											Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile			Other consumer installment
(In Thousands)	(In Thousands)			Residential				Commercial				Construction								Unallocated			Totals		(In Thousands)				Residential					Commercial		Construction						Unallocated			Totals
Beginning Balance	Beginning Balance			$	1,946			$	4,701			$	5,336			$	179				$	1,411	$	111		$	492			$	14,176		Beginning Balance	$	1,914	$	5,061	$	6,110	$	188		$	1,617	$	109	$	638	$	15,637
Impact of adopting ASC 326																												Impact of adopting ASC 326				2,656		(3,893)		(2,660)		(96)		240			602		(638)		(3,789)
Charge-offs	Charge-offs	(18)				(15)				(155)				—				(234)			(188)		—			(610)		Charge-offs				—		(81)		(139)		—		(330)			(167)		—		(717)
Recoveries	Recoveries	138				46				3				28				32			63		—			310		Recoveries				961		3		25		—		39			38		—		1,066
Provision	Provision	3				463				352				3				376			132		6			1,335		Provision				(2,512)		(12)		855		86		880			98		—		(605)
Ending Balance	Ending Balance	$	2,069			$	5,195			$	5,536			$	210			$	1,585		$	118	$	498		$	15,211	Ending Balance				$	3,019	$	1,078	$	4,191	$	178	$	2,446		$	680	$	—	$	11,592


		Nine Months Ended September 30, 2021																														Six Months Ended June 30, 2022
		Commercial, Financial, and Agricultural				Real Estate Mortgages												Consumer automobile			Other consumer installment											Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile			Other consumer installment
(In Thousands)	(In Thousands)			Residential				Commercial				Construction								Unallocated			Totals		(In Thousands)				Residential					Commercial		Construction						Unallocated			Totals
Beginning Balance	Beginning Balance			$	1,936			$	4,460			$	3,635			$	134				$	1,906	$	261		$	1,471			$	13,803		Beginning Balance	$	1,946	$	4,701	$	5,336	$	179		$	1,411	$	111	$	492	$	14,176
Charge-offs	Charge-offs	(45)				(172)				—				—				(235)			(173)		—			(625)		Charge-offs				—		(15)		(155)		—		(177)			(103)		—		(450)
Recoveries	Recoveries	22				112				109				10				139			47		—			439		Recoveries				45		45		2		28		22			45		—		187
Provision	Provision	208				365				276				84				(117)			(6)		130			940		Provision				117		87		212		(8)		51			57		(36)		480
Ending Balance	Ending Balance	$	2,121			$	4,765			$	4,020			$	228			$	1,693		$	129	$	1,601		$	14,557	Ending Balance				$	2,108	$	4,818	$	5,395	$	199	$	1,307		$	110	$	456	$	14,393

The shift in allocation and the ~~increase~~changes in the ~~loan~~ provision isfor 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 increase in provision for the three and ~~decreasing economic uncertainty caused by~~six month periods ended June 30, 2023 for consumer auto was loan volume driven. The decrease in provision for the ~~COVID-19 pandemic including supply chain disruptions.~~three and six month periods ended June 30, 2023 for commercial, financial, and agricultural 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 increase in provision for the three and six month periods ended June 30, 2023 for commercial real estate was primarily the result of 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.

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The Company has a concentration of the following to gross loans at ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:

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

~~Table of Contents~~


	June 30,
	2023		2022
Owners of residential rental properties	18.79	%	19.65	%
Owners of commercial rental properties	14.80	%	16.11	%

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

September 30, 2022
Commercial, Financial, and Agricultural Real Estate Mortgages Consumer Automobile Other consumer installment Unallocated
(In Thousands) Residential Commercial Construction Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ 5 $ 388 $ 813 $ — $ — $ — $ — $ 1,206
Collectively evaluated for impairment 2,064 4,807 4,723 210 1,585 118 498 14,005
Total ending allowance balance $ 2,069 $ 5,195 $ 5,536 $ 210 $ 1,585 $ 118 $ 498 $ 15,211
Loans:
Individually evaluated for impairment $ 724 $ 4,462 $ 7,159 $ — $ — $ — $ 12,345
Collectively evaluated for impairment 172,641 678,780 478,379 48,694 159,681 9,811 1,547,986
Total ending loans balance $ 173,365 $ 683,242 $ 485,538 $ 48,694 $ 159,681 $ 9,811 $ 1,560,331


		December 31, 2021																							December 31, 2022
		Commercial, Financial, and Agricultural			Real Estate Mortgages								Consumer Automobile		Other consumer installment			Unallocated							Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile			Other consumer installment		Unallocated
(In Thousands)	(In Thousands)			Residential			Commercial			Construction							Totals			(In Thousands)				Residential			Commercial		Construction						Totals
Allowance for Loan Losses:	Allowance for Loan Losses:																									Allowance for Loan Losses:
Ending allowance balance attributable to loans:	Ending allowance balance attributable to loans:																						Ending allowance balance attributable to loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	2		$	201		$	800		$	—	$	—	$	20		$	—		$	1,023	Individually evaluated for impairment		$	4	$	111	$	827	$	—	$	—		$	19	$	—	$	961
Collectively evaluated for impairment	Collectively evaluated for impairment	1,944			4,500			4,536			179		1,411		91			492			13,153		Collectively evaluated for impairment		1,910		4,950		5,283		188		1,617			90		638		14,676
Total ending allowance balance	Total ending allowance balance	$	1,946		$	4,701		$	5,336		$	179	$	1,411	$	111		$	492		$	14,176	Total ending allowance balance		$	1,914	$	5,061	$	6,110	$	188	$	1,617		$	109	$	638	$	15,637

Loans:	Loans:																						Loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	889		$	5,052		$	7,919		$	105	$	—	$	20					$	13,985	Individually evaluated for impairment		$	698	$	4,321	$	6,195	$	—	$	—		$	19			$	11,233

Collectively evaluated for impairment	Collectively evaluated for impairment	162,396			590,795			438,815			37,190		139,408		9,257						1,377,861		Collectively evaluated for impairment		189,763		703,888		494,437		43,308		186,112			10,342				1,627,850
Total ending loans balance	Total ending loans balance	$	163,285		$	595,847		$	446,734		$	37,295	$	139,408	$	9,277					$	1,391,846	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, ~~2021.~~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~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively:

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2022 2021 2022 2021
Interest cost $ 138 $ 127 $ 414 $ 381
Expected return on plan assets (412) (386) (1,237) (1,158)
Amortization of net loss 17 45 52 138
Net periodic benefit $ (257) $ (214) $ (771) $ (639)

~~Table of Contents~~


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2023		2022		2023		2022

Interest cost	$	198	$	138	$	396	$	276
Expected return on plan assets	(326)		(413)		(652)		(825)


Amortization of net loss	37		18		74		35
Net periodic benefit	$	(91)	$	(257)	$	(182)	$	(514)

Employer Contributions

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, that it does not expect to contribute to its defined benefit plan in ~~2022.~~2023. As of ~~September~~June 30, ~~2022,~~2023, there were no contributions made to the pension plan.

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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~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, there were ~~2,960~~1,684 and ~~2,873~~1,903 shares issued under the Plan, respectively, for total proceeds of ~~$67,000~~$39,000 and ~~$65,000.~~$44,000.

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~~June 30, ~~2022,~~2023, the Company has issued a total of ~~31,678~~39,850 shares of common stock to non-employee directors under the Director Plan in lieu of otherwise payable cash compensation with ~~9,968~~5,219 and ~~10,473~~6,990 shares issued, respectively, with an associated expense of $130,000 and $168,000 during the ~~nine~~three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~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~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:


(In Thousands)	(In Thousands)	September 30, 2022		December 31, 2021		(In Thousands)	June 30, 2023		December 31, 2022
Commitments to extend credit	Commitments to extend credit	$	180,752	$	184,364	Commitments to extend credit	$	159,795	$	169,365
Standby letters of credit	Standby letters of credit	9,795		7,027		Standby letters of credit	9,750		9,915
Credit exposure from the sale of assets with recourse	Credit exposure from the sale of assets with recourse	10,454		10,248		Credit exposure from the sale of assets with recourse	7,358		7,358
		$	201,001	$	201,639		$	176,903	$	186,638
Allowance for credit losses						Allowance for credit losses	$	1,199	$	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.

~~Table of Contents~~

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.

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Note 10. Fair Value Measurements

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


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

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

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

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

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~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, 2022									June 30, 2023
(In Thousands)	(In Thousands)	Level I		Level II		Level III		Total		(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:	Assets measured on a recurring basis:									Assets measured on a recurring basis:
Investment securities, available for sale:	Investment securities, available for sale:									Investment securities, available for sale:
U.S. Government and agency securities	U.S. Government and agency securities	$	—	$	2,902	$	—	$	2,902	U.S. Government and agency securities	$	—	$	3,885	$	—	$	3,885
Mortgage-backed securities	Mortgage-backed securities	—		1,282		—		1,282		Mortgage-backed securities	—		9,330		—		9,330

State and political securities	State and political securities	—		141,680		—		141,680		State and political securities	—		127,479		—		127,479
Other debt securities	Other debt securities	—		42,332		—		42,332		Other debt securities	—		45,932		—		45,932
Investment equity securities:	Investment equity securities:									Investment equity securities:

Equity securities	Equity securities	1,130		—		—		1,130		Equity securities	1,143		—		—		1,143


		December 31, 2021									December 31, 2022
(In Thousands)	(In Thousands)	Level I		Level II		Level III		Total		(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:	Assets measured on a recurring basis:									Assets measured on a recurring basis:
Investment securities, available for sale:	Investment securities, available for sale:									Investment securities, available for sale:

U.S. Government and agency securities										U.S. Government and agency securities	$	—	$	2,896	$	—	$	2,896
Mortgage-backed securities	Mortgage-backed securities	$	—	$	1,747	$	—	$	1,747	Mortgage-backed securities	—		1,282		—		1,282

State and political securities	State and political securities	—		116,658		—		116,658		State and political securities	—		142,809		—		142,809
Other debt securities	Other debt securities	—		48,005		—		48,005		Other debt securities	—		46,686		—		46,686
Investment equity securities:	Investment equity securities:									Investment equity securities:

Equity securities	Equity securities	1,288		—		—		1,288		Equity securities	1,142		—		—		1,142

~~Table of Contents~~

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~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, 2022									June 30, 2023
(In Thousands)	(In Thousands)	Level I		Level II		Level III		Total		(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:	Assets measured on a non-recurring basis:									Assets measured on a non-recurring basis:
Impaired loans		$	—	$	—	$	2,006	$	2,006
Collateral dependent loans										Collateral dependent loans	$	—	$	—	$	1,564	$	1,564
Other real estate owned	Other real estate owned	—		—		127		127		Other real estate owned	—		—		83		83

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

Table of Contents


	December 31, 2022
(In Thousands)	Level I		Level II		Level III		Total
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~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:

September 30, 2022

June 30, 2023

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

2,006

Appraisal of collateral (1)

Appraisal adjustments (1)

(10)% to (34)%

(14)%

Collateral dependent loans

1,564

Appraisal of collateral (1)

Appraisal adjustments (1)

(10)% to (24)%

(22)%

Other real estate owned

127

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

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

December 31, 2021

December 31, 2022

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

2,360

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (34)%

(15)%

Impaired loans

1,923

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (34)%

(14)%

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

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

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

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

Note 11. Fair Value of Financial Instruments

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

~~Table of Contents~~

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.

Table of Contents

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~~June 30, ~~2022~~2023 and December 31, ~~2021:~~2022:


		Carrying		Fair		Fair Value Measurements at September 30, 2022							Carrying		Fair		Fair Value Measurements at June 30, 2023
(In Thousands)	(In Thousands)	Value		Value		Level I		Level II		Level III		(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:	Financial assets:											Financial assets:

Loans held for sale (1)	Loans held for sale (1)	$	2,485	$	2,485	$	2,485	$	—	$	—	Loans held for sale (1)	$	3,049	$	3,049	$	3,049	$	—	$	—
Loans, net	Loans, net	1,545,489		1,503,285		—		—		1,503,285		Loans, net	1,757,811		1,723,329		—		—		1,723,329

Financial liabilities:	Financial liabilities:											Financial liabilities:

Time deposits		142,808		135,457		—		—		135,457
Time deposits & brokered deposits												Time deposits & brokered deposits	313,402		307,435		—		—		307,435
Short-term borrowings	Short-term borrowings	30,901		30,901		30,901		—		—		Short-term borrowings	180,410		180,410		180,410		—		—
Long-term borrowings	Long-term borrowings	102,829		99,100		—		—		99,100		Long-term borrowings	202,692		198,834		—		—		198,834

(1) The financial instrument is carried at cost at, ~~September~~June 30, ~~2022~~2023 which approximate the fair value of the instruments


		Carrying		Fair		Fair Value Measurements at December 31, 2021							Carrying		Fair		Fair Value Measurements at December 31, 2022
(In Thousands)	(In Thousands)	Value		Value		Level I		Level II		Level III		(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:	Financial assets:											Financial assets:

Loans held for sale (1)	Loans held for sale (1)	$	3,725	$	3,725	$	3,725	$	—	$	—	Loans held for sale (1)	$	3,298	$	3,298	$	3,298	$	—	$	—
Loans, net	Loans, net	1,377,971		1,379,787		—		—		1,379,787		Loans, net	1,624,094		1,594,073		—		—		1,594,073

Financial liabilities:	Financial liabilities:											Financial liabilities:

Time deposits		205,367		204,512		—		—		204,512
Time deposits & brokered deposits												Time deposits & brokered deposits	146,282		137,559		—		—		137,559
Short-term borrowings	Short-term borrowings	5,747		5,747		5,747		—		—		Short-term borrowings	153,349		153,349		153,349		—		—
Long-term borrowings	Long-term borrowings	125,963		127,679		—		—		127,679		Long-term borrowings	102,783		99,118		—		—		99,118

(1) The financial instrument is carried at cost at, December 31, ~~2021~~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, ~~2022,~~2023, the Company had a total of ~~1,034,525~~914,000 stock options outstanding. During the ~~period~~six months ended ~~September~~as of June 30, ~~2022,~~2023, the Company issued ~~234,000~~89,000 stock options with a strike price of ~~$24.10~~$27.77 to a group of employees. The options granted in ~~2022~~2023 all expire ten years from the grant date. Of the ~~234,000~~89,000 grants awarded in ~~2022, 156,000~~2023, 59,500 of the options vest in three years while the ~~78,000~~29,500 remaining options vest in five years. During the nine month period ended September 30, 2022, a voluntary cash settlement of 346,725 outstanding stock options with an average strike price of $30.07 was initiated. The repurchase price per outstanding share ranged from $1.4770 to $3.3685 as determined by the utilization of a Black Scholes valuation methodology.

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Stock options outstanding as of ~~September~~June 30, ~~2022~~2023 are presented below:

Stock Options Granted
Date Shares Forfeited Cash Settlement Outstanding Strike Price Vesting Period Expiration
January 18, 2022 156,000 — — 156,000 $ 24.10 3 years 10 years
January 18, 2022 78,000 — — 78,000 24.10 5 years 10 years
April 9, 2021 156,500 — — 156,500 24.23 3 years 10 years
April 9, 2021 78,000 — — 78,000 24.23 5 years 10 years
March 11, 2020 119,300 — — 119,300 25.34 3 years 10 years
March 11, 2020 119,200 — — 119,200 25.34 5 years 10 years
March 15, 2019 120,900 (16,800) — 104,100 28.01 3 years 10 years
March 15, 2019 119,100 (16,200) — 102,900 28.01 5 years 10 years
August 27, 2015 58,125 (26,250) (28,875) 3,000 28.02 5 years 10 years


Stock Options Granted
Date	Shares	Forfeited	Cash Settlement	Outstanding	Strike Price		Vesting Period	Expiration

January 20, 2023	59,500	—	—	59,500	$	27.77	3 years	10 years
January 20, 2023	29,500	—	—	29,500	27.77		5 years	10 years
January 18, 2022	156,000	—	—	156,000	24.10		3 years	10 years
January 18, 2022	78,000	—	—	78,000	24.10		5 years	10 years
April 9, 2021	156,500	—	—	156,500	24.23		3 years	10 years
April 9, 2021	78,000	—	—	78,000	24.23		5 years	10 years
March 11, 2020	119,300	—	—	119,300	25.34		3 years	10 years
March 11, 2020	119,200	—	—	119,200	25.34		5 years	10 years
March 15, 2019	120,900	(18,300)	—	102,600	28.01		3 years	10 years
March 15, 2019	119,100	(17,700)	—	101,400	28.01		5 years	10 years






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

A summary of stock option activity is presented below:


		September 30, 2022			June 30, 2023
		Shares	Weighted Average Exercise Price				Shares	Weighted Average Exercise Price
Outstanding, beginning of year	Outstanding, beginning of year	1,034,525	$	27.23		Outstanding, beginning of year	914,000	$	25.34
Granted	Granted	234,000	24.10			Granted	89,000	27.77
Cash settlement		(346,725)	30.07

Forfeited	Forfeited	(4,800)	28.59			Forfeited	—	—
Expired	Expired	—	—			Expired	—	—
Outstanding, end of period	Outstanding, end of period	917,000	$	25.35		Outstanding, end of period	1,003,000	$	25.56

Exercisable, end of period	Exercisable, end of period	107,100	$	28.01		Exercisable, end of period	224,900	$	26.59

The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a ~~straightline~~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~~six months ended ~~September~~June 30, ~~2022:~~2023:

~~Nine~~Six months ended ~~September~~June 30,

~~2022~~2023

Risk-free interest rate

~~1.23~~3.76

Expected volatility

3331

Expected Annual dividend

1.28

Expected life

6.84 years

Weighted average grant date fair value per option

~~4.28~~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 ~~$1,004,000~~$233,000 and $486,000 for the ~~nine~~three and six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$754,000~~$453,000 and $768,000 for the same ~~period~~periods of 2021. The expense level for the nine months ended September 30, 2022 was impacted by the voluntary cash settlement of 346,725 stock options which resulted in $183,000 in additional compensation expense and a reduction in additional paid-in capital of $1,074,000.2022. As of ~~September~~June 30, ~~2022,~~2023, a total

~~Table~~ of ~~Contents~~

~~of 107,100~~224,900 stock options were exercisable and the weighted average years to expiration of these options was ~~6.96~~6.19 years. Total unrecognized compensation cost for non-vested options was ~~$1,848,000~~$1,673,000 and will be recognized over their weighted average remaining vesting period of ~~1.26~~1.15 years.

Table of Contents

~~Note 13. Leases~~

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

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

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

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2022 2021 2022 2021
Finance Lease Cost:
Amortization of right-of-use asset $ 107 $ 108 $ 322 $ 367
Interest expense 61 62 184 195
Operating lease cost 71 73 214 223
Variable lease cost — — — —
Total Lease Cost $ 239 $ 243 $ 720 $ 785

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

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

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

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

Note ~~14.~~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.~~equity

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

This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the ~~negative impacts~~effects of external events, including natural disasters, national or global health emergencies, and ~~disruptions~~events of ~~the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations;~~armed conflict in other countries; or (vi) ~~the length and extent of the economic contraction as a result of the COVID-19 pandemic; or (vii)~~ the effect of changes in the business cycle and downturns in the local, regional or national economies, including the effects of inflation,; and ~~(viii)~~(vii) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2021~~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~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022

Summary Results

Net income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~$5,250,000~~$4.2 million and ~~$12,913,000~~$8.8 million, compared to ~~$4,125,000~~$4.2 million and ~~$11,154,000~~$7.7 million for the same periods of ~~2021.~~2022. Results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~2021~~2022 were impacted by ~~an increase~~a decrease in after-tax securities losses of ~~$199,000~~$12,000 (from a ~~gain~~loss of ~~$32,000~~$43,000 to a loss of ~~$167,000)~~$31,000) for the three month period and ~~an increase~~a decrease in after-tax securities losses of ~~$494,000~~$29,000 (from a ~~gain~~loss of ~~$236,000~~$91,000 to a loss of ~~$258,000)~~$62,000) for the ~~nine~~six month period. ~~Results for~~In addition, bank-owned life insurance income increased due to a gain on death benefit of $380,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2022 were impacted by additional compensation expense of $183,000 (after-tax $145,000) associated with the voluntary cash settlement of 346,725 outstanding stock options. In addition,~~2023, while an after-tax loss of $201,000 related to a branch closure negatively impacted ~~results for~~ the ~~nine~~six months ended ~~September~~June 30, 2022. The provision for ~~loan~~credit losses ~~increased $780,000~~decreased $1.5 million and $1.6 million for the three and six months ~~and $395,000~~ended June 30, 2023 due primarily to a recovery for credit losses for the ~~nine~~three and six months ~~ended September~~end June 30, ~~2022 to $855,000~~2023 of $1.2 million and ~~$1.3~~$1.1 million, respectively, relating to a commercial loan compared to ~~$75,000~~a provision of $330,000 and ~~$940,000~~$480,000 for the ~~2021~~2022 periods. The ~~increases~~decrease in the provision for credit losses also resulted from improving loan ~~losses~~portfolio credit metrics and a minimal level of loan charge-offs.Basic and diluted earnings per share for the three and six months ended June 30, 2023 were ~~primarily due to the significant growth in the loan portfolio.~~$0.59 and $1.25. Basic and diluted earnings per share for the three and ~~nine~~six months ended ~~September~~June 30, 2022 were ~~$0.74~~$0.60 and ~~$1.83. Basic and diluted earnings per share for the three and nine months ended September 30, 2021 were $0.58 and $1.58.~~$1.08. Annualized return on average assets was ~~1.09%~~0.80% for three months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~0.86%~~0.88% for the corresponding period of ~~2021.~~2022. Annualized return on average assets was ~~0.89%~~0.86% for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~0.79%~~0.80% for the corresponding period of ~~2021.Annualized~~2022.Annualized return on average equity was ~~12.61%~~9.53% for the three months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~9.85%~~10.15% for the corresponding period of ~~2021.~~2022. Annualized return on average equity was ~~10.48%~~10.37% for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~9.17%~~9.20% for the corresponding period of ~~2021.~~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 ~~$5,417,000~~$4.2 million and $8.9 million for the three and six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$4,093,000 for the same period of 2021. Core earnings were $13.2~~$4.3 million ~~for the nine months ended September 30, 2022, compared to $10.9~~and $7.8 million for the same ~~period~~periods of ~~2021.~~2022. Core earnings per share for the three and six months ended ~~September~~June 30, ~~2022 were $0.77~~2023 was $0.60 and $1.26 basic and diluted, compared to ~~$0.58~~$0.61 and $1.10 basic and diluted core earnings per share for the same ~~period~~periods of ~~2021. Core earnings per share for the nine months ended September 30, 2022 were $1.87 basic and diluted, compared to $1.55 basic and diluted for the same period of 2021.~~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)	(Dollars in Thousands, Except Per Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,				(Dollars in Thousands, Except Per Share Data)	Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
GAAP net income	GAAP net income	$	5,250	$	4,125	$	12,913	$	11,154	GAAP net income	$	4,171	$	4,231	$	8,829	$	7,663
Less: net securities (losses) gains, net of tax		(167)		32		(258)		236
Net securities losses, net of tax										Net securities losses, net of tax	31		43		62		91
Non-GAAP core earnings	Non-GAAP core earnings	$	5,417	$	4,093	$	13,171	$	10,918	Non-GAAP core earnings	$	4,202	$	4,274	$	8,891	$	7,754


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,					Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022			2023		2022
GAAP Return on average assets (ROA)	GAAP Return on average assets (ROA)	1.09	%	0.86	%	0.89	%	0.79	%	GAAP Return on average assets (ROA)	0.80	%	0.88	%		0.86	%	0.80	%
Less: net securities (losses) gains, net of tax		(0.03)	%	—	%	(0.02)	%	0.02	%
Net securities losses, net of tax										Net securities losses, net of tax	—	%	0.01	%	8	—	%	0.01	%
Non-GAAP core ROA	Non-GAAP core ROA	1.12	%	0.86	%	0.91	%	0.77	%	Non-GAAP core ROA	0.80	%	0.89	%		0.86	%	0.81	%

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			Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
			2022		2021		2022		2021				2023		2022		2023		2022
GAAP Return on average equity (ROE)	GAAP Return on average equity (ROE)		12.61	%	9.85	%	10.48	%	9.17	%	GAAP Return on average equity (ROE)		9.53	%	10.15	%	10.37	%	9.20	%
Less: net securities (losses) gains, net of tax			(0.41)	%	0.07	%	(0.21)	%	0.19	%
Net securities losses, net of tax											Net securities losses, net of tax		0.07	%	0.10	%	0.07	%	0.11	%
Non-GAAP core ROE	Non-GAAP core ROE	.	13.02	%	9.78	%	10.69	%	8.98	%	Non-GAAP core ROE	.	9.60	%	10.25	%	10.44	%	9.31	%


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
GAAP Basic earnings per share (EPS)	GAAP Basic earnings per share (EPS)	$	0.74	$	0.58	$	1.83	$	1.58	GAAP Basic earnings per share (EPS)	$	0.59	$	0.60	$	1.25	$	1.08
Less: net securities (losses) gains, net of tax		(0.03)		—		(0.04)		0.03
Net securities losses, net of tax										Net securities losses, net of tax	0.01		0.01		0.01		0.02
Non-GAAP core operating EPS	Non-GAAP core operating EPS	$	0.77	$	0.58	$	1.87	$	1.55	Non-GAAP core operating EPS	$	0.60	$	0.61	$	1.26	$	1.10


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
GAAP Diluted EPS	GAAP Diluted EPS	$	0.74	$	0.58	$	1.83	$	1.58	GAAP Diluted EPS	$	0.59	$	0.60	$	1.25	$	1.08
Less: net securities (losses) gains, net of tax		(0.03)		—		(0.04)		0.03
Net securities losses, net of tax										Net securities losses, net of tax	0.01		0.01		0.01		0.02
Non-GAAP diluted core EPS	Non-GAAP diluted core EPS	$	0.77	$	0.58	$	1.87	$	1.55	Non-GAAP diluted core EPS	$	0.60	$	0.61	$	1.26	$	1.10

Interest and Dividend Income

Interest and dividend income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 increased ~~$2,150,000~~$6,709,000 and ~~$2,608,000~~$12,298,00 compared to the same periods of ~~2021.~~2022. The increase in loan portfolio income was due to aan increase in the average loan portfolio balance ~~offset partially by a decrease~~coupled with an increase in average rate earned on the portfolio. Investment securities income has been impacted primarily by ~~a decrease~~an increase in the average rate earned on the portfolio ~~for the nine month period~~ as ~~higher~~lower yielding legacy investments matured. ~~The yield on the the investment portfolio increased during the three months ended September 30, 2022 as compared to the same period in 2021 as investment yields began to move upward.~~ The increase in dividend and other interest income is due primarily to ~~the~~an increase in ~~interest earned~~dividends received on ~~federal funds sold and interest-bearing deposits.~~FHLB restricted stock.

Interest and dividend income composition for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 was as follows:


		Three Months Ended													Three Months Ended
		September 30, 2022				September 30, 2021				Change					June 30, 2023				June 30, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	Loans including fees	$	15,051	89.25	%	$	13,382	90.95	%	$	1,669	12.47	%	Loans including fees	$	19,846	90.65	%	$	13,620	89.70	%	$	6,226	45.71	%
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	949		5.63		834		5.67		115		13.79		Taxable	1,287		5.88		864		5.69		423		48.96
Tax-exempt	Tax-exempt	236		1.40		160		1.09		76		47.50		Tax-exempt	118		0.54		194		1.28		(76)		(39.18)
Dividend and other interest income	Dividend and other interest income	628		3.72		338		2.29		290		85.80		Dividend and other interest income	642		2.93		506		3.33		136		26.88
Total interest and dividend income	Total interest and dividend income	$	16,864	100.00	%	$	14,714	100.00	%	$	2,150	14.61	%	Total interest and dividend income	$	21,893	100.00	%	$	15,184	100.00	%	$	6,709	44.18	%


		Nine Months Ended													Six Months Ended
		September 30, 2022				September 30, 2021				Change					June 30, 2023				June 30, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	Loans including fees	$	41,709	90.04	%	$	39,826	91.10	%	$	1,883	4.73	%	Loans including fees	$	37,851	90.65	%	$	26,658	90.49	%	$	11,193	41.99	%
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	2,550		5.50		2,491		5.70		59		2.37		Taxable	2,505		6.00		1,601		5.43		904		56.46
Tax-exempt	Tax-exempt	594		1.28		495		1.13		99		20.00		Tax-exempt	296		0.71		358		1.22		(62)		(17.32)
Dividend and other interest income	Dividend and other interest income	1,470		3.18		903		2.07		567		62.79		Dividend and other interest income	1,105		2.64		842		2.86		263		31.24
Total interest and dividend income	Total interest and dividend income	$	46,323	100.00	%	$	43,715	100.00	%	$	2,608	5.97	%	Total interest and dividend income	$	41,757	100.00	%	$	29,459	100.00	%	$	12,298	41.75	%

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Interest Expense

Interest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022 decreased $750,000~~2023 increased $7,170,000 and ~~$2,827,000~~$11,314,000 compared to the same periods of ~~2021.~~2022. Interest-bearing deposit ~~rates continued to remain at low levels~~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 ~~continued economic impact of supply chain disruption and level of excess balance sheet liquidity. The decrease~~increase in deposit ~~rates was offset~~interest expense. Brokered deposits have also been utilized as a funding source to supplement in ~~part by an increase in average interest-bearing demand deposits for the nine month period. Growth in the~~market deposit ~~portfolio has allowed for a decrease in average long-term borrowings resulting in a decrease in~~gathering efforts. Short and long-term borrowing interest ~~expense.~~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~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 was as follows:


		Three Months Ended													Three Months Ended
		September 30, 2022				September 30, 2021				Change					June 30, 2023				June 30, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	Deposits	$	693	52.03	%	$	1,308	62.83	%	$	(615)	(47.02)	%	Deposits	$	4,851	57.02	%	$	710	53.10	%	$	4,141	583.24	%
Short-term borrowings	Short-term borrowings	26		1.95		3		0.14		23		766.67		Short-term borrowings	2,232		26.24		2		0.15		2,230		n/m
Long-term borrowings	Long-term borrowings	613		46.02		771		37.03		(158)		(20.49)		Long-term borrowings	1,424		16.74		625		46.75		799		127.84
Total interest expense	Total interest expense	$	1,332	100.00	%	$	2,082	100.00	%	$	(750)	(36.02)	%	Total interest expense	$	8,507	100.00	%	$	1,337	100.00	%	$	7,170	536.28	%


		Nine Months Ended													Six Months Ended
		September 30, 2022				September 30, 2021				Change					June 30, 2023				June 30, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	Deposits	$	2,191	53.56	%	$	4,481	64.77	%	$	(2,290)	(51.10)	%	Deposits	$	8,223	58.43	%	$	1,498	54.30	%	$	6,725	448.93	%
Short-term borrowings	Short-term borrowings	29		0.71		7		0.10		22		314.29		Short-term borrowings	3,672		26.09		3		0.11		3,669		n/m
Long-term borrowings	Long-term borrowings	1,871		45.73		2,430		35.13		(559)		(23.00)		Long-term borrowings	2,178		15.48		1,258		45.59		920		73.13
Total interest expense	Total interest expense	$	4,091	100.00	%	$	6,918	100.00	%	$	(2,827)	(40.86)	%	Total interest expense	$	14,073	100.00	%	$	2,759	100.00	%	$	11,314	410.08	%

Net Interest Margin

The net interest margin for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~3.47%~~2.77% and ~~3.17%~~2.92%, compared to ~~2.85%~~3.12% and ~~2.84%~~3.03% for the corresponding periods of ~~2021.~~2022. The ~~increase~~decrease in the net interest margin for the three and ~~nine~~six month periods was driven by ~~a decline~~an increase in the rate paid on interest-bearing ~~deposits~~liabilities of 23198 and 29161 basis points ("bps"), respectively. The FOMC rate increases during 2022 and 2023 contributed to the increases in rate paid on interest-bearing liabilities as ~~rates~~the rate paid ~~decreased throughout 2021~~on short-term borrowings increased 513 bps and ~~remained at historically low levels during~~498 bps for the three and six month periods ended June 30, 2023 compared to the same periods of 2022. ~~Leading~~Short-term borrowings increased in volume and rate paid as this funding source was utilized to provide funding for the ~~decline~~growth in the loan portfolio, resulting in an increase of $2,230,000 and $3,669,000 in expense for the three and six month periods ended June 30, 2023 compared to the same periods of 2022. The rate paid on interest-bearing deposits ~~were decreases~~increased 158 and 127 bps for the three and six month periods ended June 30, 2023 compared to the corresponding periods of 842022 due to the FOMC rate actions and ~~91 bps~~an increase in ~~the rate~~competition for deposits. The rates paid on time deposits ~~as time deposits issued prior~~significantly contributed to the ~~COVID-19 pandemic matured. The~~ increase in ~~the earning asset yield was driven by an increase in yield on federal funds sold and interest-bearing deposits due to the rate increases enacted by the Federal Open Market Committee ("FOMC"). For~~funding costs as rates paid for the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2022 in comparison~~2023 compared to the same periods of ~~2021, there~~2022 increased 266 bps and 211 bps, respectively, as deposit gathering campaigns initiated in the latter part of 2022 continued throughout 2023. In addition, brokered deposit have been utilized to assist with the funding of the loan portfolio growth and contributed to the increase in time deposit funding costs. Partially offsetting the increase in funding cost was an ~~increase~~increases in ~~rate~~the yield on ~~federal funds sold~~interest-earning assets and growth in the average balance of ~~186~~the earning asset portfolio. The average loan portfolio balance increased $291,207,000 and 70$278,882,000 for the three and six month periods, respectively, as the average yield on the portfolio increased 81 and 71 bps ~~respectively, while~~for the ~~rate~~same periods resulting in loan interest income on ~~interest bearing deposits increased 218~~a fully taxable equivalent basis increasing $6,254,000 and ~~48 bps.~~$11,250,000. The three and six month ~~period~~periods ended ~~September~~June 30, ~~2022 was~~2023 were impacted by an increase of 18109 and 99 bps in the yield earned on the securities portfolio as legacy securities matured with the funds reinvested at higher rates.

3334

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The following is a schedule of average balances and associated yields for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~

AVERAGE BALANCES AND INTEREST RATES
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
(In Thousands) Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate
Assets:
Tax-exempt loans (3)
$ 58,735 $ 394 2.66 % $ 46,193 $ 307 2.64 %
All other loans 1,463,330 14,740 4.00 % 1,296,790 13,139 4.02 %
Total loans (2)
1,522,065 15,134 3.94 % 1,342,983 13,446 3.97 %
Federal funds sold 33,641 218 2.57 % 40,000 72 0.71 %
Taxable securities 159,721 1,158 2.94 % 150,308 1,022 2.76 %
Tax-exempt securities (3)
49,177 299 2.47 % 37,069 203 2.22 %
Total securities 208,898 1,457 2.83 % 187,377 1,225 2.65 %
Interest-bearing deposits 34,202 201 2.33 % 205,715 78 0.15 %
Total interest-earning assets 1,798,806 17,010 3.76 % 1,776,075 14,821 3.32 %
Other assets 130,576 132,820
Total assets $ 1,929,382 $ 1,908,895
Liabilities and shareholders’ equity:
Savings $ 249,083 26 0.04 % $ 228,255 22 0.04 %
Super Now deposits 405,173 287 0.28 % 308,591 219 0.28 %
Money market deposits 287,660 200 0.28 % 306,177 238 0.31 %
Time deposits 148,968 180 0.48 % 248,649 829 1.32 %
Total interest-bearing deposits 1,090,884 693 0.25 % 1,091,672 1,308 0.48 %
Short-term borrowings 8,062 26 1.23 % 8,696 3 0.14 %
Long-term borrowings 109,269 613 2.23 % 133,536 771 2.29 %
Total borrowings 117,331 639 2.16 % 142,232 774 2.16 %
Total interest-bearing liabilities 1,208,215 1,332 0.44 % 1,233,904 2,082 0.67 %
Demand deposits 533,681 490,500
Other liabilities 21,008 17,027
Shareholders’ equity 166,478 167,464
Total liabilities and shareholders’ equity $ 1,929,382 $ 1,908,895
Interest rate spread (3)
3.32 % 2.65 %
Net interest income/margin (3)
$ 15,678 3.47 % $ 12,739 2.85 %

2022:


	AVERAGE BALANCES AND INTEREST RATES
	Three Months Ended June 30, 2023						Three Months Ended June 30, 2022
(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:
Tax-exempt loans (3)	$	66,613	$	461	2.78	%	$	52,886	$	331	2.51	%
All other loans	1,672,111		19,482		4.67	%	1,394,631		13,358		3.84	%
Total loans (2)	1,738,724		19,943		4.60	%	1,447,517		13,689		3.79	%

Federal funds sold	—		—		n/a		48,352		154		1.28	%

Taxable securities	190,862		1,807		3.84	%	154,484		1,048		2.75	%
Tax-exempt securities (3)	23,310		150		2.61	%	45,824		245		2.17	%
Total securities	214,172		1,957		3.71	%	200,308		1,293		2.62	%

Interest-bearing balances in other financial institutions	9,961		122		4.91	%	102,172		168		0.66	%

Total interest-earning assets	1,962,857		22,022		4.50	%	1,798,349		15,304		3.42	%

Other assets	133,239						131,117

Total assets	$	2,096,096					$	1,929,466

Liabilities and shareholders’ equity:
Savings	$	232,889	155		0.27	%	$	248,063	24		0.04	%
Super Now deposits	271,438		913		1.35	%	388,002		239		0.25	%
Money market deposits	293,682		1,665		2.27	%	304,636		210		0.28	%
Time deposits	261,947		2,118		3.24	%	164,301		237		0.58	%
Total interest-bearing deposits	1,059,956		4,851		1.84	%	1,105,002		710		0.26	%

Short-term borrowings	169,723		2,232		5.27	%	5,636		2		0.14	%
Long-term borrowings	182,719		1,424		3.13	%	112,901		625		2.22	%
Total borrowings	352,442		3,656		4.16	%	118,537		627		2.12	%

Total interest-bearing liabilities	1,412,398		8,507		2.42	%	1,223,539		1,337		0.44	%

Demand deposits	484,607						518,467
Other liabilities	24,059						20,708
Shareholders’ equity	175,032						166,752

Total liabilities and shareholders’ equity	$	2,096,096					$	1,929,466
Interest rate spread (3)					2.08	%					2.98	%
Net interest income/margin (3)			$	13,515	2.77	%			$	13,967	3.12	%

1. Information on this table has been calculated using average daily balance sheets to obtain average balances.

2. Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.

3. Income and rates on fully taxable equivalent basis include an adjustment for the difference between annual income

from tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% and are reconciled to the equivalent GAAP

~~measurement~~measure below the tables.

Table of Contents


		AVERAGE BALANCES AND INTEREST RATES													AVERAGE BALANCES AND INTEREST RATES
		Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021							Six Months Ended June 30, 2023						Six Months Ended June 30, 2022
(In Thousands)	(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate		(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:	Assets:													Assets:
Tax-exempt loans (3)	Tax-exempt loans (3)	$	53,269	$	1,033	2.59	%	$	46,217	$	991	2.87	%	Tax-exempt loans (3)	$	65,669	$	909	2.79	%	$	50,775	$	639	2.54	%
All other loans	All other loans	1,403,504		40,893		3.90	%	1,292,028		39,043		4.04	%	All other loans	1,636,798		37,133		4.57	%	1,372,810		26,153		3.84	%
Total loans (2)	Total loans (2)	1,456,773		41,926		3.85	%	1,338,245		40,034		4.00	%	Total loans (2)	1,702,467		38,042		4.51	%	1,423,585		26,792		3.80	%

Federal funds sold	Federal funds sold	43,938		465		1.41	%	21,993		117		0.71	%	Federal funds sold	—		—		n/a		49,171		247		1.01	%

Taxable securities	Taxable securities	152,937		3,126		2.76	%	147,942		3,105		2.84	%	Taxable securities	186,168		3,386		3.67	%	149,489		1,968		2.67	%
Tax-exempt securities (3)	Tax-exempt securities (3)	45,357		752		2.24	%	36,638		627		2.31	%	Tax-exempt securities (3)	28,409		375		2.66	%	43,416		453		2.12	%
Total securities	Total securities	198,294		3,878		2.64	%	184,580		3,732		2.73	%	Total securities	214,577		3,761		3.53	%	192,905		2,421		2.54	%

Interest-bearing deposits		97,520		429		0.59	%	206,895		172		0.11	%
Interest-bearing balances in other financial institutions														Interest-bearing balances in other financial institutions	9,985		224		4.52	%	129,704		228		0.35	%

Total interest-earning assets	Total interest-earning assets	1,796,525		46,698		3.48	%	1,751,713		44,055		3.37	%	Total interest-earning assets	1,927,029		42,027		4.20	%	1,795,365		29,688		3.34	%

Other assets	Other assets	129,048						128,567						Other assets	132,561						128,624

Total assets	Total assets	$	1,925,573					$	1,880,280					Total assets	$	2,059,590					$	1,923,989

Liabilities and shareholders’ equity:	Liabilities and shareholders’ equity:													Liabilities and shareholders’ equity:
Savings	Savings	$	246,063	72		0.04	%	$	222,889	94		0.06	%	Savings	$	238,067	275		0.23	%	$	244,528	46		0.04	%
Super Now deposits	Super Now deposits	388,149		721		0.25	%	294,570		694		0.31	%	Super Now deposits	318,669		1,852		1.17	%	379,496		434		0.23	%
Money market deposits	Money market deposits	296,998		596		0.27	%	307,309		761		0.33	%	Money market deposits	291,719		2,945		2.04	%	301,744		396		0.26	%
Time deposits	Time deposits	167,876		802		0.64	%	253,130		2,932		1.55	%	Time deposits	225,414		3,151		2.82	%	177,487		622		0.71	%
Total interest-bearing deposits	Total interest-bearing deposits	1,099,086		2,191		0.27	%	1,077,898		4,481		0.56	%	Total interest-bearing deposits	1,073,869		8,223		1.54	%	1,103,255		1,498		0.27	%

Short-term borrowings	Short-term borrowings	6,308		29		0.59	%	7,152		7		0.13	%	Short-term borrowings	145,871		3,672		5.09	%	5,416		3		0.11	%
Long-term borrowings	Long-term borrowings	112,457		1,871		2.22	%	138,669		2,430		2.34	%	Long-term borrowings	151,169		2,178		2.91	%	114,077		1,258		2.23	%
Total borrowings	Total borrowings	118,765		1,900		2.14	%	145,821		2,437		2.23	%	Total borrowings	297,040		5,850		3.98	%	119,493		1,261		2.13	%

Total interest-bearing liabilities	Total interest-bearing liabilities	1,217,851		4,091		0.45	%	1,223,719		6,918		0.76	%	Total interest-bearing liabilities	1,370,909		14,073		2.07	%	1,222,748		2,759		0.46	%

Demand deposits	Demand deposits	519,599						473,088						Demand deposits	491,356						512,441
Other liabilities	Other liabilities	23,814						21,327						Other liabilities	27,050						22,184
Shareholders’ equity	Shareholders’ equity	164,309						162,146						Shareholders’ equity	170,275						166,616

Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	1,925,573					$	1,880,280					Total liabilities and shareholders’ equity	$	2,059,590					$	1,923,989
Interest rate spread (3)	Interest rate spread (3)					3.03	%					2.61	%	Interest rate spread (3)					2.13	%					2.88	%
Net interest income/margin (3)	Net interest income/margin (3)			$	42,607	3.17	%			$	37,137	2.84	%	Net interest income/margin (3)			$	27,954	2.92	%			$	26,929	3.03	%

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~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	(In Thousands)	2022		2021		2022		2021		(In Thousands)	2023		2022		2023		2022
Total interest income	Total interest income	$	16,864	$	14,714	$	46,323	$	43,715	Total interest income	$	21,893	$	15,184	$	41,757	$	29,459
Total interest expense	Total interest expense	1,332		2,082		4,091		6,918		Total interest expense	8,507		1,337		14,073		2,759
Net interest income (GAAP)	Net interest income (GAAP)	15,532		12,632		42,232		36,797		Net interest income (GAAP)	13,386		13,847		27,684		26,700
Tax equivalent adjustment	Tax equivalent adjustment	146		107		375		340		Tax equivalent adjustment	129		120		270		229
Net interest income (fully taxable equivalent) (NON-GAAP)	Net interest income (fully taxable equivalent) (NON-GAAP)	$	15,678	$	12,739	$	42,607	$	37,137	Net interest income (fully taxable equivalent) (NON-GAAP)	$	13,515	$	13,967	$	27,954	$	26,929

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The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:


		Three Months Ended September 30,						Three months ended September 30,								Three Months Ended June 30,						Six months ended June 30,
		2022 vs. 2021						2022 vs. 2021								2023 vs. 2022						2023 vs. 2022
		Increase (Decrease) Due to						Increase (Decrease) Due to								Increase (Decrease) Due to						Increase (Decrease) Due to
(In Thousands)	(In Thousands)	Volume		Rate		Net		Volume			Rate		Net		(In Thousands)	Volume		Rate		Net		Volume		Rate		Net
Interest income:	Interest income:														Interest income:
Tax-exempt loans	Tax-exempt loans	$	85	$	2	$	87	$	104		$	(62)	$	42	Tax-exempt loans	$	92	$	38	$	130	$	202	$	68	$	270
All other loans	All other loans	1,666		(65)		1,601		2,600			(750)		1,850		All other loans	2,935		3,189		6,124		5,521		5,459		10,980
Federal funds sold	Federal funds sold	(13)		159		146		175			173		348		Federal funds sold	(154)		—		(154)		(247)		—		(247)
Taxable investment securities	Taxable investment securities	66		70		136		75			(54)		21		Taxable investment securities	283		476		759		562		856		1,418
Tax-exempt investment securities	Tax-exempt investment securities	71		25		96		134			(9)		125		Tax-exempt investment securities	(138)		43		(95)		(179)		101		(78)
Interest bearing deposits	Interest bearing deposits	(114)		237		123		(60)			317		257		Interest bearing deposits	(272)		226		(46)		(1,497)		1,493		(4)
Total interest-earning assets	Total interest-earning assets	1,761		428		2,189		3,028			(385)		2,643		Total interest-earning assets	2,746		3,972		6,718		4,362		7,977		12,339

Interest expense:	Interest expense:														Interest expense:
Savings deposits	Savings deposits	4		—		4		5			(27)		(22)		Savings deposits	(2)		133		131		(1)		230		229
Super Now deposits	Super Now deposits	68		—		68		126			(99)		27		Super Now deposits	(93)		767		674		(80)		1,498		1,418
Money market deposits	Money market deposits	(14)		(24)		(38)		(26)			(139)		(165)		Money market deposits	(8)		1,463		1,455		(13)		2,562		2,549
Time deposits	Time deposits	(251)		(398)		(649)		(776)			(1,354)		(2,130)		Time deposits	216		1,665		1,881		211		2,318		2,529
Short-term borrowings	Short-term borrowings	—		23		23		(1)		0	23		22		Short-term borrowings	985		1,245		2,230		1,339		2,330		3,669
Long-term borrowings	Long-term borrowings	(138)		(20)		(158)		(439)		0	(120)		(559)		Long-term borrowings	480		319		799		474		446		920
Total interest-bearing liabilities	Total interest-bearing liabilities	(331)		(419)		(750)		(1,111)			(1,716)		(2,827)		Total interest-bearing liabilities	1,578		5,592		7,170		1,930		9,384		11,314
Change in net interest income	Change in net interest income	$	2,092	$	847	$	2,939	$	4,139		$	1,331	$	5,470	Change in net interest income	$	1,168	$	(1,620)	$	(452)	$	2,432	$	(1,407)	$	1,025

Provision for ~~Loan~~Credit Losses

The provision for ~~loan~~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 ~~loan~~credit losses is determined by applying loss factors to outstanding loans by type, ~~excluding loans for~~. 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 ~~a specific allowance has been determined. Loss~~it uses to supplement the historical charge-off factor because these factors are ~~based on management’s consideration of~~likely to cause estimated credit losses associated with the ~~nature of the portfolio segments, changes in mix and volume of the~~existing loan ~~portfolio, and~~pools to differ from historical ~~loan~~ loss experience. ~~In addition, management considers industry standards and trends with respect to non-performing loans and its knowledge and experience with specific lending segments.~~

Although management believes it uses the best information available to make such determinations and that the allowance for ~~loan~~credit losses is adequate at ~~September~~June 30, ~~2022,~~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 ~~loan~~credit losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.

The allowance for ~~loan~~credit losses ~~increased~~decreased from ~~$14,176,000~~$15,637,000 at December 31, ~~2021~~2022 to ~~$15,211,000~~$11,592,000 at ~~September~~June 30, ~~2022.~~2023. The ~~increase~~decrease in allowance was primarily due to ~~growth in~~ the ~~loan portfolio.~~adoption of CECL on January 1, 2023 coupled with net recoveries of $349,000 for the six months ended June 30 ,2023. At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the allowance for ~~loan~~credit losses to total loans was ~~0.97%~~0.66% and ~~1.02%~~0.95%, respectively.

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The three and six months ended June 30, 2023 had a recovery for credit losses of $1,180,000 and $1,109,000, respectively, compared to a provision for ~~loan~~credit losses ~~totaled $855,000~~of $330,000 and ~~$1,335,000 for the three and nine months ended September 30, 2022 and the amounts~~$480,000 for the corresponding ~~2021 periods were $75,000 and $940,000.~~2022 periods. The ~~increase~~decrease in the provision for ~~loan~~credit losses ~~for the three months and nine months ended September 30 2022 compared to the corresponding 2021 periods~~ was ~~primarily~~ the result of improving credit metrics and the adoption of CECL offset by loan portfolio ~~growth and to a lesser extent the continued economic uncertainty caused by continued supply chain shortages.~~growth.

Nonperforming loans decreased to ~~$5,743,000~~$4,276,000 at ~~September~~June 30, ~~2022~~2023 from ~~$6,250,000~~$4,890,000 at December 31, ~~2021.~~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 ~~for any impairment~~ recorded within the allowance for ~~loan~~credit losses. The ratio of non-performing loans to total loans ratio decreased to ~~0.37%~~0.24% at ~~September~~June 30, 2023 from 0.34% at June 30, 2022 ~~from 0.58% at September 30, 2021~~and as non-performing loans have decreased to ~~$5.7 million~~$4,276,000 from $5,100,000 at ~~September~~June 30, ~~2022 from $7.8 million at September 30, 2021.~~2022. Net loan ~~charge-offs~~recoveries of ~~$300,000~~$349,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 impacted the allowance for ~~loan~~credit losses, which was ~~0.97%~~0.66% of total loans at ~~September~~June 30 ~~2022~~2023 compared to ~~1.08%~~0.97% at ~~September~~June 30, ~~2021.~~2022.

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


		Total Nonperforming Loans							Total Nonperforming Loans
(In Thousands)	(In Thousands)	90 Days Past Due		Non-accrual		Total		(In Thousands)	90 Days Past Due		Non-accrual		Total
June 30, 2023								June 30, 2023	$	1,120	$	3,156	$	4,276
March 31, 2023								March 31, 2023	1,215		3,551		4,766
December 31, 2022								December 31, 2022	1,275		3,615		4,890
September 30, 2022	September 30, 2022	$	1,161	$	4,582	$	5,743	September 30, 2022	1,161		4,582		5,743
June 30, 2022	June 30, 2022	421		4,679		5,100		June 30, 2022	421		4,679		5,100
March 31, 2022		364		4,917		5,281
December 31, 2021		861		5,389		6,250
September 30, 2021		854		6,909		7,763

Additional allowance for ~~loan~~credit losses and net ~~(chargte-offs)~~(charge-offs) recoveries information is presented by loan portfolio segment in the tables below. The six months ending June 30, 2023 was impacted by the CECL adoption reclassification entry disclosed in Note 6. Loans.


		September 30, 2022																						June 30, 2023
		Amount of Allowance for Loan Losses Allocated					Total loans		Allowance for Loan Losses to Total Loans Ratio				Net (Charge-Offs) Recoveries		Average Loans				Ratio of Net (Charge-Offs) Recoveries to Average Loans					Amount of Allowance for Credit Losses Allocated				Total loans					Allowance for Credit Losses to Total Loans Ratio				Net (Charge-Offs) Recoveries						Average Loans				Ratio of Net (Charge-Offs) Recoveries to Average Loans

(In Thousands)	(In Thousands)										(In Thousands)

Commercial, financial, and agricultural	Commercial, financial, and agricultural				$	2,069					$	173,365					1.19	%				$	120							$	169,822									0.07		%			Commercial, financial, and agricultural					$	3,019			$	208,174			1.45	%		$	961		$	199,448			0.48	%
Real estate mortgage:	Real estate mortgage:																				Real estate mortgage:
Residential	Residential				5,195						683,242						0.76	%				31								634,031									—		%	Residential				1,078						743,705				0.14	%		(78)				724,170			(0.01)	%
Commercial	Commercial				5,536						485,538						1.14	%				(152)					458,523					(0.03)		%	Commercial			4,191						517,713				0.81		%			(114)				509,033			(0.02)	%
Construction	Construction	210					48,694		0.43	%			28		44,161				0.06	%	Construction			178					53,486					0.33		%		—						46,540				—		%
Consumer automobiles	Consumer automobiles	1,585					159,681		0.99	%			(202)		140,595				(0.14)	%	Consumer automobiles			2,446				234,956					1.04		%		(291)						213,039					(0.14)		%
Other consumer installment loans	Other consumer installment loans	118					9,811		1.20	%			(125)		9,641				(1.30)	%	Other consumer installment loans			680				10,121					6.72		%		(129)						10,237				(1.26)		%
Unallocated		498

		$	15,211				$	1,560,331	0.97	%			$	(300)	$	1,456,773			(0.02)	%				$	11,592			$	1,768,155				0.66		%		$	349					$	1,702,467			0.02		%

Total non-accrual loans outstanding	Total non-accrual loans outstanding	$	4,582																		Total non-accrual loans outstanding			$	3,156
Non-accrual loans to total loans outstanding	Non-accrual loans to total loans outstanding	0.29		%																	Non-accrual loans to total loans outstanding			0.18		%
Allowance for loan losses to non-accrual loans		331.97		%
Allowance for credit losses to non-accrual loans																					Allowance for credit losses to non-accrual loans			367.30		%

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		December 31, 2021																						December 31, 2022
		Amount of Allowance for Loan Losses Allocated					Total loans		Allowance for Loan Losses to Total Loans Ratio				Net (Charge-Offs) Recoveries		Average Loans				Ratio of Net (Charge-Offs) Recoveries to Average Loans					Amount of Allowance for Loan Losses Allocated				Total loans					Allowance for Loan Losses to Total Loans Ratio				Net (Charge-Offs) Recoveries						Average Loans				Ratio of Net (Charge-Offs) Recoveries to Average Loans

(In Thousands)	(In Thousands)										(In Thousands)

Commercial, financial, and agricultural	Commercial, financial, and agricultural				$	1,946					$	163,285					1.19	%				$	(10)							$	175,631									(0.01)		%			Commercial, financial, and agricultural					$	1,914			$	190,461			1.00	%		$	165		$	173,433			0.10	%
Real estate mortgage:	Real estate mortgage:																				Real estate mortgage:
Residential	Residential				4,701						595,847						0.79	%				(107)								584,849									(0.02)		%	Residential				5,061						708,209				0.71	%		26				649,989			—	%
Commercial	Commercial				5,336						446,734						1.19	%				95					381,306					0.02		%	Commercial			6,110						500,632				1.22		%			(150)				466,526			(0.03)	%
Construction	Construction	179					37,295		0.48	%			10		41,564				0.02	%	Construction			188					43,308					0.43		%		29						44,968				0.06		%
Consumer automobiles	Consumer automobiles	1,411					139,408		1.01	%			(143)		152,496				(0.09)	%	Consumer automobiles			1,617				186,112					0.87		%		(328)						150,261					(0.22)		%
Other consumer installment loans	Other consumer installment loans	111					9,277		1.20	%			(112)		9,787				(1.14)	%	Other consumer installment loans			109				10,361					1.05		%		(191)						9,737				(1.96)		%
Unallocated	Unallocated	492																			Unallocated			638
		$	14,176				$	1,391,846	1.02	%			$	(267)	$	1,345,633			(0.02)	%				$	15,637			$	1,639,083				0.95		%		$	(449)					$	1,494,914			(0.03)		%

Total non-accrual loans outstanding	Total non-accrual loans outstanding	$	5,389																		Total non-accrual loans outstanding			$	3,615
Non-accrual loans to total loans outstanding	Non-accrual loans to total loans outstanding	0.39		%																	Non-accrual loans to total loans outstanding			0.22		%
Allowance for loan losses to non-accrual loans	Allowance for loan losses to non-accrual loans	263.05		%																	Allowance for loan losses to non-accrual loans			432.56		%

Non-interest Income

Total non-interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same periods in ~~2021~~2022 decreased ~~$868,000~~$115,000 and ~~$1,842,000.~~$270,000. Excluding net securities ~~gains,~~losses, non-interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 decreased ~~$617,000~~$130,000 and ~~$1,217,000~~$306,000 compared to the same periods in ~~2021.~~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 ~~the product mix~~higher rates has ~~caused the Company to increasingly act in a broker capacity with the fee income from broker activity included in loan broker commissions. Service charges~~reduced mortgage activity. Bank-owned life insurance increased ~~for the three and nine month periods primarily~~ due to ~~an increase in overdraft fees. Brokerage commissions have~~a gain on death benefit of $380,000 recognized during the first quarter of 2023. Debit card income declined due to ~~changes in the product mix and reduced consumer activity. The decrease in debit card fees is a result of an decrease in debit card usage.~~volume.

Non-interest income composition for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 was as follows:


		Three Months Ended													Three Months Ended
		September 30, 2022				September 30, 2021				Change					June 30, 2023				June 30, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	Service charges	$	559	26.84	%	$	456	15.45	%	$	103	22.59	%	Service charges	$	516	25.52	%	$	509	23.82	%	$	7	1.38	%
Net debt securities (losses) gains, available for sale		(156)		(7.49)		48		1.63		(204)		425.00
Net debt securities losses, available for sale														Net debt securities losses, available for sale	(19)		(0.94)		(10)		(0.47)		(9)		(90.00)
Net equity securities losses	Net equity securities losses	(55)		(2.64)		(8)		(0.27)		(47)		(587.50)		Net equity securities losses	(20)		(0.99)		(44)		(2.06)		24		54.55

Bank-owned life insurance	Bank-owned life insurance	170		8.16		279		9.45		(109)		(39.07)		Bank-owned life insurance	166		8.21		161		7.53		5		3.11
Gain on sale of loans	Gain on sale of loans	294		14.11		456		15.45		(162)		(35.53)		Gain on sale of loans	244		12.07		266		12.45		(22)		(8.27)
Insurance commissions	Insurance commissions	109		5.23		129		4.37		(20)		(15.50)		Insurance commissions	115		5.69		107		5.01		8		7.48
Brokerage commissions	Brokerage commissions	142		6.82		237		8.03		(95)		(40.08)		Brokerage commissions	141		6.97		158		7.39		(17)		(10.76)
Loan broker commissions	Loan broker commissions	438		21.03		772		26.16		(334)		(43.26)		Loan broker commissions	317		15.68		371		17.36		(54)		(14.56)
Debit card income	Debit card income	344		16.51		388		13.15		(44)		(11.34)		Debit card income	340		16.82		391		18.30		(51)		(13.04)
Other	Other	238		11.43		194		6.57		44		22.68		Other	222		10.97		228		10.66		(6)		(2.63)
Total non-interest income	Total non-interest income	$	2,083	100.00	%	$	2,951	100.00	%	$	(868)	(29.41)	%	Total non-interest income	$	2,022	100.00	%	$	2,137	100.00	%	$	(115)	(5.38)	%

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		Nine Months Ended													Six Months Ended
		September 30, 2022				September 30, 2021				Change					June 30, 2023				June 30, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	Service charges	$	1,563	23.57	%	$	1,218	14.37	%	$	345	28.33	%	Service charges	$	1,012	23.65	%	$	1,004	22.07	%	$	8	0.80	%
Net debt securities (losses) gains, available for sale		(168)		(2.53)		323		3.81		(491)		152.01
Net equity securities losses		(158)		(2.38)		(24)		(0.28)		(134)		(558.33)
Net debt securities losses, available for sale														Net debt securities losses, available for sale	(80)		(1.87)		(12)		(0.26)		(68)		(566.67)
Net equity securities (losses) gains														Net equity securities (losses) gains	1		0.02		(103)		(2.26)		104		100.97

Bank-owned life insurance	Bank-owned life insurance	501		7.55		614		7.25		(113)		(18.40)		Bank-owned life insurance	722		16.87		331		7.28		391		118.13
Gain on sale of loans	Gain on sale of loans	905		13.65		2,034		24.00		(1,129)		(55.51)		Gain on sale of loans	475		11.10		611		13.43		(136)		(22.26)
Insurance commissions	Insurance commissions	386		5.82		436		5.15		(50)		(11.47)		Insurance commissions	280		6.54		277		6.09		3		1.08
Brokerage commissions	Brokerage commissions	500		7.54		663		7.82		(163)		(24.59)		Brokerage commissions	306		7.15		358		7.87		(52)		(14.53)
Loan broker commissions	Loan broker commissions	1,350		20.36		1,449		17.10		(99)		(6.83)		Loan broker commissions	487		11.38		912		20.05		(425)		(46.60)
Debit card income	Debit card income	1,080		16.28		1,166		13.76		(86)		(7.38)		Debit card income	675		15.77		736		16.18		(61)		(8.29)
Other	Other	673		10.14		595		7.02		78		13.11		Other	401		9.39		435		9.55		(34)		(7.82)
Total non-interest income	Total non-interest income	$	6,632	100.00	%	$	8,474	100.00	%	$	(1,842)	(21.74)	%	Total non-interest income	$	4,279	100.00	%	$	4,549	100.00	%	$	(270)	(5.94)	%

Non-interest Expense

Total non-interest expense ~~decreased $127,000~~increased $1,009,000 and $900,000 for the three and six months ended ~~September~~June 30, ~~2022 and increased $1,101,000 for the nine months ended September 30, 2022~~2023 compared to the same periods of ~~2021.~~2022. The increase in salaries and employee benefits is attributable to the current employment environment ~~employee retention efforts,~~and routine annual wage ~~increases, and the voluntary cash settlement of 346,725 outstanding stock options resulting in $183,000 of compensation expense recognized during the second quarter of 2022.~~increases. Furniture and equipment expenses in addition to occupancy expenses have ~~decreased~~remained stable as increased maintenance costs ~~and~~have been offset by a decrease in the level of ~~depreciation have decreased.~~depreciation. Software amortization ~~fluctuations~~decreases are due to changes in software licensing costs. ~~Other~~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 ~~for~~due an increase in the ~~nine month period primarily from a write down on leasehold improvements of $254,000 related to a branch closure during the first quarter of 2022.~~assessment rate.

Non-interest expense composition for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 was as follows:


		Three Months Ended													Three Months Ended
		September 30, 2022				September 30, 2021				Change					June 30, 2023				June 30, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	Salaries and employee benefits	$	6,016	58.29	%	$	5,837	55.87	%	$	179	3.07	%	Salaries and employee benefits	$	6,312	55.23	%	$	6,141	58.93	%	$	171	2.78	%
Occupancy	Occupancy	730		7.07		745		7.13		(15)		(2.01)		Occupancy	772		6.75		740		7.10		32		4.32
Furniture and equipment	Furniture and equipment	816		7.91		883		8.45		(67)		(7.59)		Furniture and equipment	790		6.91		746		7.16		44		5.90
Software amortization	Software amortization	188		1.82		226		2.16		(38)		(16.81)		Software amortization	173		1.51		219		2.10		(46)		(21.00)
Pennsylvania shares tax	Pennsylvania shares tax	334		3.24		373		3.57		(39)		(10.46)		Pennsylvania shares tax	279		2.44		396		3.80		(117)		(29.55)
Professional fees	Professional fees	626		6.07		615		5.89		11		1.79		Professional fees	906		7.93		582		5.59		324		55.67
Federal Deposit Insurance Corporation deposit insurance	Federal Deposit Insurance Corporation deposit insurance	260		2.52		220		2.11		40		18.18		Federal Deposit Insurance Corporation deposit insurance	452		3.95		228		2.19		224		98.25

Marketing	Marketing	151		1.46		231		2.21		(80)		(34.63)		Marketing	272		2.38		220		2.11		52		23.64
Intangible amortization	Intangible amortization	34		0.33		44		0.42		(10)		(22.73)		Intangible amortization	32		0.28		41		0.39		(9)		(21.95)
Other	Other	1,165		11.29		1,273		12.19		(108)		(8.48)		Other	1,441		12.62		1,107		10.63		334		30.17
Total non-interest expense	Total non-interest expense	$	10,320	100.00	%	$	10,447	100.00	%	$	(127)	(1.22)	%	Total non-interest expense	$	11,429	100.00	%	$	10,420	100.00	%	$	1,009	9.68	%

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		Nine Months Ended													Six Months Ended
		September 30, 2022				September 30, 2021				Change					June 30, 2023				June 30, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	Salaries and employee benefits	$	18,421	58.02	%	$	17,107	55.82	%	$	1,314	7.68	%	Salaries and employee benefits	$	12,488	55.93	%	$	12,405	57.89	%	$	83	0.67	%
Occupancy	Occupancy	2,380		7.50		2,438		7.96		(58)		(2.38)		Occupancy	1,638		7.34		1,650		7.70		(12)		(0.73)
Furniture and equipment	Furniture and equipment	2,454		7.73		2,663		8.69		(209)		(7.85)		Furniture and equipment	1,636		7.33		1,638		7.64		(2)		(0.12)
Software amortization	Software amortization	660		2.08		632		2.06		28		4.43		Software amortization	356		1.59		472		2.20		(116)		(24.58)
Pennsylvania shares tax	Pennsylvania shares tax	1,119		3.52		1,097		3.58		22		2.01		Pennsylvania shares tax	527		2.36		785		3.66		(258)		(32.87)
Professional fees	Professional fees	1,746		5.50		1,882		6.14		(136)		(7.23)		Professional fees	1,594		7.14		1,120		5.23		474		42.32
Federal Deposit Insurance Corporation deposit insurance	Federal Deposit Insurance Corporation deposit insurance	690		2.17		705		2.30		(15)		(2.13)		Federal Deposit Insurance Corporation deposit insurance	697		3.12		430		2.01		267		62.09

Marketing	Marketing	435		1.37		434		1.42		1		0.23		Marketing	427		1.91		284		1.33		143		50.35
Intangible amortization	Intangible amortization	119		0.37		147		0.48		(28)		(19.05)		Intangible amortization	67		0.30		85		0.40		(18)		(21.18)
Other	Other	3,723		11.74		3,541		11.55		182		5.14		Other	2,897		12.98		2,558		11.94		339		13.25
Total non-interest expense	Total non-interest expense	$	31,747	100.00	%	$	30,646	100.00	%	$	1,101	3.59	%	Total non-interest expense	$	22,327	100.00	%	$	21,427	100.00	%	$	900	4.20	%

Provision for Income Taxes

Income taxes decreased $15,000 and increased ~~$258,000 and $353,000~~$237,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same periods of ~~2021.~~2022. The effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was ~~18.48%~~19.15% and ~~18.18%~~17.83% compared to ~~18.42%~~19.16% and ~~18.39%~~17.97% for the same periods of ~~2021.~~2022. The Company currently is in a deferred tax asset position. A valuation allowance was established on the ~~$1,003,000~~$1,810,000 of capital loss carryforwards ~~for the twelve months ended~~as of December 31, ~~2021,~~2022, which remained unchanged during the ~~third~~second quarter of ~~2022.~~2023.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents ~~decreased $227,000,000~~increased $4,528,000 from ~~$263,862,000~~$40,333,000 at December 31, ~~2021~~2022 to ~~$36,862,000~~$44,861,000 at ~~September~~June 30, ~~2022,~~2023, primarily as a result of the following activity during the ~~nine~~six months ended ~~September~~June 30, ~~2022. The decrease in cash and cash equivalents is primarily due to the decrease in interest-bearing balances held with other financial institutions.~~2023.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds being greater than loan originations, less ~~$905,000~~$475,000 in realized gains, by ~~$1,240,000~~$249,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2023.

Loans

Gross loans increased ~~$168,553,000~~$129,672,000 since December 31, ~~2021~~2022 due primarily to an increase in both residential and commercial real estate mortgage categories in addition to consumer automobile ~~loans increasing as used car inventories rebounded from historically low levels.~~loans.

4041

Table of Contents

The allocation of the loan portfolio, by category, as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 is presented below:

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

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


		September 30, 2022						December 31, 2021							June 30, 2023				December 31, 2022				Change
(In Thousands)	(In Thousands)	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Commercial, financial, and agricultural	Commercial, financial, and agricultural	$	271	$	452	$	723	$	314	$	574	$	888	Commercial, financial, and agricultural	$	208,174	11.77	%	$	190,461	11.62	%	$	17,713	9.30	%
Real estate mortgage:	Real estate mortgage:													Real estate mortgage:
Residential	Residential	3,735		174		3,909		3,999		178		4,177		Residential	743,705		42.03		708,209		43.19		35,496		5.01	%
Commercial	Commercial	1,600		2,237		3,837		1,836		2,509		4,345		Commercial	517,713		29.26		500,632		30.53		17,081		3.41	%

		$	5,606	$	2,863	$	8,469	$	6,149	$	3,261	$	9,410
Construction														Construction	53,486		3.02		43,308		2.64		10,178		23.50	%
Consumer automobile loans														Consumer automobile loans	234,956		13.28		186,112		11.35		48,844		26.24	%
Other consumer installment loans														Other consumer installment loans	10,121		0.57		10,361		0.63		(240)		(2.32)	%
Net deferred loan fees and discounts														Net deferred loan fees and discounts	1,248		0.07		648		0.04		600		92.59	%
Gross loans														Gross loans	$	1,769,403	100.00	%	$	1,639,731	100.00	%	$	129,672	7.91	%

Investments

The fair value of the investment debt securities portfolio at ~~September~~June 30, ~~2022 increased $21,786,000~~2023 decreased $7,047,000 since December 31, ~~2021,~~2022, while the amortized cost of the portfolio ~~increased $38,872,000.~~decreased $7,131,000. The ~~increase~~decrease in the investment portfolio amortized value occurred within the state and political segment of the ~~portfolio.~~portfolio as principal cash flow was partially reinvested with the majority of the cash flow funding loan portfolio growth. The mortgage-backed segment ~~was reduced~~increased as bonds ~~prepaid due~~were purchased to ~~the low interest rate environment.~~provide future cash flow. The other debt segment balances remained constant and consists primarily of ~~the investment portfolio is primarily~~ corporate ~~bonds and decreased due to maturities. The municipal segment was increased as primarily bonds with a final maturity of one to five years have been purchased.~~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 ~~89.29%~~84.02% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

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

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

The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at $1,350,000 for ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 while the fair value ~~decreased $158,000~~increased $1,000 over the same time period.

Table of Contents

The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at ~~September~~June 30, ~~2022~~2023 follows:


		A- to AAA					B- to BBB+				C- to CCC+				Not Rated				Total					A- to AAA					B- to BBB+				C- to CCC+				Not Rated				Total
(In Thousands)	(In Thousands)	Amortized Cost			Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		(In Thousands)	Amortized Cost			Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale (AFS):	Available for sale (AFS):																						Available for sale (AFS):
U.S. Government and agency securities	U.S. Government and agency securities	$	3,003		$	2,902	$	—	$	—	$	—	$	—	$	—	$	—	$	3,003	$	2,902	U.S. Government and agency securities	$	1,503		$	1,467	$	—	$	—	$	—	$	—	$	2,498	$	2,418	$	4,001	$	3,885
Mortgage-backed securities	Mortgage-backed securities	1,508		7	1,282		—		—		—		—		—		—		1,508		1,282		Mortgage-backed securities	9,710		7	9,330		—		—		—		—		—		—		9,710		9,330

State and political securities	State and political securities	151,088			141,138		80		80		—		—		495		462		151,663		141,680		State and political securities	131,164			123,481		—		—		—		—		4,087		3,998		135,251		127,479
Other debt securities	Other debt securities	25,007			22,785		5,664		5,130		—		—		15,433		14,417		46,104		42,332		Other debt securities	24,808			23,051		6,328		5,585		—		—		18,873		17,296		50,009		45,932
Total debt securities AFS	Total debt securities AFS	$	180,606		$	168,107	$	5,744	$	5,210	$	—	$	—	$	15,928	$	14,879	$	202,278	$	188,196	Total debt securities AFS	$	167,185		$	157,329	$	6,328	$	5,585	$	—	$	—	$	25,458	$	23,712	$	198,971	$	186,626

Financing Activities

Deposits

Total deposits decreased ~~$30,900,000~~$2,703,000 from December 31, ~~2021~~2022 to ~~September~~June 30, ~~2022.~~2023. Time deposits ~~decreased $62,559,000~~increased $88,275,000 over this period to a total of ~~$142,808,000~~$226,224,000 as ~~excess~~deposit gathering efforts focused on ~~balance sheet liquidity has allowed for~~time deposits as customers sought a ~~decrease in the reliance~~higher return on ~~higher rate time~~their deposit ~~funding. An increase in core~~balances. Brokered deposits increased by $78,845,000 as usage provides an alternative to FHLB borrowings and supplemented funding loan portfolio growth. Core deposits (deposits less time deposits) ~~of $31,659,000 has provided relationship driven funding for the loan~~declined as deposit balances flowed from noninterest-bearing and ~~investment portfolios.~~lower rate products into higher rate products such as time deposit accounts. Emphasis ~~during 2021 and through 2022~~ has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking products has increased due to these efforts coupled with a change in consumer behavior ~~due to~~over the ~~business and travel restrictions that were temporarily in effect due to the COVID-19 pandemic.~~past several years.

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


		September 30, 2022				December 31, 2021				Change					June 30, 2023				December 31, 2022				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Demand deposits	Demand deposits	$	537,403	33.79	%	$	494,360	30.49	%	$	43,043	8.71	%	Demand deposits	$	475,937	30.63	%	$	519,063	33.35	%	$	(43,126)	(8.31)	%
NOW accounts	NOW accounts	392,140		24.66		366,399		22.60		25,741		7.03		NOW accounts	238,353		15.34		372,574		23.94		(134,221)		(36.03)
Money market deposits	Money market deposits	268,532		16.88		318,877		19.67		(50,345)		(15.79)		Money market deposits	296,957		19.11		270,589		17.38		26,368		9.74
Savings deposits	Savings deposits	249,532		15.69		236,312		14.58		13,220		5.59		Savings deposits	229,108		14.75		247,952		15.93		(18,844)		(7.60)
Time deposits	Time deposits	142,808		8.98		205,367		12.66		(62,559)		(30.46)		Time deposits	226,224		14.56		137,949		8.86		88,275		63.99
Brokered deposits														Brokered deposits	87,178		5.61		8,333		0.54		78,845		5.07
Total deposits	Total deposits	$	1,590,415	100.00	%	$	1,621,315	100.00	%	$	(30,900)	(1.91)	%	Total deposits	$	1,553,757	100.00	%	$	1,556,460	100.00	%	$	(2,703)	(0.17)	%

As of June 30, 2023 and December 31, 2022 the Company had $450,127,000 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 $89,929,000 and $180,252,000 at June 30, 2023 and December 31, 2022, respectively. Total uninsured deposits less collateralized public funds was $360,198,000 at June 30, 2023 and $437,263,000 at December 31, 2022.

Borrowed Funds

Total borrowed funds increased ~~1.53%~~49.57%, or ~~$2,020,000,~~$126,970,000, to ~~$133,730,000~~$383,102,000 at ~~September~~June 30, ~~2022~~2023 compared to ~~$131,710,000~~$256,132,000 at December 31, ~~2021.~~2022. The ~~decrease~~increase in long term borrowings occurred as fixed rate borrowings ~~matured~~were initiated to lock in interest rates and to reduce the usage of FHLB overnight borrowings. Short term FHLB borrowings were ~~replaced by short-term FHLB borrowings.~~utilized to provide short term funding for the loan portfolio growth. Securities sold under agreements to repurchase have decreased as customers balances have decreased.

September 30, 2022 December 31, 2021 Change
(In Thousands) Amount % Total Amount % Total Amount %
Short-term borrowings:
FHLB repurchase agreements $ 25,852 19.33 % $ — — % $ 25,852 100.00 %
Securities sold under agreement to repurchase 5,049 3.78 5,747 4.36 (698) (12.15)
Total short-term borrowings 30,901 23.11 5,747 4.36 25,154 437.69
Long-term borrowings:
Long-term FHLB borrowings 95,000 71.03 118,000 89.59 (23,000) (19.49)
Long-term finance lease 7,829 5.85 7,963 6.05 (134) (1.68)
Total long-term borrowings 102,829 76.89 125,963 95.64 (23,134) (18.37)
Total borrowed funds $ 133,730 100.00 % $ 131,710 100.00 % $ 2,020 1.53 %

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	June 30, 2023				December 31, 2022				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Short-term borrowings:
FHLB repurchase agreements	$	125,621	32.79	%	$	148,195	57.86	%	$	(22,574)	(15.23)
Short-term FHLB borrowings	50,000		13.05		—		—		50,000		n/a
Securities sold under agreement to repurchase	4,789		1.25		5,154		2.01		(365)		(7.08)
Total short-term borrowings	180,410		47.09		153,349		59.87		27,061		17.65
Long-term borrowings:
Long-term FHLB borrowings	195,000		50.89		95,000		37.09		100,000		105.26
Long-term finance lease	7,692		2.01		7,783		3.04		(91)		(1.17)

Total long-term borrowings	202,692		52.91		102,783		40.13		99,909		97.20
Total borrowed funds	$	383,102	100.00	%	$	256,132	100.00	%	$	126,970	49.57	%

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					Remaining Contractual Maturity Overnight and Continuous
(In Thousands)	(In Thousands)	September 30, 2022		December 31, 2021		(In Thousands)	June 30, 2023		December 31, 2022
Investment debt securities pledged, fair value	Investment debt securities pledged, fair value	$	6,941	$	8,881	Investment debt securities pledged, fair value	$	7,285	$	7,165
Repurchase agreements	Repurchase agreements	5,049		5,747		Repurchase agreements	4,789		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.

~~Table of Contents~~

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

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

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

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

Table of Contents

The Company's capital ratios as of June 30, 2023 and December 31, 2022 were as follows:


	June 30, 2023				December 31, 2022
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	172,025	9.695	%	$	165,346	9.973	%
For Capital Adequacy Purposes	79,847		4.500		74,607		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	124,206		7.000		116,056		7.000
To Be Well Capitalized	115,334		6.500		107,766		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	184,983	10.425	%	$	181,127	10.925	%
For Capital Adequacy Purposes	141,953		8.000		132,633		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	186,314		10.500		174,081		10.500
To Be Well Capitalized	177,442		10.000		165,791		10.000
Tier I Capital (to Risk-weighted Assets)
Actual	$	172,025	9.695	%	$	165,346	9.973	%
For Capital Adequacy Purposes	106,462		6.000		99,476		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	150,821		8.500		140,925		8.500
To Be Well Capitalized	141,949		8.000		132,635		8.000
Tier I Capital (to Average Assets)
Actual	$	172,025	8.332	%	$	165,346	8.636	%
For Capital Adequacy Purposes	82,585		4.000		76,585		4.000
To Be Well Capitalized	103,232		5.000		95,731		5.000

Jersey Shore State Bank's capital ratios as of June 30, 2023 and December 31, 2022 were as follows:


	June 30, 2023				December 31, 2022
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	124,177	9.516	%	$	119,783	9.781	%
For Capital Adequacy Purposes	58,722		4.500		55,109		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	91,345		7.000		85,725		7.000
To Be Well Capitalized	84,820		6.500		79,602		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	134,791	10.330	%	$	131,379	10.728	%
For Capital Adequacy Purposes	104,388		8.000		97,971		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	137,009		10.500		128,587		10.500
To Be Well Capitalized	130,485		10.000		122,464		10.000
Tier I Capital (to Risk-weighted Assets)	-				-
Actual	$	124,177	9.516	%	$	119,783	9.781	%
For Capital Adequacy Purposes	78,296		6.000		73,479		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	110,919		8.500		104,095		8.500
To Be Well Capitalized	104,394		8.000		97,972		8.000
Tier I Capital (to Average Assets)
Actual	$	124,177	8.155	%	$	119,783	8.383	%
For Capital Adequacy Purposes	60,908		4.000		57,155		4.000
To Be Well Capitalized	76,135		5.000		71,444		5.000

Table of Contents

Luzerne Bank's capital ratios as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 were as follows:


		September 30, 2022				December 31, 2021					June 30, 2023				December 31, 2022
(In Thousands)	(In Thousands)	Amount		Ratio		Amount		Ratio		(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)	Common Equity Tier I Capital (to Risk-weighted Assets)									Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	Actual	$	43,380	10.406	%	$	42,291	11.164	%	Actual	$	46,679	9.810	%	$	43,364	9.877	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	18,759		4.500		17,047		4.500		For Capital Adequacy Purposes	21,412		4.500		19,757		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	29,181		7.000		26,517		7.000		Minimum To Maintain Capital Conservation Buffer At Reporting Date	33,308		7.000		30,733		7.000
To Be Well Capitalized	To Be Well Capitalized	27,097		6.500		24,623		6.500		To Be Well Capitalized	30,929		6.500		28,538		6.500
Total Capital (to Risk-weighted Assets)	Total Capital (to Risk-weighted Assets)									Total Capital (to Risk-weighted Assets)
Actual	Actual	$	47,385	11.367	%	$	46,148	12.182	%	Actual	$	49,023	10.303	%	$	47,549	10.830	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	33,349		8.000		30,306		8.000		For Capital Adequacy Purposes	38,065		8.000		35,124		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	43,771		10.500		39,776		10.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	49,960		10.500		46,100		10.500
To Be Well Capitalized	To Be Well Capitalized	41,686		10.000		37,882		10.000		To Be Well Capitalized	47,581		10.000		43,905		10.000
Tier I Capital (to Risk-weighted Assets)	Tier I Capital (to Risk-weighted Assets)									Tier I Capital (to Risk-weighted Assets)
Actual	Actual	$	43,380	10.406	%	$	42,291	11.164	%	Actual	$	46,679	9.810	%	$	43,364	9.877	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	25,012		6.000		22,729		6.000		For Capital Adequacy Purposes	28,550		6.000		26,342		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	35,434		8.500		32,199		8.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	40,446		8.500		37,318		8.500
To Be Well Capitalized	To Be Well Capitalized	33,350		8.000		30,305		8.000		To Be Well Capitalized	38,066		8.000		35,123		8.000
Tier I Capital (to Average Assets)	Tier I Capital (to Average Assets)									Tier I Capital (to Average Assets)
Actual	Actual	$	43,380	7.973	%	$	42,291	7.537	%	Actual	$	46,679	8.215	%	$	43,364	8.260	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	21,763		4.000		22,444		4.000		For Capital Adequacy Purposes	22,729		4.000		21,000		4.000
To Be Well Capitalized	To Be Well Capitalized	27,204		5.000		28,056		5.000		To Be Well Capitalized	28,411		5.000		26,249		5.000

Liquidity; Interest Rate Sensitivity and Market Risk

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

The following liquidity measures are monitored for compliance and were within the limits cited, with the exception of net loans to total deposits that was 113%, at ~~September~~June 30, ~~2022:~~2023:

1. Net Loans to Total Assets, 85% maximum

2. Net Loans to Total Deposits, 100% maximum

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

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

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

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

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

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

Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a total current maximum borrowing capacity at the FHLB of ~~$720,252,000.~~$812,216,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $100,000,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled ~~$120,852,000~~$370,622,000 as of ~~September~~June 30, ~~2022.~~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~~June 30, ~~2023~~2024 assuming a static balance sheet as of ~~September~~June 30, ~~2022.~~2023.


		Parallel Rate Shock in Basis Points																								Parallel Rate Shock in Basis Points
(In Thousands)	(In Thousands)	-200			-100			Static		+100			+200			+300			+400			(In Thousands)	-300			-200			-100			Static		+100			+200			+300			+400
Net interest income	Net interest income	$	66,551		$	69,113		$	71,694	$	74,346		$	76,969		$	79,559		$	82,072		Net interest income	$	58,497		$	60,617		$	62,366		$	63,802	$	64,790		$	65,720		$	66,634		$	67,518
Change from static	Change from static	(5,143)			(2,581)			—		2,652			5,275			7,865			10,378			Change from static	(5,305)			(3,185)			(1,436)			—		988			1,918			2,832			3,716
Percent change from static	Percent change from static	-7.17		%	-3.60		%	—		3.70		%	7.36		%	10.97		%	14.48		%	Percent change from static	-8.31		%	-4.99		%	-2.25		%	—		1.55		%	3.01		%	4.44		%	5.82		%

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

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Inflation

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at both the level of the Company and the Banks. The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party. There have been no substantial changes in the Company’s gap analysis or simulation analysis compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, ~~2021.~~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~~June 30, ~~2022.~~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~~June 30, ~~2022~~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, ~~2021.~~2022, as supplemented by the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

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~~June 30, ~~2022.~~2023.


Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Units) Purchased		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month #1 ~~(July~~(April 1 - ~~July 31, 2022)~~April 30, 2023)	—	$	—	—	324,000
Month #2 ~~(August~~(May 1 - ~~August~~May 31, ~~2022)~~2023)	—	—		—	~~324,000~~353,000
Month #3 ~~(September~~(June 1 - ~~September~~June 30, ~~2022)~~2023)	—	—		—	~~324,000~~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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Item 6. Exhibits


3(i)						Articles of Incorporation of the Registrant ~~as presently in effect~~ (incorporated by reference to Exhibit 3(i) of the Registrant's ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~period~~year ended ~~September 30, 2019)~~December 31, 2022).
3(ii)						Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020).
~~10.1~~						Amendment to Employment Agreement, dated July 15, 2022, between Penns Woods Bancorp, Inc. and Richard A. Grafmyre (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on July 21, 2022)
~~10.2~~						Amendment to Employment Agreement, dated July 15, 2022, between Penns Woods Bancorp, Inc. and Brian L. Knepp (incorporated by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K filed on July 21, 2022)
31(i)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
31(ii)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
32(i)						Section 1350 Certification of Chief Executive Officer.
32(ii)						Section 1350 Certification of Chief Financial Officer.
101						Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021;~~2022; (ii) the Consolidated Statement of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021;~~2022; (iii) Consolidated Statement of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021;~~2022; (iv) the Consolidated Statement of Shareholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021;~~2022; (v) the Consolidated Statement of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~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.
104						Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101).

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SIGNATURES

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


		PENNS WOODS BANCORP, INC.
		(Registrant)

Date:	~~November 9, 2022~~August 11, 2023	/s/ Richard A. Grafmyre
		Richard A. Grafmyre, Chief Executive Officer
		(Principal Executive Officer)


Date:	~~November 9, 2022~~August 11, 2023	/s/ Brian L. Knepp
		Brian L. Knepp, President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting
		Officer)

5051


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

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


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



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



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



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