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PENNS WOODS BANCORP INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

By on May 10, 2022 0

WINNING SUMMARY

Comparison of three and three month periods ended March 31, 2022 and 2021

Summary of results

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

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

             Reconciliation of GAAP and Non-GAAP Financial Measures

(Dollars in Thousands, Except Per Share Data)                                                       Three Months Ended March 31,
                                                                                                       2022              2021
GAAP net income                                                                                     $  3,432          $ 3,441
Less: net securities (losses) gains, net of tax                                                          (48)              94
Non-GAAP core earnings                                                                              $  3,480          $ 3,347


                                                                                   Three Months Ended March 31,
                                                                                     2022                2021
Return on average assets (ROA)                                                         0.72  %             0.75  %
Less: net securities (losses) gains, net of tax                                       (0.01) %             0.02  %
Non-GAAP core ROA                                                                      0.73  %             0.73  %


                                                                                   Three Months Ended March 31,
                                                                                     2022                2021
Return on average equity (ROE)                                                         8.17  %             8.59  %
Less: net securities (losses) gains, net of tax                                       (0.11) %             0.24  %
Non-GAAP core ROE                                                         .            8.28  %             8.35  %


                                                                                 Three Months Ended March
                                                                                            31,
                                                                                   2022             2021
Basic earnings per share (EPS)                                                  $   0.49          $ 0.49
Less: net securities (losses) gains, net of tax                                    (0.01)           0.02
Non-GAAP core operating EPS                                                 

$0.50 $0.47

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                                                                                 Three Months Ended March
                                                                                            31,
                                                                                   2022             2021
Diluted EPS                                                                     $   0.49          $ 0.49
Less: net securities (losses) gains, net of tax                                    (0.01)           0.02
Non-GAAP diluted core EPS                                                   

$0.50 $0.47

Interest and dividend income

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

Composition of interest and dividend income for the three months ended March 31, 2022 and 2021 was as follows:

                                                                                                  Three Months Ended
                                                       March 31, 2022                                March 31, 2021                                   Change
(In Thousands)                                Amount                % Total                 Amount                % Total               Amount                   %
Loans including fees                       $  13,038              91.34     %            $  13,345              91.44     %            $ (307)                (2.30)   %
Investment securities:
Taxable                                          737               5.16                        819               5.61                     (82)               (10.01)
Tax-exempt                                       164               1.15                        171               1.17                      (7)                (4.09)
Dividend and other interest income               336               2.35                        260               1.78                      76           

29.23

Total interest and dividend income         $  14,275             100.00     %            $  14,595             100.00     %            $ (320)                (2.19)   %





Interest Expense

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

Interest expense composition for the three months ended March 31, 2022 and 2021
was as follows:
                                                                                                 Three Months Ended
                                                      March 31, 2022                               March 31, 2021                                   Change
(In Thousands)                              Amount                % Total                Amount                % Total                Amount                    %
Deposits                                  $    788              55.42     %            $  1,684              66.69     %            $   (896)               (53.21)   %
Short-term borrowings                            1               0.07                         2               0.08                        (1)               (50.00)
Long-term borrowings                           633              44.51                       839              33.23                      (206)               (24.55)
Total interest expense                    $  1,422             100.00     %            $  2,525             100.00     %            $ (1,103)               (43.68)   %




Net Interest Margin

The net interest margin for the three months ended March 31, 2022 was 2.93%
compared to 2.88% for the corresponding period of 2021. The increase in the net
interest margin for the three month period was driven by a decline in the rate
paid on interest-bearing deposits of 35 basis points ("bps") as rates paid
decreased throughout 2021 and through the first three months of 2022. Leading
the decline in the rate paid on interest-bearing deposits was a 94 bps decline
in the rate paid on time deposits as time deposits issued prior to the start of
the COVID-19 pandemic matured. Offsetting the decrease in rates paid on the
interest
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bearing liabilities was a decrease in the yield of the loan portfolio of 26 bps
coupled with the yield on the investment portfolio declining 32 bps as legacy
earning assets were paid down or matured.

The following is a table of average balances and associated returns for the three months ended March 31, 2022 and 2021:

                                                                                                    AVERAGE BALANCES AND INTEREST RATES
                                                                Three Months Ended March 31, 2022                                         Three Months Ended March 31, 2021
(In Thousands)                                  Average Balance (1)          Interest             Average Rate            Average Balance (1)          Interest             Average Rate
Assets:
Tax-exempt loans (3)                           $            47,974          $    308                       2.60  %       $            45,534          $    349                       3.11  %
All other loans                                          1,351,414            12,795                       3.84  %                 1,293,395            13,069                       4.10  %
Total loans (2)                                          1,399,388            13,103                       3.80  %                 1,338,929            13,418                       4.06  %

Federal funds sold                                          50,000                93                       0.75  %                         -                 -                          -  %

Taxable securities                                         144,438               920                       2.58  %                   145,047             1,033                       2.89  %
Tax-exempt securities (3)                                   40,981               208                       2.06  %                    36,369               216                       2.41  %
Total securities                                           185,419             1,128                       2.47  %                   181,416             1,249                       2.79  %

Interest-bearing deposits                                  157,541                60                       0.15  %                   195,995                46                       0.10  %

Total interest-earning assets                            1,792,348            14,384                       3.25  %                 1,716,340            14,713                       3.48  %

Other assets                                               127,421                                                                   124,074

Total assets                                   $         1,919,769                                                       $         1,840,414

Liabilities and shareholders' equity:
Savings                                        $           240,953                22                       0.04  %       $           214,636                44                       0.08  %
Super Now deposits                                         370,895               195                       0.21  %                   289,236               267                       0.37  %
Money market deposits                                      298,820               186                       0.25  %                   306,000               267                       0.35  %
Time deposits                                              190,819               385                       0.82  %                   254,460             1,106                       1.76  %
Total interest-bearing deposits                          1,101,487               788                       0.29  %                 1,064,332             1,684                       0.64  %

Short-term borrowings                                        5,194                 1                       0.08  %                     5,680                 2                       0.14  %
Long-term borrowings                                       115,267               633                       2.23  %                   141,483               839                       2.40  %
Total borrowings                                           120,461               634                       2.13  %                   147,163               841                       2.32  %

Total interest-bearing liabilities                       1,221,948             1,422                       0.47  %                 1,211,495             2,525                       0.85  %

Demand deposits                                            506,348                                                                   445,759
Other liabilities                                           23,357                                                                    22,872
Shareholders' equity                                       168,116                                                                   160,288

Total liabilities and shareholders'
equity                                         $         1,919,769                                                       $         1,840,414
Interest rate spread                                                                                       2.78  %                                                                   2.63  %
Net interest income/margin                                                  $ 12,962                       2.93  %                                    $ 12,188                       2.88  %




1.  Information on this table has been calculated using average daily balance
sheets to obtain average balances.
2.  Non-accrual loans have been included with loans for the purpose of analyzing
net interest earnings.
3.  Income and rates on fully taxable equivalent basis include an adjustment for
the difference between annual income
from tax-exempt obligations and the taxable equivalent of such income at the
standard tax rate of 21%







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The following table presents the adjustment to convert net interest income to
net interest income on a fully taxable equivalent basis for the three months
ended March 31, 2022 and 2021:

                                                                           Three Months Ended March 31,
(In Thousands)                                                                2022                  2021
Total interest income                                                  $        14,275          $  14,595
Total interest expense                                                           1,422              2,525
Net interest income (GAAP)                                                      12,853             12,070
Tax equivalent adjustment                                                          109                118
Net interest income (fully taxable equivalent) (NON-GAAP)              $    

12,962 $12,188



The following table sets forth the respective impact that both volume and rate
changes have had on net interest income on a fully taxable equivalent basis for
the three months ended March 31, 2022 and 2021:

                                                   Three Months Ended March 31,
                                                           2022 vs. 2021
                                                    Increase (Decrease) Due to
(In Thousands)                                   Volume               Rate          Net
Interest income:
Tax-exempt loans                        $         18                $   (60)     $    (42)
All other loans                                  583                   (856)         (273)
Federal funds sold                                93                      -            93
Taxable investment securities                     (4)                  (109)         (113)
Tax-exempt investment securities                  26                    (34)           (8)
Interest bearing deposits                        (10)                    24            14
Total interest-earning assets                    706                 (1,035)         (329)

Interest expense:
Savings deposits                                   4                    (26)          (22)
Super Now deposits                                63                   (135)          (72)
Money market deposits                             (6)                   (75)          (81)
Time deposits                                   (230)                  (491)         (721)
Short-term borrowings                              -                     (1)           (1)
Long-term borrowings                            (149)                   (57)         (206)
Total interest-bearing liabilities              (318)                  (785)       (1,103)
Change in net interest income           $      1,024                $  (250)     $    774



Provision for Loan Losses

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

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

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

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

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

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

Nonperforming loans decreased to $5,281,000 at March 31, 2022 from $6,250,000 at
December 31, 2021. The majority of nonperforming loans involve loans that are
either in a secured position and have sureties with a strong underlying
financial position or have a specific allocation for any impairment recorded
within the allowance for loan losses. The ratio of nonperforming loans to total
loans was 0.38% and 0.45% at March 31, 2022 and December 31, 2021, respectively,
and the ratio of the allowance for loan losses to nonperforming loans was
265.54% and 226.82% at March 31, 2022 and December 31, 2021, respectively.
Internal loan review and analysis coupled with changes in the loan portfolio
composition resulted in a provision for loan losses of $150,000 for the three
months ended March 31, 2022.

Here is a table showing total non-performing loans as of:

                                    Total Nonperforming Loans
(In Thousands)           90 Days Past Due      Non-accrual        Total
March 31, 2022          $      364            $      4,917      $ 5,281
December 31, 2021              861                   5,389        6,250
September 30, 2021             854                   6,909        7,763
June 30, 2021                  529                   7,402        7,931
March 31, 2021                 607                   8,665        9,272



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

Commercial, financial, and
agricultural                              $         1,936       $   162,273                    1.19  %       $              4          $      161,698                           -  %
Real estate mortgage:
Residential                                         4,801           613,161                    0.78  %                      3                 606,449                           -  %
Commercial                                          5,215           443,415                    1.18  %                   (154)                445,914                       (0.03) %
Construction                                          197            41,923                    0.47  %                      -                  39,286                           -  %
Consumer automobiles                                1,376           135,568                    1.01  %                   (120)                136,544                       (0.09) %
Other consumer installment loans                      114             9,366                    1.22  %                    (36)                  9,497                       (0.38) %
Unallocated                                           384
                                          $        14,023       $ 1,405,706                    1.00  %       $           (303)         $    1,399,388                       (0.02) %

Total non-accrual loans outstanding       $         4,917
Non-accrual loans to total loans
outstanding                                       0.35  %
Allowance for loan losses to
non-accrual loans                               285.19  %


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

Commercial, financial, and
agricultural                              $         1,946       $   163,285                    1.19  %       $            (10)         $      175,631                       (0.01) %
Real estate mortgage:
Residential                                         4,701           595,847                    0.79  %                   (107)                584,849                       (0.02) %
Commercial                                          5,336           446,734                    1.19  %                     95                 381,306                        0.02  %
Construction                                          179            37,295                    0.48  %                     10                  41,564                        0.02  %
Consumer automobiles                                1,411           139,408                    1.01  %                   (143)                152,496                       (0.09) %
Other consumer installment loans                      111             9,277                    1.20  %                   (112)                  9,787                       (1.14) %
Unallocated                                           492
                                          $        14,176       $ 1,391,846                    1.02  %       $           (267)         $    1,345,633                       (0.02) %

Total unrecognized loans outstanding $5,389 Unrecognized loans to total loans outstanding

                                       0.39  %
Allowance for loan losses to
non-accrual loans                               263.05  %




Non-interest Income

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




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Non-interest income composition for the three months ended March 31, 2022 and
2021 was as follows:

                                                                                                  Three Months Ended
                                                            March 31, 2022                               March 31, 2021                              Change
(In Thousands)                                       Amount                % Total                Amount                % Total            Amount               %
Service charges                                 $         495                 20.52  %       $         383                 14.65  %       $  112               29.24  %
Net debt securities (losses) gains,
available for sale                                         (2)                (0.08)                   138                  5.28            (140)       

101.45

Net equity securities losses                              (58)                (2.40)                   (23)                (0.88)            (35)       

(152.17)

Net securities (losses) gains, trading                     (1)                (0.04)                     4                  0.15              (5)            (125.00)
Bank-owned life insurance                                 170                  7.05                    173                  6.62              (3)              (1.73)
Gain on sale of loans                                     345                 14.30                    908                 34.74            (563)             (62.00)
Insurance commissions                                     170                  7.05                    157                  6.01              13                8.28
Brokerage commissions                                     200                  8.29                    219                  8.38             (19)              (8.68)
Loan broker commissions                                   541                 22.43                    181                  6.92             360              198.90
Debit card income                                         345                 14.30                    380                 14.54             (35)              (9.21)
Other                                                     207                  8.58                     94                  3.59             113              120.21
Total non-interest income                       $       2,412              
 100.00  %       $       2,614                100.00  %       $ (202)              (7.73) %




Non-interest Expense

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

Non-interest expense composition for the three months ended March 31, 2022 and
2021 was as follows:
                                                                                                    Three Months Ended
                                                              March 31, 2022                               March 31, 2021                              Change
(In Thousands)                                         Amount                % Total                Amount                % Total             Amount              %
Salaries and employee benefits                    $       6,264                 56.91  %       $       5,598                 56.26  %       $   666              11.90  %
Occupancy                                                   910                  8.27                    976                  9.81              (66)             (6.76)
Furniture and equipment                                     892                  8.10                    809                  8.13               83              10.26
Software amortization                                       253                  2.30                    198                  1.99               55              27.78
Pennsylvania shares tax                                     389                  3.53                    352                  3.54               37              10.51
Professional fees                                           538                  4.89                    583                  5.86              (45)             (7.72)
Federal Deposit Insurance Corporation
deposit insurance                                           202                  1.84                    221                  2.22              (19)             (8.60)

Marketing                                                    64                  0.58                     63                  0.63                1               1.59
Intangible amortization                                      43                  0.39                     53                  0.53              (10)            (18.87)
Other                                                     1,452                 13.19                  1,098                 11.03              354              32.24
Total non-interest expense                        $      11,007                100.00  %       $       9,951                100.00  %       $ 1,056              10.61  %




Provision for Income Taxes

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



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ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

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

Loans held for sale

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


Loans

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

The breakdown of the loan portfolio, by category, at March 31, 2022 and
December 31, 2021 is shown below:

                                                           March 31, 2022                                December 31, 2021                                Change
(In Thousands)                                      Amount                 % Total                  Amount                  % Total             Amount               %
Commercial, financial, and agricultural        $      162,273                 11.54  %       $         163,285                 11.73  %       $ (1,012)             (0.62) %
Real estate mortgage:
Residential                                           613,161                 43.61                    595,847                 42.80            17,314               2.91  %
Commercial                                            443,415                 31.54                    446,734                 32.09            (3,319)             (0.74) %
Construction                                           41,923                  2.98                     37,295                  2.68             4,628              12.41  %
Consumer automobile loans                             135,568                  9.64                    139,408                 10.01            (3,840)             (2.75) %
Other consumer installment loans                        9,366                  0.67                      9,277                  0.67                89               0.96  %
Net deferred loan fees and discounts                      260                  0.02                        301                  0.02               (41)            (13.62) %
Gross loans                                    $    1,405,966                100.00  %       $       1,392,147                100.00  %       $ 13,819               0.99  %


The following table shows the amount of cumulative and non-cumulative TDRs at
March 31, 2022 and December 31, 2021:

                                                              March 31, 2022                                         December 31, 2021
(In Thousands)                                Accrual           Non-accrual           Total           Accrual           Non-accrual           Total
Commercial, financial, and
agricultural                                 $   308          $        507          $   815          $   314          $        574          $   888
Real estate mortgage:
Residential                                    3,961                   177            4,138            3,999                   178            4,177
Commercial                                     1,799                 2,332            4,131            1,836                 2,509            4,345

                                             $ 6,068          $      3,016          $ 9,084          $ 6,149          $      3,261          $ 9,410



Investments

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

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

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

The fair value of the equity portfolio continues to fluctuate as the economic
and political environment continues to impact stock pricing. The amortized cost
of the available for sale equity securities portfolio has remained flat at
$1,300,000 for March 31, 2022 and December 31, 2021 while the fair value
decreased $58,000 over the same time period.

The distribution of credit ratings based on amortized cost and fair value of the debt securities portfolio at March 31, 2022 follows:

                                                     A- to AAA                                    B- to BBB+                                   C- to CCC+                                 Not Rated                                   Total
                                                                                                                                                                               Amortized
(In Thousands)                           Amortized Cost          Fair Value          Amortized Cost           Fair Value          Amortized Cost           Fair Value             Cost             Fair Value           Amortized Cost          Fair Value
Available for sale (AFS):

Mortgage-backed securities             $         1,532        7 $    1,452          $            -          $         -          $       -               $         -          $       -          $         -          $         1,532          $    1,452

State and political securities                 128,568             126,258                     120                  121                  -                         -              1,180                1,177                  129,868             127,556
Other debt securities                           25,639              24,618                   5,505                5,396                  -                         -             17,021               16,652                   48,165              46,666
Total debt securities AFS              $       155,739          $  152,328          $        5,625          $     5,517          $       -               $         -          $  18,201          $    17,829          $       179,565          $  175,674



Financing Activities

Deposits

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

The deposit balances and their changes for the periods discussed are as follows:

                                                        March 31, 2022                                 December 31, 2021                                Change
(In Thousands)                                  Amount                 % Total                   Amount                  % Total              Amount                %
Demand deposits                            $      514,130                  31.89  %       $         494,360                  30.49  %       $ 19,770                4.00  %
NOW accounts                                      379,838                  23.56                    366,399                  22.60            13,439                3.67
Money market deposits                             299,166                  18.55                    318,877                  19.67           (19,711)              (6.18)
Savings deposits                                  245,661                  15.24                    236,312                  14.58             9,349                3.96
Time deposits                                     173,600                  10.76                    205,367                  12.66           (31,767)             (15.47)
 Total deposits                            $    1,612,395                 100.00  %       $       1,621,315                 100.00  %       $ (8,920)              (0.55) %





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Borrowed Funds

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

                                                            March 31, 2022                             December 31, 2021                            Change
(In Thousands)                                       Amount                 % Total              Amount               % Total              Amount               %
Short-term borrowings:

Securities sold under agreement to
repurchase                                      $        6,634                  5.55  %       $    5,747                  4.36  %       $     887              15.43  %
Total short-term borrowings                              6,634                  5.55               5,747                  4.36                887              15.43
Long-term borrowings:
Long-term FHLB borrowings                              105,000                 87.82             118,000                 89.59            (13,000)            (11.02)
Long-term finance lease                                  7,918                  6.62               7,963                  6.05                (45)             (0.57)

Total long-term borrowings                             112,918                 94.45             125,963                 95.64            (13,045)            (10.36)
Total borrowed funds                            $      119,552                100.00  %       $  131,710                100.00  %       $ (12,158)             (9.23) %



Short-Term Borrowings

The following table provides additional information regarding secured borrowings that have been accounted for as repurchase agreements.

                                                                 Remaining 

Contractual expiry Night and

Continued

(In Thousands)                                                    March 31, 2022            December 31, 2021
Investment debt securities pledged, fair value                  $          7,748          $            8,881
Repurchase agreements                                                      6,634                       5,747



Capital

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

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

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



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

                                                                            March 31, 2022                             December 31, 2021
(In Thousands)                                                       Amount                  Ratio               Amount                Ratio

Ordinary Tier I capital (to risk-weighted assets) Actual

                                                          $      158,069                10.730  %       $  156,439                10.791  %
For Capital Adequacy Purposes                                           66,292                 4.500              65,237                 4.500

Minimum to maintain the capital conservation buffer at the closing date

                                                         103,121                 7.000             101,480                 7.000
To Be Well Capitalized                                                  95,755                 6.500              94,232                 6.500
Total Capital (to Risk-weighted Assets)
Actual                                                          $      172,198                11.690  %       $  170,708                11.776  %
For Capital Adequacy Purposes                                          117,843                 8.000             115,970                 8.000

Minimum to maintain the capital conservation buffer at the closing date

                                                         154,669                10.500             152,211                10.500
To Be Well Capitalized                                                 147,304                10.000             144,963                10.000
Tier I Capital (to Risk-weighted Assets)
Actual                                                          $      158,069                10.730  %       $  156,439                10.791  %
For Capital Adequacy Purposes                                           88,389                 6.000              86,983                 6.000

Minimum to maintain the capital conservation buffer at the closing date

                                                         125,218                 8.500             123,226                 8.500
To Be Well Capitalized                                                 117,852                 8.000             115,977                 8.000
Tier I Capital (to Average Assets)
Actual                                                          $      158,069                 8.330  %       $  156,439                 8.397  %
For Capital Adequacy Purposes                                           75,903                 4.000              74,521                 4.000
To Be Well Capitalized                                                  94,879                 5.000              93,152                 5.000



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

                                                                            March 31, 2022                             December 31, 2021
(In Thousands)                                                       Amount                  Ratio               Amount                Ratio

Ordinary Tier I capital (to risk-weighted assets) Actual

                                                          $      111,825                10.303  %       $  110,682                10.337  %
For Capital Adequacy Purposes                                           48,841                 4.500              48,183                 4.500

Minimum to maintain the capital conservation buffer at the closing date

                                                          75,975                 7.000              74,952                 7.000
To Be Well Capitalized                                                  70,549                 6.500              69,598                 6.500
Total Capital (to Risk-weighted Assets)
Actual                                                          $      122,280                11.266  %       $  121,094                11.309  %
For Capital Adequacy Purposes                                           86,831                 8.000              85,662                 8.000

Minimum to maintain the capital conservation buffer at the closing date

                                                         113,966                10.500             112,431                10.500
To Be Well Capitalized                                                 108,539                10.000             107,078                10.000
Tier I Capital (to Risk-weighted Assets)                                        -                                         -
Actual                                                          $      111,825                10.303  %       $  110,682                10.337  %
For Capital Adequacy Purposes                                           65,122                 6.000              64,244                 6.000

Minimum to maintain the capital conservation buffer at the closing date

                                                          92,256                 8.500              91,013                 8.500
To Be Well Capitalized                                                  86,829                 8.000              85,659                 8.000
Tier I Capital (to Average Assets)
Actual                                                          $      111,825                 8.315  %       $  110,682                 8.326  %
For Capital Adequacy Purposes                                           53,794                 4.000              53,174                 4.000
To Be Well Capitalized                                                  67,243                 5.000              66,468                 5.000



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Luzerne Bank's capital ratios as of March 31, 2022 and December 31, 2021 were as
follows:

                                                                            March 31, 2022                           December 31, 2021
(In Thousands)                                                       Amount                 Ratio               Amount               Ratio

Ordinary Tier I capital (to risk-weighted assets) Actual

                                                          $      42,847                11.052  %       $  42,291                11.164  %
For Capital Adequacy Purposes                                          17,446                 4.500             17,047                 4.500

Minimum to maintain the capital conservation buffer at the closing date

                                                         27,138                 7.000             26,517                 7.000
To Be Well Capitalized                                                 25,200                 6.500             24,623                 6.500
Total Capital (to Risk-weighted Assets)
Actual                                                          $      46,521                11.999  %       $  46,148                12.182  %
For Capital Adequacy Purposes                                          31,017                 8.000             30,306                 8.000

Minimum to maintain the capital conservation buffer at the closing date

                                                         40,709                10.500             39,776                10.500
To Be Well Capitalized                                                 38,771                10.000             37,882                10.000
Tier I Capital (to Risk-weighted Assets)
Actual                                                          $      42,847                11.052  %       $  42,291                11.164  %
For Capital Adequacy Purposes                                          23,261                 6.000             22,729                 6.000

Minimum to maintain the capital conservation buffer at the closing date

                                                         32,953                 8.500             32,199                 8.500
To Be Well Capitalized                                                 31,015                 8.000             30,305                 8.000
Tier I Capital (to Average Assets)
Actual                                                          $      42,847                 7.763  %       $  42,291                 7.537  %
For Capital Adequacy Purposes                                          22,078                 4.000             22,444                 4.000
To Be Well Capitalized                                                 27,597                 5.000             28,056                 5.000



Liquidity; Sensitivity to interest rates 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 in March 31, 2022:

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

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

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

Management monitors the Company's liquidity on both a long and short-term basis,
thereby providing management necessary information to react to current balance
sheet trends. Cash flow needs are assessed and sources of funds are determined.
Funding strategies consider both customer needs and economical cost. Both short
and long-term funding needs are addressed by maturities and sales of available
for sale and trading investment securities, loan repayments and maturities, and
liquidating
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money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides basic funding to meet the needs of depositors, borrowers and creditors.

Management monitors and determines the desirable level of liquidity.
Consideration is given to loan demand, investment opportunities, deposit pricing
and growth potential, as well as the current cost of borrowing funds. The
Company has a total current maximum borrowing capacity at the FHLB of
$669,483,000. In addition to this credit arrangement, the Company has additional
lines of credit with correspondent banks of $100,000,000. Management believes it
has sufficient liquidity to satisfy estimated short-term and long-term funding
needs. FHLB borrowings totaled $105,000,000 as of March 31, 2022.

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

The Company currently maintains a gap position of being asset sensitive.  The
Company has strategically taken this position as it has decreased the duration
of the earning asset portfolio by adding quality short and intermediate term
loans such as home equity loans and the selling of long-term municipal bonds.
Lengthening of the liability portfolio is being undertaken to build protection
in a rising rate environment.

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

Sensitivity to interest rates

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

The following is a rate shock forecast for the twelve month period ending March 31, 2023 assuming a static balance sheet at March 31, 2022.

                                                                                  Parallel Rate Shock in Basis Points
(In Thousands)                             -200              -100             Static             +100              +200              +300              +400
Net interest income                     $ 51,824          $ 54,746          $ 57,374          $ 60,914          $ 64,502          $ 68,183          $ 71,893
Change from static                        (5,550)           (2,628)                -             3,540             7,128            10,809            14,519
Percent change from static                 -9.67  %          -4.58  %              -              6.17  %          12.42  %          18.84  %          25.31  %



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

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Inflation

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

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