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

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

By Michael M. Pack
November 9, 2022
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PROFIT OVERVIEW

Comparison of the ended three and nine months 09/30/2022 and 2021

Summary Results

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

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

             Reconciliation of GAAP and Non-GAAP Financial Measures

Three months ended September Nine months ended September (dollars in thousands except per share data)

                     30,                                 30,
                                                                                        2022              2021              2022              2021
GAAP net income                                                            

$5,250 $4,125 $12,913 $11,154
Less: Net securities (losses) gains, after tax

             (167)              32               (258)              236
Non-GAAP core earnings                                                              $   5,417          $ 4,093          $  13,171          $ 10,918


                                                                Three

months ended 09/30Nine months ended 09/30,

                                                                     2022                2021                2022                2021
GAAP Return on average assets (ROA)                                    1.09  %            0.86  %              0.89  %            0.79  %
Less: net securities (losses) gains, net of tax                       (0.03) %               -  %             (0.02) %            0.02  %
Non-GAAP core ROA                                                      1.12  %            0.86  %              0.91  %            0.77  %


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                                                                Three Months Ended September 30,         Nine Months Ended September 30,
                                                                     2022                2021                2022                2021
GAAP Return on average equity (ROE)                                   12.61  %            9.85  %             10.48  %            9.17  %
Less: net securities (losses) gains, net of tax                       (0.41) %            0.07  %             (0.21) %            0.19  %
Non-GAAP core ROE                                         .           13.02  %            9.78  %             10.69  %            8.98  %


                                                                    Three Months Ended            Nine Months Ended September
                                                                       September 30,                          30,
                                                                   2022             2021             2022             2021
GAAP Basic earnings per share (EPS)                             $   0.74          $ 0.58          $   1.83          $ 1.58
Less: net securities (losses) gains, net of tax                    (0.03)              -             (0.04)           0.03
Non-GAAP core operating EPS                                     $   0.77          $ 0.58          $   1.87          $ 1.55


                                                                    Three Months Ended            Nine Months Ended September
                                                                       September 30,                          30,
                                                                   2022             2021             2022             2021
GAAP Diluted EPS                                                $   0.74          $ 0.58          $   1.83          $ 1.58
Less: net securities (losses) gains, net of tax                    (0.03)              -             (0.04)           0.03
Non-GAAP diluted core EPS                                       $   0.77    

$0.58 $1.87 $1.55

Interest and dividend income

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

Composition of interest and dividend income for the past three and nine months
09/30/2022 and 2021 was as follows:

                                                                                                   Three Months Ended
                                                      September 30, 2022                             September 30, 2021                                 Change
(In Thousands)                                Amount                 % Total                 Amount                 % Total                Amount                  %
Loans including fees                       $   15,051              89.25     %            $   13,382              90.95     %            $ 1,669                12.47    %
Investment securities:
Taxable                                           949               5.63                         834               5.67                      115                13.79
Tax-exempt                                        236               1.40                         160               1.09                       76                47.50
Dividend and other interest income                628               3.72                         338               2.29                      290        

85.80

Total interest and dividend income         $   16,864             100.00     %            $   14,714             100.00     %            $ 2,150                14.61    %


                                                                                                 Nine Months Ended
                                                      September 30, 2022                             September 30, 2021                              Change
(In Thousands)                                Amount                 % Total                 Amount                 % Total                Amount               %
Loans including fees                       $   41,709              90.04     %            $   39,826              91.10     %            $ 1,883                 4.73    %
Investment securities:
Taxable                                         2,550               5.50                       2,491               5.70                       59                 2.37
Tax-exempt                                        594               1.28                         495               1.13                       99                20.00
Dividend and other interest income              1,470               3.18                         903               2.07                      567        

62.79

Total interest and dividend income         $   46,323             100.00     %            $   43,715             100.00     %            $ 2,608                 5.97    %


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interest expense

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

Composition of interest expense for the past three and nine months 09/30/2022 and 2021 was as follows:

                                                                                                   Three Months Ended
                                                     September 30, 2022                              September 30, 2021                                  Change
(In Thousands)                                Amount                 % Total                  Amount                 % Total               Amount                   %
Deposits                                  $       693              52.03     %            $     1,308              62.83     %            $ (615)               (47.02)   %
Short-term borrowings                              26               1.95                            3               0.14                      23                766.67
Long-term borrowings                              613              46.02                          771              37.03                    (158)               (20.49)
Total interest expense                    $     1,332             100.00     %            $     2,082             100.00     %            $ (750)               (36.02)   %


                                                                                                     Nine Months Ended
                                                     September 30, 2022                              September 30, 2021                                   Change
(In Thousands)                                Amount                 % Total                  Amount                 % Total                Amount                    %
Deposits                                  $     2,191              53.56     %            $     4,481              64.77     %            $ (2,290)               (51.10)   %
Short-term borrowings                              29               0.71                            7               0.10                        22                314.29
Long-term borrowings                            1,871              45.73                        2,430              35.13                      (559)               (23.00)
Total interest expense                    $     4,091             100.00     %            $     6,918             100.00     %            $ (2,827)               (40.86)   %



Net Interest Margin

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


















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The following is a breakdown of the average balance sheets and associated returns for the trailing three and nine months 09/30/2022 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  %


1.  Information on this table has been calculated using average daily balance
sheets to obtain average balances.
2.  Non-accrual loans have been included with loans for the purpose of analyzing
net interest earnings.
3.  Income and rates on fully taxable equivalent basis include an adjustment for
the difference between annual income
from tax-exempt obligations and the taxable equivalent of such income at the
standard tax rate of 21% and are reconciled to the equivalent GAAP
measurement below the tables.
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                                                                                                      AVERAGE BALANCES AND INTEREST RATES
                                                               Nine Months Ended September 30, 2022                                        Nine Months Ended September 30, 2021
(In Thousands)                                   Average Balance (1)          Interest             Average Rate              Average Balance (1)          Interest             Average Rate
Assets:
Tax-exempt loans (3)                           $             53,269          $  1,033                        2.59  %       $             46,217          $    991                        2.87  %
All other loans                                           1,403,504            40,893                        3.90  %                  1,292,028            39,043                        4.04  %
Total loans (2)                                           1,456,773            41,926                        3.85  %                  1,338,245            40,034                        4.00  %

Federal funds sold                                           43,938               465                        1.41  %                     21,993               117                        0.71  %

Taxable securities                                          152,937             3,126                        2.76  %                    147,942             3,105                        2.84  %
Tax-exempt securities (3)                                    45,357               752                        2.24  %                     36,638               627                        2.31  %
Total securities                                            198,294             3,878                        2.64  %                    184,580             3,732                        2.73  %

Interest-bearing deposits                                    97,520               429                        0.59  %                    206,895               172                        0.11  %

Total interest-earning assets                             1,796,525            46,698                        3.48  %                  1,751,713            44,055                        3.37  %

Other assets                                                129,048                                                                     128,567

Total assets                                   $          1,925,573                                                        $          1,880,280

Liabilities and shareholders' equity:
Savings                                        $            246,063                72                        0.04  %       $            222,889                94                        0.06  %
Super Now deposits                                          388,149               721                        0.25  %                    294,570               694                        0.31  %
Money market deposits                                       296,998               596                        0.27  %                    307,309               761                        0.33  %
Time deposits                                               167,876               802                        0.64  %                    253,130             2,932                        1.55  %
Total interest-bearing deposits                           1,099,086             2,191                        0.27  %                  1,077,898             4,481                        0.56  %

Short-term borrowings                                         6,308                29                        0.59  %                      7,152                 7                        0.13  %
Long-term borrowings                                        112,457             1,871                        2.22  %                    138,669             2,430                        2.34  %
Total borrowings                                            118,765             1,900                        2.14  %                    145,821             2,437                        2.23  %

Total interest-bearing liabilities                        1,217,851             4,091                        0.45  %                  1,223,719             6,918                        0.76  %

Demand deposits                                             519,599                                                                     473,088
Other liabilities                                            23,814                                                                      21,327
Shareholders' equity                                        164,309                                                                     162,146

Total liabilities and shareholders'
equity                                         $          1,925,573                                                        $          1,880,280
Interest rate spread (3)                                                                                     3.03  %                                                                     2.61  %
Net interest income/margin (3)                                               $ 42,607                        3.17  %                                     $ 37,137                        2.84  %


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

The following table presents the adjustment to convert net interest income to
net interest income on a fully taxable equivalent basis for the three and nine
months ended September 30, 2022 and 2021:

                                                Three Months Ended September 30,        Nine Months Ended September 30,
(In Thousands)                                      2022                2021               2022                2021
Total interest income                           $   16,864          $  14,714          $   46,323          $   43,715
Total interest expense                               1,332              2,082               4,091               6,918
Net interest income (GAAP)                          15,532             12,632              42,232              36,797
Tax equivalent adjustment                              146                107                 375                 340
Net interest income (fully taxable
equivalent) (NON-GAAP)                          $   15,678          $  12,739          $   42,607          $   37,137



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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 months ended September 30, 2022 and 2021:

                                                               Three Months Ended September 30,                             Three months ended September 30,
                                                                         2022 vs. 2021                                                2022 vs. 2021
                                                                  Increase (Decrease) Due to                                   Increase (Decrease) Due to
(In Thousands)                                              Volume                 Rate             Net                 Volume                 Rate             Net
Interest income:
Tax-exempt loans                                    $          85                $    2          $    87          $        104              $   (62)         $    42
All other loans                                             1,666                   (65)           1,601                 2,600                 (750)           1,850
Federal funds sold                                            (13)                  159              146                   175                  173              348
Taxable investment securities                                  66                    70              136                    75                  (54)              21
Tax-exempt investment securities                               71                    25               96                   134                   (9)             125
Interest bearing deposits                                    (114)                  237              123                   (60)                 317              257
Total interest-earning assets                               1,761                   428            2,189                 3,028                 (385)           2,643

Interest expense:
Savings deposits                                                4                     -                4                     5                  (27)             (22)
Super Now deposits                                             68                     -               68                   126                  (99)              27
Money market deposits                                         (14)                  (24)             (38)                  (26)                (139)            (165)
Time deposits                                                (251)                 (398)            (649)                 (776)              (1,354)          (2,130)
Short-term borrowings                                           -                    23               23                    (1)           0      23               22
Long-term borrowings                                         (138)                  (20)            (158)                 (439)           0    (120)            (559)
Total interest-bearing liabilities                           (331)                 (419)            (750)               (1,111)              (1,716)    

(2,827)

Change in net interest income                       $       2,092                $  847          $ 2,939          $      4,139              $ 1,331          $ 5,470



Provision for Loan Losses

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

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

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

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

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

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

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

The table below shows the total non-performing loans as of:

                                    Total Nonperforming Loans
(In Thousands)           90 Days Past Due       Non-accrual        Total
September 30, 2022      $       1,161          $      4,582      $ 5,743
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 losses and net recoveries (charge-offs) are presented in the tables below by loan portfolio segment.

                                                                                                      September 30, 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                              $         2,069       $   173,365                    1.19  %       $            120          $      169,822                        0.07  %
Real estate mortgage:
Residential                                         5,195           683,242                    0.76  %                     31                 634,031                           -  %
Commercial                                          5,536           485,538                    1.14  %                   (152)                458,523                       (0.03) %
Construction                                          210            48,694                    0.43  %                     28                  44,161                        0.06  %
Consumer automobiles                                1,585           159,681                    0.99  %                   (202)                140,595                       (0.14) %
Other consumer installment loans                      118             9,811                    1.20  %                   (125)                  9,641                       (1.30) %
Unallocated                                           498
                                          $        15,211       $ 1,560,331                    0.97  %       $           (300)         $    1,456,773                       (0.02) %

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


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                                                                                                      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 outstanding interest-free loans $5,389

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



Non-interest Income

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

Composition of interest-free income for the past three and nine months
09/30/2022 and 2021 was as follows:

                                                                                              Three Months Ended
                                                        September 30, 2022                       September 30, 2021                          Change
(In Thousands)                                     Amount              % Total              Amount              % Total            Amount               %
Service charges                                 $     559                 26.84  %       $     456                 15.45  %       $  103               22.59  %
Net debt securities (losses) gains,
available for sale                                   (156)                (7.49)                48                  1.63            (204)             425.00
Net equity securities losses                          (55)                (2.64)                (8)                (0.27)            (47)            (587.50)

Bank-owned life insurance                             170                  8.16                279                  9.45            (109)             (39.07)
Gain on sale of loans                                 294                 14.11                456                 15.45            (162)             (35.53)
Insurance commissions                                 109                  5.23                129                  4.37             (20)             (15.50)
Brokerage commissions                                 142                  6.82                237                  8.03             (95)             (40.08)
Loan broker commissions                               438                 21.03                772                 26.16            (334)             (43.26)
Debit card income                                     344                 16.51                388                 13.15             (44)             (11.34)
Other                                                 238                 11.43                194                  6.57              44               22.68
Total non-interest income                       $   2,083                100.00  %       $   2,951                100.00  %       $ (868)             (29.41) %


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                                                                                                Nine Months Ended
                                                        September 30, 2022                       September 30, 2021                           Change
(In Thousands)                                     Amount              % Total              Amount              % Total             Amount                %
Service charges                                 $   1,563                 23.57  %       $   1,218                 14.37  %       $    345               28.33  %
Net debt securities (losses) gains,
available for sale                                   (168)                (2.53)               323                  3.81              (491)             152.01
Net equity securities losses                         (158)                (2.38)               (24)                (0.28)             (134)            (558.33)

Bank-owned life insurance                             501                  7.55                614                  7.25              (113)             (18.40)
Gain on sale of loans                                 905                 13.65              2,034                 24.00            (1,129)             (55.51)
Insurance commissions                                 386                  5.82                436                  5.15               (50)             (11.47)
Brokerage commissions                                 500                  7.54                663                  7.82              (163)             (24.59)
Loan broker commissions                             1,350                 20.36              1,449                 17.10               (99)              (6.83)
Debit card income                                   1,080                 16.28              1,166                 13.76               (86)              (7.38)
Other                                                 673                 10.14                595                  7.02                78               13.11
Total non-interest income                       $   6,632                100.00  %       $   8,474                100.00  %       $ (1,842)             (21.74) %



Non-interest Expense

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

Composition of noninterest expenses for the past three and nine months
09/30/2022 and 2021 was as follows:

                                                                                                Three Months Ended
                                                          September 30, 2022                       September 30, 2021                          Change
(In Thousands)                                       Amount              % Total              Amount              % Total            Amount              %
Salaries and employee benefits                    $   6,016                 58.29  %       $   5,837                 55.87  %       $  179               3.07  %
Occupancy                                               730                  7.07                745                  7.13             (15)             (2.01)
Furniture and equipment                                 816                  7.91                883                  8.45             (67)             (7.59)
Software amortization                                   188                  1.82                226                  2.16             (38)            (16.81)
Pennsylvania shares tax                                 334                  3.24                373                  3.57             (39)            (10.46)
Professional fees                                       626                  6.07                615                  5.89              11               1.79
Federal Deposit Insurance Corporation
deposit insurance                                       260                  2.52                220                  2.11              40              18.18

Marketing                                               151                  1.46                231                  2.21             (80)            (34.63)
Intangible amortization                                  34                  0.33                 44                  0.42             (10)            (22.73)
Other                                                 1,165                 11.29              1,273                 12.19            (108)             (8.48)
Total non-interest expense                        $  10,320                100.00  %       $  10,447                100.00  %       $ (127)             (1.22) %


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                                                                                                 Nine Months Ended
                                                          September 30, 2022                       September 30, 2021                          Change
(In Thousands)                                       Amount              % Total              Amount              % Total             Amount              %
Salaries and employee benefits                    $  18,421                 58.02  %       $  17,107                 55.82  %       $ 1,314               7.68  %
Occupancy                                             2,380                  7.50              2,438                  7.96              (58)             (2.38)
Furniture and equipment                               2,454                  7.73              2,663                  8.69             (209)             (7.85)
Software amortization                                   660                  2.08                632                  2.06               28               4.43
Pennsylvania shares tax                               1,119                  3.52              1,097                  3.58               22               2.01
Professional fees                                     1,746                  5.50              1,882                  6.14             (136)             (7.23)
Federal Deposit Insurance Corporation
deposit insurance                                       690                  2.17                705                  2.30              (15)             (2.13)

Marketing                                               435                  1.37                434                  1.42                1               0.23
Intangible amortization                                 119                  0.37                147                  0.48              (28)            (19.05)
Other                                                 3,723                 11.74              3,541                 11.55              182               5.14
Total non-interest expense                        $  31,747                100.00  %       $  30,646                100.00  %       $ 1,101               3.59  %



Provision for Income Taxes

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

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents decreased $227,000,000 out $263,862,000 at
December 31, 2021 to $36,862,000 at 09/30/2022mainly as a result of the following activities during the past nine months 09/30/2022. The decrease in cash and cash equivalents is mainly due to the decrease in interest-bearing balances at other financial institutions.

Loans held for sale

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

loan

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

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The breakdown of the loan portfolio by category as of 09/30/2022 and
December 31, 2021 is shown 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 table below shows the amount of accrued and unaccrued TDRs at
09/30/2022 and December 31, 2021:

                                                            September 30, 2022                                       December 31, 2021
(In Thousands)                                Accrual           Non-accrual           Total           Accrual           Non-accrual           Total
Commercial, financial, and
agricultural                                 $   271          $        452          $   723          $   314          $        574          $   888
Real estate mortgage:
Residential                                    3,735                   174            3,909            3,999                   178            4,177
Commercial                                     1,600                 2,237            3,837            1,836                 2,509            4,345

                                             $ 5,606          $      2,863          $ 8,469          $ 6,149          $      3,261          $ 9,410



Investments

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

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

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

The fair value of the equity portfolio continues to fluctuate as the economic
and political environment continues to impact stock pricing. The amortized cost
of the available for sale equity securities portfolio has remained flat at
$1,350,000 for September 30, 2022 and December 31, 2021 while the fair value
decreased $158,000 over the same time period.
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The distribution of credit ratings by amortized cost and fair value for the debt portfolio 09/30/2022 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):
U.S. Government and agency
securities                             $         3,003          $    2,902          $            -          $         -          $       -               $         -          $       -          $         -          $         3,003          $    2,902
Mortgage-backed securities                       1,508     7         1,282                       -                    -                  -                         -                  -                    -                    1,508               1,282

State and political securities                 151,088             141,138                      80                   80                  -                         -                495                  462                  151,663             141,680
Other debt securities                           25,007              22,785                   5,664                5,130                  -                         -             15,433               14,417                   46,104              42,332
Total debt securities AFS              $       180,606          $  168,107          $        5,744          $     5,210          $       -               $         -          $  15,928          $    14,879          $       202,278          $  188,196



Financing Activities

Deposits

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

Deposit balances and their changes for the discussed periods follow:

                                                       September 30, 2022                                 December 31, 2021                                 Change
(In Thousands)                                    Amount                  % Total                   Amount                  % Total               Amount                %
Demand deposits                            $         537,403                  33.79  %       $         494,360                  30.49  %       $  43,043                8.71  %
NOW accounts                                         392,140                  24.66                    366,399                  22.60             25,741                7.03
Money market deposits                                268,532                  16.88                    318,877                  19.67            (50,345)             (15.79)
Savings deposits                                     249,532                  15.69                    236,312                  14.58             13,220                5.59
Time deposits                                        142,808                   8.98                    205,367                  12.66            (62,559)             (30.46)
 Total deposits                            $       1,590,415                 100.00  %       $       1,621,315                 100.00  %       $ (30,900)              (1.91) %



Borrowed Funds

Total debt increased by 1.53% or $2,020,000to $133,730,000 at
09/30/2022 compared to $131,710,000 at December 31, 2021. The decline in long-term loans occurred as fixed-rate loans matured and were replaced with short-term FHLB loans. Securities sold under repurchase agreements have decreased as customer 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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Short-Term Borrowings

The following table provides additional information on secured loans accounted for as repurchase agreements.

                                                                 Remaining 

Contractual maturity overnight and

Continually

(In Thousands)                                                  September 30, 2022          December 31, 2021
Investment debt securities pledged, fair value                  $          6,941          $            8,881
Repurchase agreements                                                      5,049                       5,747



Capital

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

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

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






















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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

Hard Tier I capital (on risk-weighted assets) Indeed

                                                          $  162,230                10.178  %       $  156,439                10.791  %
For Capital Adequacy Purposes                                       71,727                 4.500              65,237                 4.500

Minimum to maintain the capital conservation buffer at the 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 the capital conservation buffer at the 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 the capital conservation buffer at the 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


The Jersey Shore State Bank capital ratios per 09/30/2022 and
December 31, 2021 were as follows:

                                                                        September 30, 2022                         December 31, 2021
(In Thousands)                                                     Amount                Ratio               Amount                Ratio

Hard Tier I capital (on risk-weighted assets) Indeed

                                                          $  116,369                 9.887  %       $  110,682                10.337  %
For Capital Adequacy Purposes                                       52,965                 4.500              48,183                 4.500

Minimum to maintain the capital conservation buffer at the 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 the capital conservation buffer at the 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 the capital conservation buffer at the 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





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Luzerne 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

Hard Tier I capital (on risk-weighted assets) Indeed

                                                          $  43,380                10.406  %       $  42,291                11.164  %
For Capital Adequacy Purposes                                      18,759                 4.500             17,047                 4.500

Minimum to maintain the capital conservation buffer at the reporting date

                                                     29,181                 7.000             26,517                 7.000
To Be Well Capitalized                                             27,097                 6.500             24,623                 6.500
Total Capital (to Risk-weighted Assets)
Actual                                                          $  47,385                11.367  %       $  46,148                12.182  %
For Capital Adequacy Purposes                                      33,349                 8.000             30,306                 8.000

Minimum to maintain the capital conservation buffer at the reporting date

                                                     43,771                10.500             39,776                10.500
To Be Well Capitalized                                             41,686                10.000             37,882                10.000
Tier I Capital (to Risk-weighted Assets)
Actual                                                          $  43,380                10.406  %       $  42,291                11.164  %
For Capital Adequacy Purposes                                      25,012                 6.000             22,729                 6.000

Minimum to maintain the capital conservation buffer at the reporting date

                                                     35,434                 8.500             32,199                 8.500
To Be Well Capitalized                                             33,350                 8.000             30,305                 8.000
Tier I Capital (to Average Assets)
Actual                                                          $  43,380                 7.973  %       $  42,291                 7.537  %
For Capital Adequacy Purposes                                      21,763                 4.000             22,444                 4.000
To Be Well Capitalized                                             27,204                 5.000             28,056                 5.000


Liquidity; Interest rate sensitivity and market risk

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

The following liquidity ratios are monitored for compliance and were within the limits stated below 09/30/2022:

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

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

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

Management monitors the Company's liquidity on both a long and short-term basis,
thereby providing management necessary information to react to current balance
sheet trends. Cash flow needs are assessed and sources of funds are determined.
Funding strategies consider both customer needs and economical cost. Both short
and long-term funding needs are addressed by
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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. In addition to this credit arrangement, the Company has additional
lines of credit with correspondent banks of $100,000,000. Management believes it
has sufficient liquidity to satisfy estimated short-term and long-term funding
needs. FHLB borrowings totaled $120,852,000 as of September 30, 2022.

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

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

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

interest rate sensitivity

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

The following is an interest rate shock forecast for the end of the 12 month period
September 30, 2023 assuming a static balance sheet as of 09/30/2022.

                                                                                  Parallel Rate Shock in Basis Points
(In Thousands)                             -200              -100             Static             +100              +200              +300              +400
Net interest income                     $ 66,551          $ 69,113          $ 71,694          $ 74,346          $ 76,969          $ 79,559          $ 82,072
Change from static                        (5,143)           (2,581)                -             2,652             5,275             7,865            10,378
Percent change from static                 -7.17  %          -3.60  %              -              3.70  %           7.36  %          10.97  %          14.48  %



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

                                       46

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Table of Contents

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.

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