# CITIZENS FINANCIAL SERVICES INC (CZFS) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from CITIZENS FINANCIAL SERVICES INC's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/739421/000114036123010821/brhc10049067_10k.htm Accession: 0001140361-23-010821 Filing date: 2023-03-09 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/CZFS/ All MD&A years: /company/CZFS/mda/ Previous year: /company/CZFS/mda/fy2021/ (FY 2021) Next year: /company/CZFS/mda/fy2023/ (FY 2023) ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CAUTIONARY STATEMENT We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Company, the Bank, First Citizens Insurance, Realty or the Company on a consolidated basis. When we use words such as “believes,” “expects,” “anticipates,” or similar expressions, we are making forward-looking statements.  Forward-looking statements may prove inaccurate. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements: [[GREPCENT_TABLE]] [["","\u2022","The continuing impact of the COVID-19 pandemic may have an adverse effect on our business and operations, our customers, including their ability to make timely loan payments, our service providers, and on the economy and financial markets more significant that we expect."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Interest rates could change more rapidly or more significantly than we expect."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The economy could change significantly in an unexpected way, which would cause the demand for new loans and the ability of borrowers to repay outstanding loans to change in ways that our models do not anticipate."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The financial markets could suffer a significant disruption, which may have a negative effect on our financial condition and that of our borrowers, and on our ability to raise money by issuing new securities."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","It could take us longer than we anticipate implementing strategic initiatives, including expansions, designed to increase revenues or manage expenses, or we may be unable to implement those initiatives at all."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Acquisitions and dispositions of assets and companies could affect us in ways that management has not anticipated."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","We may become subject to new legal obligations or the resolution of litigation may have a negative effect on our financial condition or operating results."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","We may become subject to new and unanticipated accounting, tax, regulatory or compliance practices or requirements. Failure to comply with any one or more of these requirements could have an adverse effect on our operations."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","We could experience greater loan delinquencies than anticipated, adversely affecting our earnings and financial condition."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","We could experience greater losses than expected due to the ever increasing volume of information theft and fraudulent scams impacting our customers and the banking industry."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","We could lose the services of some or all of our key personnel, which would negatively impact our business because of their business development skills, financial expertise, lending experience, technical expertise and market area knowledge."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The agricultural economy is subject to extreme swings in both the costs of resources and the prices received from the sale of products as a result of weather, government regulations, international trade agreements and consumer tastes, which could negatively impact certain of our customers."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Loan concentrations in certain industries could negatively impact our results, if financial results or economic conditions deteriorate."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Companies providing support services related to the exploration and drilling of the natural gas reserves in our market area may be affected by federal, state and local laws and regulations such as restrictions on production, permitting, changes in taxes and environmental protection, which could negatively impact our customers and, as a result, negatively impact our loan and deposit volume and loan quality. Additionally, the activities the companies providing support services related to the exploration and drilling of the natural gas reserves may be dependent on the market price of natural gas. As a result, decreases in the market price of natural gas could also negatively impact these companies, our customers."]] [[/GREPCENT_TABLE]] Additional factors are discussed in this Annual Report on Form 10-K under “Item 1A. Risk Factors.”  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. 20 Index  INTRODUCTION The following is management’s discussion and analysis of the significant changes in financial condition, the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for the Company. The Company’s consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes. Except as noted, tabular information is presented in thousands of dollars. The Company currently engages in the general business of banking throughout its service area of Bradford, Tioga, Clinton, Potter and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill and Lancaster counties in south central Pennsylvania and Allegany County in southern New York. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural customers in the central Pennsylvania market. We maintain our main office in Mansfield, Pennsylvania. Presently we operate 36 banking facilities, 33 of which operate as bank branches. In addition, we have leased an additional facility in Williamsport, Pennsylvania that will be opened as a full service branch in 2023. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Fivepointville, Kennett Square, State College and two branches near the city of Lebanon, Pennsylvania. In November of 2022, we opened a full service branch in Ephrata, Pennsylvania. We also have a limited branch office in Winfield, Pennsylvania. In New York, our office is in Wellsville. As part of the MidCoast acquisition in 2020, we aquired two branches in Wilmington Delaware, one branch in Dover Delaware, and a corporate administration building in Wilmington, Delaware. In November of 2022, we opened a full service branch in Greenville, Delaware. Risk identification and management are essential elements for the successful management of the Company.  In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, liquidity, reputational and regulatory risk. Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates.  Interest rate risk results from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company.  The Company uses its asset/liability and funds management policies to control and manage interest rate risk. Credit risk represents the possibility that a customer may not perform in accordance with contractual terms.  Credit risk results from loans with customers and the purchasing of securities.  The Company’s primary credit risk is in the loan portfolio.  The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for loan losses.  Also, the investment policy limits the amount of credit risk that may be taken in the investment portfolio. Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors.  The Company has established guidelines within its asset/liability and funds management policy to manage liquidity risk.  These guidelines include, among other things, contingent funding alternatives. Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion, could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information, which could include identify theft, or theft of customer information through third parties. We expend significant resources to comply with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers, and adversely impact our earnings and liquidity. Regulatory risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company and its subsidiary.  We cannot predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations. Readers should carefully review the risk factors described in other documents the Company files with the SEC, including the annual reports on Form 10-K, the quarterly reports on Form 10-Q and any current reports on Form 8-K filed by us. 21 Index SELECTED FINANCIAL DATA The following table sets forth certain financial data as of and for each of the years in the five year period ended December 31, 2022: [[GREPCENT_TABLE]] [["(in thousands, except per share data)","","2022","","","2021","","","2020","","","2019","","","2018"],["Interest and dividend income","","$","83,357","","","$","73,217","","","$","70,296","","","$","61,980","","","$","56,758"],["Interest expense","","","11,223","","","","7,105","","","","8,105","","","","12,040","","","","9,574"],["Net interest income","","","72,134","","","","66,112","","","","62,191","","","","49,940","","","","47,184"],["Provision for loan losses","","","1,683","","","","1,550","","","","2,400","","","","1,675","","","","1,925"],["Net interest income after provision for loan losses","","","70,451","","","","64,562","","","","59,791","","","","48,265","","","","45,259"],["Non-interest income","","","9,999","","","","11,754","","","","11,158","","","","8,242","","","","7,754"],["Investment securities gains (losses), net","","","(261",")","","","551","","","","264","","","","144","","","","(19",")"],["Non-interest expenses","","","44,694","","","","41,550","","","","40,847","","","","33,341","","","","31,557"],["Income before provision for income taxes","","","35,495","","","","35,317","","","","30,366","","","","23,310","","","","21,437"],["Provision for income taxes","","","6,435","","","","6,199","","","","5,263","","","","3,820","","","","3,403"],["Net income","","$","29,060","","","$","29,118","","","$","25,103","","","$","19,490","","","$","18,034"],["Per share data:"],["Net income - Basic (1)","","$","7.32","","","$","7.31","","","$","6.46","","","$","5.36","","","$","4.93"],["Net income - Diluted (1)","","","7.32","","","","7.31","","","","6.46","","","","5.36","","","","4.93"],["Cash dividends declared (1)","","","1.90","","","","1.84","","","","1.88","","","","1.73","","","","1.67"],["Stock dividend","","","1","%","","","1","%","","","1","%","","","1","%","","","1","%"],["Book value (1) (2)","","","58.74","","","","53.39","","","","47.93","","","","42.68","","","","39.17"],["End of Period Balances:"],["Total assets","","$","2,333,393","","","$","2,143,863","","","$","1,891,674","","","$","1,466,339","","","$","1,430,712"],["Available for sale securities","","","439,506","","","","412,402","","","","295,189","","","","240,706","","","","241,010"],["Loans","","","1,724,999","","","","1,441,533","","","","1,405,281","","","","1,115,569","","","","1,081,883"],["Allowance for loan losses","","","18,552","","","","17,304","","","","15,815","","","","13,845","","","","12,884"],["Total deposits","","","1,844,208","","","","1,836,511","","","","1,588,858","","","","1,211,118","","","","1,185,156"],["Total borrowings","","","257,278","","","","73,977","","","","88,838","","","","85,117","","","","91,194"],["Stockholders' equity","","","200,147","","","","212,492","","","","194,259","","","","157,774","","","","139,229"],["Key Ratios"],["Return on assets (net income to average total assets)","","","1.29","%","","","1.45","%","","","1.46","%","","","1.34","%","","","1.29","%"],["Return on equity (net income to average total equity)","","","12.98","%","","","14.26","%","","","14.21","%","","","13.00","%","","","13.00","%"],["Equity to asset ratio (average equity to average total assets, excluding other comprehensive income)","","","9.93","%","","","10.20","%","","","10.27","%","","","10.31","%","","","9.90","%"],["Net interest margin (tax equivalent) (3)","","","3.41","%","","","3.52","%","","","3.92","%","","","3.72","%","","","3.66","%"],["Efficiency (4)","","","52.55","%","","","51.57","%","","","53.62","%","","","54.27","%","","","55.04","%"],["Dividend payout ratio (dividends declared divided by net income)","","","26.11","%","","","25.36","%","","","29.32","%","","","32.40","%","","","34.08","%"],["Tier 1 leverage (5)","","","9.03","%","","","9.31","%","","","9.16","%","","","9.77","%","","","9.15","%"],["Common equity risk based capital (5)","","","10.92","%","","","12.03","%","","","11.22","%","","","12.11","%","","","11.47","%"],["Tier 1 risk-based capital (5)","","","11.32","%","","","12.53","%","","","11.75","%","","","12.79","%","","","12.18","%"],["Total risk-based capital (5)","","","12.87","%","","","14.35","%","","","12.86","%","","","14.04","%","","","13.42","%"],["Nonperforming assets/total loans","","","0.43","%","","","0.61","%","","","0.93","%","","","1.38","%","","","1.33","%"],["Nonperforming loans/total loans","","","0.40","%","","","0.53","%","","","0.80","%","","","1.08","%","","","1.27","%"],["Allowance for loan losses/total loans","","","1.08","%","","","1.20","%","","","1.13","%","","","1.24","%","","","1.19","%"],["Net (recoveries)charge-offs/average loans","","","0.03","%","","","0.00","%","","","0.03","%","","","0.06","%","","","0.02","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Amounts were adjusted to reflect stock dividends."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Calculation excludes accumulated other comprehensive income (loss)."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","Tax adjusted net interest income to average interest-earning assets. Tax adjusted net Interest income is a non-gaap measure and is reconciled to the GAAP equivalent measure on page 25 of this 10-K."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(4)","Bank non-interest expenses to tax adjusted net interest income and non-interest income, excluding security gains. Tax adjusted net Interest income is a non-gaap measure and is reconciled to the GAAP equivalent measure on page 30 of this 10k. The efficiency ratio calculated using non-tax effected net interest income was 53.22% 52.21%, 54.50%, 55.36% and 56.26%, for the years ended 2022, 2021, 2020, 2019 and 2018, respectively."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(5)","Ratio calculated on consolidated level"]] [[/GREPCENT_TABLE]] 22 Index  TRUST AND INVESTMENT SERVICES; OIL AND GAS SERVICES Our Investment and Trust Division is committed to helping our customers meet their financial goals.  The Trust Division offers professional trust administration, investment management services, estate planning and administration, custody of securities and individual retirement accounts. In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. Assets held by the Bank in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Bank. As of December 31, 2022 and 2021, assets owned and invested by customers of the Bank through the Bank’s investment representatives totaled $283.5 million and $282.1 million, respectively.  Additionally, as summarized in the table below, the Trust Department had assets under management as of December 31, 2022 and 2021 of $150.0 million and $154.8 million, respectively. During the year ended December 31, 2022, $12.9 million of new trust accounts were opened, $10.2 million of additional contributions to trust accounts, $12.8 million distributed from trust accounts, and $700,000 of accounts were closed. As a result of market fluctuations, the fair value of the trust accounts decreased approximately $14.4 million during the year ended December 31, 2022. The following table reflects trust accounts by investment type and structure: [[GREPCENT_TABLE]] [["(market values - in thousands)","","2022","","","2021"],["INVESTMENTS:"],["Bonds","","$","13,497","","","$","8,640"],["Stock","","","33,659","","","","22,099"],["Savings and Money Market Funds","","","14,813","","","","11,587"],["Mutual Funds","","","75,700","","","","105,233"],["Mineral interests","","","8,465","","","","2,959"],["Mortgages","","","783","","","","856"],["Real Estate","","","1,965","","","","2,099"],["Miscellaneous","","","847","","","","942"],["Cash","","","302","","","","425"],["TOTAL","","$","150,031","","","$","154,840"],["ACCOUNTS:"],["Trusts","","","47,762","","","","46,953"],["Guardianships","","","400","","","","443"],["Employee Benefits","","","50,883","","","","62,149"],["Investment Management","","","50,985","","","","45,293"],["Custodial","","","1","","","","2"],["TOTAL","","$","150,031","","","$","154,840"]] [[/GREPCENT_TABLE]] Our financial consultants offer full service brokerage and financial planning services throughout the Bank’s market areas.  Appointments can be made at any Bank branch.  Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc. RESULTS OF OPERATIONS Net income for the year ended December 31, 2022 was $29,060,000, which represents a decrease of $58,000, or 0.2%, when compared to 2021.  Net income for the year ended December 31, 2021 was $29,118,000, which represents an increase of $4,015,000, or 16.0%, when compared to 2020. Basic and diluted earnings per share were $7.32, $7.31 and $6.46 for 2022, 2021 and 2020, respectively. Net income is influenced by five key components: net interest income, provision for loan losses, non-interest income, non-interest expenses, and the provision for income taxes. Net Interest Income The most significant source of revenue is net interest income; the amount by which interest earned on interest-earning assets exceeds interest paid on interest-bearing liabilities.  Factors that influence net interest income are changes in volume of interest-earning assets and interest-bearing liabilities as well as changes in the associated interest rates. The following table sets forth the Company’s average balances of, and the interest earned or incurred on, each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and rate “spread” created. 23 Index [[GREPCENT_TABLE]] [["Analysis of Average Balances and Interest Rates"],["","","2022","","","2021","","","2020"],["(dollars in thousands)","","","Average Balance (1)$","","Interest $","","","","Average Rate %","","","","Average Balance (1) $","","","Interest $","","","","Average Rate %","","","","Average Balance (1) $","","","Interest $","","","","Average Rate %"],["ASSETS"],["Short-term investments:"],["Interest-bearing deposits at banks","","","52,655","","","171","","","","0.32","","","","108,872","","","","124","","","","0.11","","","","41,330","","","","37","","","","0.09"],["Total short-term investments","","","52,655","","","171","","","","0.32","","","","108,872","","","","124","","","","0.11","","","","41,330","","","","37","","","","0.09"],["Interest bearing time deposits at banks","","","8,352","","","229","","","","2.75","","","","12,527","","","","323","","","","2.57","","","","14,139","","","","364","","","","2.57"],["Investment securities:"],["Taxable","","","372,430","","","6,238","","","","1.68","","","","252,470","","","","4,198","","","","1.66","","","","188,241","","","","4,488","","","","2.38"],["Tax-exempt (3)","","","120,592","","","3,106","","","","2.58","","","","104,379","","","","2,786","","","","2.67","","","","80,131","","","","2,366","","","","2.95"],["Total investment securities (3)","","","493,022","","","9,344","","","","1.90","","","","356,849","","","","6,984","","","","1.96","","","","268,372","","","","6,854","","","","2.55"],["Loans:"],["Residential mortgage loans","","","204,063","","","9,712","","","","4.76","","","","203,062","","","","9,867","","","","4.86","","","","210,696","","","","11,161","","","","5.30"],["Construction loans","","","73,214","","","3,298","","","","4.50","","","","56,315","","","","2,292","","","","4.07","","","","26,343","","","","1,288","","","","4.89"],["Commercial Loans","","","854,460","","","41,155","","","","4.82","","","","739,000","","","","36,215","","","","4.90","","","","590,469","","","","31,087","","","","5.26"],["Agricultural Loans","","","347,420","","","15,387","","","","4.43","","","","349,951","","","","15,079","","","","4.31","","","","357,201","","","","16,022","","","","4.49"],["Loans to state & political subdivisions (3)","","","56,004","","","1,863","","","","3.33","","","","52,804","","","","1,871","","","","3.54","","","","86,143","","","","3,458","","","","4.01"],["ConsumerOther loans","","","58,715","","","3,201","","","","5.45","","","","24,125","","","","1,385","","","","5.74","","","","20,986","","","","1,185","","","","5.65"],["Loans, net of discount (2)(3)(4)","","","1,593,876","","","74,616","","","","4.68","","","","1,425,257","","","","66,709","","","","4.68","","","","1,291,838","","","","64,201","","","","4.97"],["Total interest-earning assets","","","2,147,905","","","84,360","","","","3.93","","","","1,903,505","","","","74,140","","","","3.89","","","","1,615,679","","","","71,456","","","","4.42"],["Cash and due from banks","","","6,708","","","","","","","","","","","6,525","","","","","","","","","","","","7,487"],["Bank premises and equipment","","","17,287","","","","","","","","","","","17,194","","","","","","","","","","","","17,286"],["Other assets","","","84,066","","","","","","","","","","","75,410","","","","","","","","","","","","79,305"],["Total non-interest earning assets","","","108,061","","","","","","","","","","","99,129","","","","","","","","","","","","104,078"],["Total assets","","","2,255,966","","","","","","","","","","","2,002,634","","","","","","","","","","","","1,719,757"],["LIABILITIES AND STOCKHOLDERS' EQUITY"],["Interest-bearing liabilities:"],["NOW accounts","","","520,895","","","2,425","","","","0.47","","","","457,189","","","","1,387","","","","0.30","","","","383,931","","","","1,102","","","","0.29"],["Savings accounts","","","323,939","","","421","","","","0.13","","","","290,376","","","","322","","","","0.11","","","","241,429","","","","476","","","","0.20"],["Money market accounts","","","343,288","","","2,004","","","","0.58","","","","257,937","","","","684","","","","0.27","","","","205,142","","","","1,012","","","","0.49"],["Certificates of deposit","","","299,110","","","2,466","","","","0.82","","","","351,265","","","","3,444","","","","0.98","","","","345,397","","","","4,261","","","","1.23"],["Total interest-bearing deposits","","","1,487,232","","","7,316","","","","0.49","","","","1,356,767","","","","5,837","","","","0.43","","","","1,175,899","","","","6,851","","","","0.58"],["Other borrowed funds","","","149,661","","","3,907","","","","2.61","","","","84,621","","","","1,268","","","","1.50","","","","93,237","","","","1,254","","","","1.34"],["Total interest-bearing liabilities","","","1,636,893","","","11,223","","","","0.69","","","","1,441,388","","","","7,105","","","","0.49","","","","1,269,136","","","","8,105","","","","0.64"],["Demand deposits","","","374,675","","","","","","","","","","","341,604","","","","","","","","","","","","257,285"],["Other liabilities","","","20,443","","","","","","","","","","","15,420","","","","","","","","","","","","16,662"],["Total non-interest-bearing liabilities","","","95,118","","","","","","","","","","","357,024","","","","","","","","","","","","273,947"],["Stockholders' equity","","","223,955","","","","","","","","","","","204,222","","","","","","","","","","","","176,674"],["Total liabilities & stockholders' equity","","","2,255,966","","","","","","","","","","","2,002,634","","","","","","","","","","","","1,719,757"],["Net interest income","","","","","","73,137","","","","","","","","","","","","67,035","","","","","","","","","","","","63,351"],["Net interest spread (5)","","","","","","","","","","3.24","%","","","","","","","","","","","3.40","%","","","","","","","","","","","3.78","%"],["Net interest income as a percentage of average interest-earning assets","","","","","","","","","","3.41","%","","","","","","","","","","","3.52","%","","","","","","","","","","","3.92","%"],["Ratio of interest-earning assets to interest-bearing liabilities","","","","","","","","","","131.00","","","","","","","","","","","","132.00","","","","","","","","","","","","127.00"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Averages are based on daily averages."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Includes loan origination and commitment fees."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 21% for 2022, 2021 and 2020."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(4)","Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(5)","Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities."]] [[/GREPCENT_TABLE]] For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Federal statutory rate for the corresponding year. Accordingly, tax equivalent adjustments for investments and loans have been made accordingly to the previous table for the years ended December 31, 2022, 2021 and 2020, respectively (in thousands): 24 Index [[GREPCENT_TABLE]] [["","","2022","","","2021","","","2020"],["Interest and dividend income from investment securities, interest bearing time deposits and short-term investments (non-tax adjusted) (GAAP)","","$","9,092","","","$","6,846","","","$","6,758"],["Tax equivalent adjustment","","","652","","","","585","","","","497"],["Interest and dividend income from investment securities, interest bearing time deposits and short-term investments (tax equivalent basis) (Non-GAAP)","","$","9,744","","","$","7,431","","","$","7,255"],["","","","2022","","","","2021","","","","2020"],["Interest and fees on loans (non-tax adjusted) (GAAP)","","$","74,265","","","$","66,371","","","$","63,538"],["Tax equivalent adjustment","","","351","","","","338","","","","663"],["Interest and fees on loans (tax equivalent basis) (Non-GAAP)","","$","74,616","","","$","66,709","","","$","64,201"],["","","","2022","","","","2021","","","","2020"],["Total interest income","","$","83,357","","","$","73,217","","","$","70,296"],["Total interest expense","","","11,223","","","","7,105","","","","8,105"],["Net interest income (GAAP)","","","72,134","","","","66,112","","","","62,191"],["Total tax equivalent adjustment","","","1,003","","","","923","","","","1,160"],["Net interest income (tax equivalent basis) (Non-GAAP)","","$","73,137","","","$","67,035","","","$","63,351"]] [[/GREPCENT_TABLE]] The following table shows the tax-equivalent effect of changes in volume and rates on interest income and expense (in thousands): Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis [[GREPCENT_TABLE]] [["","","2022 vs. 2021 (1)","","","2021 vs. 2020 (1)"],["","","Change in Volume","","","Change in Rate","","","Total Change","","","Change in Volume","","","Change in Rate","","","Total Change"],["Interest Income:"],["Short-term investments:"],["Interest-bearing deposits at banks","","$","(18",")","","$","65","","","$","47","","","$","73","","","$","14","","","$","87"],["Interest bearing time deposits at banks","","","(118",")","","","24","","","","(94",")","","","(41",")","","","-","","","","(41",")"],["Investment securities:"],["Taxable","","","2,010","","","","30","","","","2,040","","","","1,287","","","","(1,577",")","","","(290",")"],["Tax-exempt","","","414","","","","(94",")","","","320","","","","615","","","","(195",")","","","420"],["Total investment securities","","","2,424","","","","(64",")","","","2,360","","","","1,902","","","","(1,772",")","","","130"],["Total investment income","","","2,288","","","","25","","","","2,313","","","","1,934","","","","(1,758",")","","","176"],["Loans:"],["Residential mortgage loans","","","49","","","","(204",")","","","(155",")","","","(394",")","","","(900",")","","","(1,294",")"],["Construction loans","","","742","","","","264","","","","1,006","","","","1,177","","","","(173",")","","","1,004"],["Commercial Loans","","","5,549","","","","(609",")","","","4,940","","","","7,074","","","","(1,946",")","","","5,128"],["Agricultural Loans","","","(108",")","","","416","","","","308","","","","(321",")","","","(622",")","","","(943",")"],["Loans to state & political subdivisions","","","110","","","","(118",")","","","(8",")","","","(1,218",")","","","(369",")","","","(1,587",")"],["Other loans","","","1,882","","","","(66",")","","","1,816","","","","180","","","","20","","","","200"],["Total loans, net of discount","","","8,224","","","","(317",")","","","7,907","","","","6,498","","","","(3,990",")","","","2,508"],["Total Interest Income","","","10,512","","","","(292",")","","","10,220","","","","8,432","","","","(5,748",")","","","2,684"],["Interest Expense:"],["Interest-bearing deposits:"],["NOW accounts","","","215","","","","823","","","","1,038","","","","219","","","","66","","","","285"],["Savings accounts","","","40","","","","59","","","","99","","","","133","","","","(287",")","","","(154",")"],["Money Market accounts","","","285","","","","1,035","","","","1,320","","","","410","","","","(738",")","","","(328",")"],["Certificates of deposit","","","(473",")","","","(505",")","","","(978",")","","","73","","","","(890",")","","","(817",")"],["Total interest-bearing deposits","","","67","","","","1,412","","","","1,479","","","","835","","","","(1,849",")","","","(1,014",")"],["Other borrowed funds","","","1,343","","","","1,296","","","","2,639","","","","(60",")","","","74","","","","14"],["Total interest expense","","","1,410","","","","2,708","","","","4,118","","","","775","","","","(1,775",")","","","(1,000",")"],["Net interest income","","$","9,102","","","$","(3,000",")","","$","6,102","","","$","7,657","","","$","(3,973",")","","$","3,684"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","The portion of the total change attributable to both volume and rate changes during the year has been allocated to volume and rate components based upon the absolute dollar amount of the change in each component prior to allocation."]] [[/GREPCENT_TABLE]] 2022 vs. 2021 Tax equivalent net interest income for 2022 was $73,137,000 compared to $67,035,000 for 2021, an increase of $6,102,000 or 9.1%. Total interest income increased $10,220,000, as loan interest income increased $7,907,000, and total investment income increased $2,313,000. Interest expense increased $4,118,000 from 2021. 25 Index Total tax equivalent interest income from investment securities increased $2,360,000 in 2022 from 2021. The average balance of investment securities increased $136.2 million, which had an effect of increasing interest income by $2,424,000 due to volume. The majority of the increase in volume was in taxable securities, which experienced an increase in the average balance of $120.0 million. The average tax-effected yield on our investment portfolio decreased from 1.96% in 2021 to 1.90% in 2022. The decrease in the tax-effected yield is attributable to purchases made prior to 2022, which were made in a lower rate environment. As a result of the yield on investment securities decreasing 6 basis points (bps) to 1.90%, interest income on investment securities decreased $64,000, with the decrease related to tax-exempt securities.  The investment strategy for 2022 was to utilize excess cash, cashflows from the investment portfolio and deposit inflows to purchase U.S. treasury securities, due to a limited spread between US treasuries and agencies, mortgage backed securities issued by government sponsored entities and obligations of state and political securities. The increase in the investment portfolio was in response to the deposit inflows that occurred in 2021 and the first half of 2022. We continually monitor interest rate trading ranges and try to focus purchases to times when rates are in the top of the trading range. The Bank believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, while providing sufficient cashflows to meet liquidity needs. In total, loan interest income increased $7,907,000 in 2022 from 2021.  The average balance of our loan portfolio increased by $168.6 million in 2022 compared to 2021, which resulted in an increase in interest income of $8,224,000 due to volume.  The increase in the average balance of loans was driven by in large part by growth in the Delaware market during 2022. While the Bank’s other markets experienced loan growth, it was not to the extent experienced in Delaware. The average tax-effected yield on our loan portfolio was 4.68% for both 2022 and 2021 and a small decrease in loan interest income of $317,000 was due to rate. The tax-effected yield remained steady due to 2021 benefitting from additional PPP amortization of $2,061,000 compared to 2022, otherwise the yield on loans 2022 would have exceeded 2021. [[GREPCENT_TABLE]] [["","\u2022","Interest income on residential mortgage loans decreased $155,000. The average balance of residential mortgage loans increased $1.0 million, resulting in an increase of $49,000 due to volume. The change due to rate was a decrease of $204,000 as the average yield on residential mortgages decreased from 4.86% in 2021 to 4.76% in 2022 as a result of the lower rate environment prior to 2022. The increase in market interest rates during 2022 resulted in a significant slowdown in residential lending activity."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The average balance of construction loans increased $16.9 million from 2021 to 2022 as a result of projects in our south central Pennsylvania market and Delaware market, which resulted in an increase of $742,000 in interest income. The average yield on construction loans increased from 4.07% to 4.50%, which correlated to a $264,000 increase in interest income."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Interest income on commercial loans increased $4,940,000 from 2021 to 2022. The increase in the average balance of commercial loans of $115.5 million is attributable to the Delaware market. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $5,549,000. Our lenders have been able to attract and retain loan relationships in their markets by providing excellent customer service and having attractive products. We believe our lenders are adept at customizing and structuring loans to customers that meet their needs and satisfy our commitment to credit quality. In many cases, the Bank works with the Small Business Administration (SBA) guaranteed loan programs to offset credit risk and to further promote economic growth in our market area. The average yield on commercial loans decreased 8 basis points to 4.82% in 2022, resulting in a decrease in interest income due to rate of $609,000. The decrease in yield on commercial loans was due to PPP amortization decreasing $2,061,000 in 2022 compared to 2021."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Interest income on agricultural loans increased $308,000 from 2021 to 2022. The decrease in the average balance of agricultural loans of $2.5 million is primarily attributable to the south central Pennsylvania market. The decrease in the average balance of these loans resulted in a decrease in interest income due to volume of $108,000. The average yield on agricultural loans increased from 4.31% in 2021 to 4.43% in 2022 due to a general increase in market rates, resulting in an increase in interest income due to rate of $416,000. We believe our lenders are adept at customizing, understanding and have the expertise to structure loans for customers that meet their needs and satisfy our commitment to credit quality. In many cases, the Bank works with the United States Department of Agriculture\u2019s (USDA) guaranteed loan programs to offset credit risk and to further promote economic growth in our market area."]] [[/GREPCENT_TABLE]] 26 Index [[GREPCENT_TABLE]] [["","\u2022","The average balance of loans to state and political subdivisions increased $3.2 million from 2021 to 2022 which had a positive impact of $110,000 on total interest income due to volume was due to customers issuing debt for various public service projects that the Bank was able to finance. The average tax equivalent yield on loans to state and political subdivisions decreased from 3.54% in 2021 to 3.33% in 2022, decreasing interest income by $118,000."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The average balance of other loans increased $34.6 million as a result of an increase in outstanding student loans. This resulted in an increase of $1,882,000 on total interest income due to volume. The average tax equivalent yield on other loans decreased from 5.74% in 2021 to 5.45% in 2022, decreasing interest income by $66,000 in other loans"]] [[/GREPCENT_TABLE]] Total interest expense increased $4,118,000 in 2022 compared to 2021.  The majority of the increase was due to an increase in the average rate paid on interest bearing liabilities of 20 basis points to 0.69%. This increase resulted in an increase in interest expense of $2,708,000. The increase in rates was driven by the Federal Reserve’s response to inflation during 2022 by increasing interest rates. The average rate on money markets increased from 0.27% to 0.58% resulting in an increase in interest expense of $1,035,000. The average rate paid on savings accounts increased 2 bps and resulted in an increase in interest expense of $59,000. The average rate paid on NOW accounts increased from 0.30% to 0.47% resulting in an increase in interest expense of $823,000. The average rate paid on other borrowed funds increased from 1.50% to 2.61% resulting in an increase in interest expense of $1,296,000. The average rate on certificates of deposit decreased from 0.98% to 0.82% resulting in a decrease in interest expense of $505,000. Average interest-bearing liabilities increased $195.5 million in 2022, with average interest-bearing deposits increasing $130.5 million and average other borrowings increasing $65.0 million. As a result of the increase in average deposits, interest expense increased $1,410,000 as result of the change in volume. Increases in average deposits, which were primarily driven by organic growth across all markets of the Bank, included NOW accounts of $63.7 million, savings accounts of $33.6 million and money market accounts of $85.4 million. Certificates of deposits decreased $52.2 million as maturing balances were not placed into term products. The combined impact to interest expense of these increases in deposits was a $67,000 increase. The average balance of other borrowed funds increased $60.5 million due to funding loan growth, which corresponds to an increase in interest expense of $1,343,000. Our tax equivalent net interest margin for 2022 was 3.41% compared to 3.52% for 2021, with the change attributable to the yield of interest-earning assets increasing less than the cost from interest-bearing liabilities during 2022. Interest rates increased dramatically in 2022 in response to historically high inflation forcing the Federal Reserve to aggressively tighten monetary policy at a pace and levels not seen in decades. The year began with accelerating inflation that was exacerbated by the Russian invasion of Ukraine driving energy prices higher with crude oil peaking at $130 a barrel in early March. Other commodities prices followed oils lead reaching extremely high levels and adding to inflationary fears.  The Federal Reserve completely abandoned their belief that inflation would prove transitory and began to tighten monetary policy by both reducing the size of its balance sheet and increasing over-night borrowing rates. Coming into the year the Central Bank’s official forecast was for a total increase in rates by 0.75%, but inflation continued to climb to levels not seen since the early 1980’s pushing the Fed Reserve into a series of 75-basis point increases then ending the year with a 50-basis point hike in December for a total increase of 4.25%. The result of these moves created an inverted Treasury yield curve with every maturity from 1 month T-Bills to 7 year Treasuries all yielding more than the 10 year Treasury. The closely followed 2-year to 10-year Treasury spread started the year at a positive 88-basis points and ended the year at a negative 55-basis points.  The 2-year Treasury started the year at 0.78% and ended the year at 4.43% while the 10-year Treasury’s move was from 1.56% to 3.88%. Commodities prices eased in the second half of the year and inflation measures fell as a result, but a strong labor market kept wage inflation high pressuring the Federal Reserve to remain resolute in maintaining an aggressive tightening monetary policy.  Treasury yields ended the year well below the peak as the inverted yield curve increased concerns the Federal Reserve’s would make a policy error. 2021 vs. 2020 Tax equivalent net interest income for 2021 was $67,035,000 compared to $63,351,000 for 2020, an increase of $3,684,000 or 5.8%. Total interest income increased $2,684,000, as loan interest income increased $2,508,000, and total investment income increased $176,000. Interest expense decreased $1,000,000 from 2020. 27 Index Total tax equivalent interest income from investment securities increased $130,000 in 2021 from 2020. The average balance of investment securities increased $88.5 million, which had an effect of increasing interest income by $1,902,000 due to volume. The majority of the increase in volume was in tax-exempt securities, which experienced an increase in the average balance of $64.2 million. The average tax-effected yield on our investment portfolio decreased from 2.55% in 2020 to 1.96% in 2021. The decrease in the tax-effected yield is attributable to purchases made in a lower rate environment. As a result of the yield on investment securities decreasing 59 basis points (bps) to 1.96%, interest income on investment securities decreased $1,772,000, with the decrease primarily related to taxable securities.  The investment strategy for 2021 was to utilize cashflows from the investment portfolio and deposit inflows to purchase U.S. treasury securities, mortgage backed securities issued by government sponsored entities and obligations of state and political securities. The increase in the investment portfolio was in response to the deposit inflows that occurred in 2021. In total, loan interest income increased $2,508,000 in 2021 from 2020.  The average balance of our loan portfolio increased by $133.4 million in 2021 compared to 2020, which resulted in an increase in interest income of $6,498,000 due to volume.  The increase in the average balance of loans was driven by the MidCoast acquisition from 2020, which was outstanding for the entire year and loan growth that occurred primarily in the Delaware market. The average tax-effected yield on our loan portfolio decreased 29 basis points to 4.68% in 2021, resulting in a decrease in loan interest income of $3,990,000. The decrease in the tax-effected yield was due to the lower rate environment promoted by the Federal Reserve in response to the COVID-19 pandemic. [[GREPCENT_TABLE]] [["","\u2022","Interest income on residential mortgage loans decreased $1,294,000. The average balance of residential mortgage loans decreased $7.6 million, resulting in a decrease of $394,000 due to volume. The decrease in loans was due to loans being refinanced and sold on the secondary market. The change due to rate was a decrease of $900,000 as the average yield on residential mortgages decreased from 5.30% in 2020 to 4.86% in 2021 as a result of the lower rate environment during the year as a result of COVID-19 pandemic."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The average balance of construction loans increased $30.0 million from 2020 to 2021 as a result of projects in our south central Pennsylvania market and Delaware market, which resulted in an increase of $1,177,000 in interest income. The average yield on construction loans decreased from 4.89% to 4.07%, which correlated to a $173,000 decrease in interest income."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Interest income on commercial loans increased $5,128,000 from 2020 to 2021. The increase in the average balance of commercial loans of $148.5 million is attributable to the MidCoast acquisition and growth in the Delaware market. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $7,074,000. The average yield on commercial loans decreased 36 basis points to 4.90% in 2021, resulting in a decrease in interest income due to rate of $1,946,000."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Interest income on agricultural loans decreased $943,000 from 2020 to 2021. The decrease in the average balance of agricultural loans of $7.3 million was primarily attributable to the south central Pennsylvania market. The decrease in the average balance of these loans resulted in a decrease in interest income due to volume of $321,000. The average yield on agricultural loans decreased from 4.49% in 2020 to 4.31% in 2021 due to a general decrease in rates, resulting in a decrease in interest income due to rate of $622,000."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The average balance of loans to state and political subdivisions decreased $33.3 million from 2020 to 2021 which had a negative impact of $1,218,000 on total interest income due to volume was due to customers refinancing through the municipal bond market. The average tax equivalent yield on loans to state and political subdivisions decreased from 4.01% in 2020 to 3.54% in 2021, decreasing interest income by $369,000."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The average balance of other loans increased $3.1 million as a result of an increase in outstanding student loans. This resulted in an increase of $180,000 on total interest income due to volume. The average tax equivalent yield on other loans increased from 5.65% in 2020 to 5.74% in 2021, increasing interest income by $20,000 in other loans"]] [[/GREPCENT_TABLE]] 28 Index Total interest expense decreased $1,000,000 in 2021 compared to 2020.  The majority of the decrease was due to a decrease in the average rate paid on interest bearing deposits of 15 basis points to 0.43%. This decrease resulted in a decrease in interest expense of $1,849,000. The decrease in rates was driven by the Federal Reserve’s response to the COVID-19 pandemic. The average rate on certificates of deposit decreased from 1.23% to 0.98% resulting in a decrease in interest expense of $890,000. The average rate on money markets decreased from 0.49% to 0.27% resulting in a decrease in interest expense of $738,000. The average rate paid on savings accounts decreased 9 bps and resulted in a decrease in interest expense of $287,000. The average rate paid on other borrowed funds increased from 1.34% to 1.50% resulting in an increase in interest expense of $74,000 and was due to interest expense on debt issued in 2021. Average interest-bearing liabilities increased $172.3 million in 2021, with average interest-bearing deposits increasing $180.9 million and average other borrowings decreasing $8.6 million. As a result of the increase in average deposits, interest expense increased $835,000 as result of the change in volume. Increases in average deposits, which were primarily driven by organic growth across all markets of the Bank, included NOW accounts of $73.3 million, savings accounts of $48.9 million, money market accounts of $52.8 million and certificates of deposits of $5.9 million. The combined impact to interest expense of these increases was $835,000. The average balance of other borrowed funds decreased $8.6 million, which corresponds to a decrease in interest expense of $60,000. Our tax equivalent net interest margin for 2021 was 3.52% compared to 3.92% for 2020, with the change attributable to the yield of interest-earning assets decreasing more than the cost from interest-bearing liabilities during 2021. Interest rates rose in 2021 in response to shifting expectations for fiscal policy and an enduring pandemic that continued to hamper economic activity, strengthening and prolonging unusually strong inflationary pressures and altering the expected path of monetary policy. PROVISION FOR LOAN LOSSES For the year ended December 31, 2022, we recorded a provision for loan losses of $1,683,000. The provision for 2022 was $133,000, or 8.6%, higher than the provision in 2021. The increase in the provision for loan losses was primarily due to organic loan growth in 2022 compared to 2021 offset by the improved economic outlook compared to 2021 that was impacted more by the Covid-19 pandemic. (see also “Financial Condition – Allowance for Loan Losses and Credit Quality Risk”). For the year ended December 31, 2021, we recorded a provision for loan losses of $1,550,000. The provision for 2021 was $850,000, or 35.4%, lower than the provision in 2020. The decrease in the provision for loan losses was primarily the result of the impact the COVID-19 pandemic had on the economy in 2020 and limited organic growth in 2021 compared to 2020. (see also “Financial Condition – Allowance for Loan Losses and Credit Quality Risk”). NON-INTEREST INCOME The following table reflects non-interest income by major category for the years ended December 31 (dollars in thousands): [[GREPCENT_TABLE]] [["","","2022","","","2021","","","2020"],["Service charges","","","5,346","","","","4,755","","","$","4,221"],["Trust","","","803","","","","865","","","","803"],["Brokerage and insurance","","","1,895","","","","1,625","","","","1,297"],["Equity security gains (losses), net","","","(247",")","","","339","","","","(41",")"],["Available for sale security gains (losses), net","","","(14",")","","","212","","","","305"],["Gains on loans sold","","","258","","","","1,283","","","","2,168"],["Earnings on bank owned life insurance","","","852","","","","1,828","","","","695"],["Other","","","845","","","","1,398","","","","1,974"],["Total","","$","9,738","","","$","12,305","","","$","11,422"]] [[/GREPCENT_TABLE]] 29 Index [[GREPCENT_TABLE]] [["","","2022/2021 Change","","","2021/2020 Change"],["","","Amount","","","%","","","Amount","","","%"],["Service charges","","$","591","","","","12.4","","","$","534","","","","12.7"],["Trust","","","(62",")","","","(7.2",")","","","62","","","","7.7"],["Brokerage and insurance","","","270","","","","16.6","","","","328","","","","25.3"],["Equity security gains (losses), net","","","(586",")","","","(172.9",")","","","380","","","","(926.8",")"],["Available for sale security gains (losses), net","","","(226",")","","","(106.6",")","","","(93",")","","","(30.5",")"],["Gains on loans sold","","","(1,025",")","","","(79.9",")","","","(885",")","","","(40.8",")"],["Earnings on bank owned life insurance","","","(976",")","","","(53.4",")","","","1,133","","","","163.0"],["Other","","","(553",")","","","(39.6",")","","","(576",")","","","(29.2",")"],["Total","","$","(2,567",")","","","(20.9",")","","$","883","","","","7.7"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 Non-interest income decreased $2,567,000 in 2022 from 2021, or 20.9%.  We experienced a $14,000 net loss on available for sale securities in 2022 compared to net gains totaling $212,000 in 2021. During 2022, we sold $7.5 million of US Agency securities for a pre-tax loss of $14,000. During 2021, we sold $17.2 million of US treasury securities for a pre-tax gain of $177,000 and $12.0 million of US Agency securities for a pre-tax gain of $35,000 to take advantage of market conditions at the time of the sales. During 2022, net equity security losses amounted to $247,000 as a result of market conditions experienced in 2022 compared to gains of $339,000 last year. Gains on loans sold decreased $1,025,000 compared to last year. The decrease in gains on loans sold is attributable to a $41.6 million, or 74.8% decrease in the proceeds from the sale of residential mortgages loans as a result of the increase in mortgage interest rates. The increase in service charges of $591,000 for 2022 is attributable to an increase in customer spending in 2022 compared to 2021. The decrease in other income is due to fees on offering derivative contracts for certain customers, that provided the customer with fixed rate loans, which generated fee income of $88,000 in 2022 compared to $494,000 in 2021. The decrease in earnings on bank owned life insurance is due to two former employees of the Company passing during the first quarter of 2021, which generated a death benefit payable to the Company of $1,155,000. The increase in brokerage and insurance commissions was attributable to growth in our south central and north central, Pennsylvania markets. 2021 vs. 2020 Non-interest income increased $883,000 in 2021 from 2020, or 7.7%.  We experienced a $212,000 net gain on available for sale securities in 2021 compared to net gains totaling $305,000 in 2020. During 2021, we sold $17.2 million of US treasury securities for a pre-tax gain of $177,000 and $12.0 million of US Agency securities for a pre-tax gain of $35,000 to take advantage of market conditions at the time of the sales. During 2020, we sold 19 mortgage backed securities for a net gain of $305,000 to lock in gains that benefitted from the Federal Reserve investment purchase program in response to the COVID-19 pandemic. During 2021, net equity security gains amounted to $339,000 as a result of market gains experienced in 2021 compared to losses of $41,000 in 2020 associated with the Covid-19 pandemic. Gains on loans sold decreased $885,000 compared to 2020. The decrease in gains on loans sold was attributable to a $20.2 million, or 26.6% decrease in the proceeds from the sale of residential mortgages loans. The increase in service charges of $534,000 for 2021 was attributable to the Bank’s response to the COVID-19 pandemic in 2020 and an increase in customer spending in 2021 compared to 2020 which was impacted by mandatory stay at home orders as customers ate out less and spent less on discretionary items. The decrease in other income was due to fees on offering derivative contracts for certain customers, that provided the customer with fixed rate loans, which generated fee income of $494,000 in 2021 compared to $1,373,000 in 2020. The increase in earnings on bank owned life insurance was due to two former employees of the Company passing during the first quarter of 2021, which generated a death benefit payable to the Company of $1,155,000. The increase in brokerage and insurance commissions was attributable to growth in our south central and north central, Pennsylvania markets. Non-interest Expenses The following tables reflect the breakdown of non-interest expense by major category for the years ended December 31 (dollars in thousands): 30 Index [[GREPCENT_TABLE]] [["","","2022","","","2021","","","2020"],["Salaries and employee benefits","","","27,837","","","","25,902","","","$","24,190"],["Occupancy","","","3,138","","","","2,966","","","","2,557"],["Furniture and equipment","","","565","","","","519","","","","757"],["Professional fees","","","1,891","","","","1,526","","","","1,517"],["FDIC insurance","","","676","","","","522","","","","476"],["Pennsylvania shares tax","","","907","","","","880","","","","868"],["Amortization of intangibles","","","156","","","","192","","","","216"],["Merger and acquisition","","","-","","","","-","","","","2,179"],["ORE expenses","","","17","","","","439","","","","451"],["Software expenses","","","1,446","","","","1,321","","","","1,155"],["Other","","","8,061","","","","7,283","","","","6,481"],["Total","","$","44,694","","","$","41,550","","","$","40,847"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","2022/2021 Change","","","2021/2020 Change"],["","","Amount","","","%","","","Amount","","","%"],["Salaries and employee benefits","","$","1,935","","","","7.5","","","$","1,712","","","","7.1"],["Occupancy","","","172","","","","5.8","","","","409","","","","16.0"],["Furniture and equipment","","","46","","","","8.9","","","","(238",")","","","(31.4",")"],["Professional fees","","","365","","","","23.9","","","","9","","","","0.6"],["FDIC insurance","","","154","","","","29.5","","","","46","","","","9.7"],["Pennsylvania shares tax","","","27","","","","3.1","","","","12","","","","1.4"],["Amortization of intangibles","","","(36",")","","","(18.8",")","","","(24",")","","","(11.1",")"],["Merger and acquisition","","","-","","","NA","","","","(2,179",")","","","(100.0",")"],["ORE expenses","","","(422",")","","","(96.1",")","","","(12",")","","","(2.7",")"],["Software expenses","","","125","","","","9.5","","","","166","","","","14.4"],["Other","","","778","","","","10.7","","","","802","","","","12.4"],["Total","","$","3,144","","","","7.6","","","$","703","","","","1.7"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 Non-interest expenses for 2022 totaled $44,694,000, which represents an increase of $3,144,000, compared to 2021 expenses of $41,550,000. Salaries and employee benefits increased $1,935,000 or 7.5%. The increase was due to merit increases effective at the beginning of 2022, additional headcount 14.7 FTEs added during 2022 and increased health care related expenses due to actual claims of employees. Employee commissions related to brokerage and insurance commissions increased due to the increased sales in 2022 compared to 2021. The increase in occupancy expenses is due to the additional branches opened during 2022 and higher utility and maintenance expenses. The increase in professional fees was due to $250,000 of fees associated with the recently announced HVB merger that is expected to close in the first half of 2023. The increase in other expenses is additional marketing expenses, primarily in the Delaware market, charge-offs associated with fraudulent customer account activity, appraisal fees, travel related expenses as the economy reopens from pandemic related issues and the Delaware franchise tax due to growth in that market. The decrease in ORE expenses is due to gains on sales of ORE properties experienced during 2022. 2021 vs. 2020 Non-interest expenses for 2021 totaled $41,550,000, which represents an increase of $703,000, compared to 2020 expenses of $40,847,000. Salaries and employee benefits increased $1,712,000 or 7.1%. The increase was due to merit increases effective at the beginning of 2021, additional headcount as part of the MidCoast acquisition and servicing the Delaware market and increased profit sharing expenses due to increased profitability of the Company. Employee commissions related to brokerage and insurance commissions increased due to the increased sales in 2021 compared to 2020. The increase in occupancy expenses was due to the additional branches acquired as part of the MidCoast acquisition and the Kennett Square branch as they are included for a full year in 2021. The decrease in merger and acquisition costs was due to costs associated with the MidCoast acquisition that closed in April 2020. The decrease in furniture and fixtures was due to a decrease in non-capitalized items that were purchased in 2020 to support the acquisition. The increase in other expenses was due to charitable contributions made in our south central Pennsylvania and Delaware markets and the Delaware franchise tax due to the performance of the Delaware market, advertising and promotions associated with the Delaware markets. 31 Index PROVISION FOR INCOME TAXES The provision for income taxes was $6,435,000, $6,199,000 and $5,263,000 for 2022, 2021 and 2020, respectively. The effective tax rates for 2022, 2021 and 2020 were 18.1%, 17.6% and 17.3%, respectively. The increase in income tax expense of $236,000 in 2022 was due earnings on bank owned life insurance being excluded from taxable income, which was higher in 2021 than 2022, which accounts for an increase in income taxes of $205,000 at a 21% tax rate. The increase in income tax expense of $936,000 in 2021 was due to the increase of $4,951,000 in income before the provision for income taxes, which accounts for an increase in tax expense of $1,040,000 at a 21% tax rate. We are involved in seven limited partnership agreements that operate low-income housing projects in our market areas, two of which we entered into during 2022. During 2022, 2021 and 2020, we recognized tax credits related to one of the seven partnerships. Tax credits associated with four of the partnerships were fully utilized by December 2022. We expect to start recognizing credits on the remaining three projects in 2023. We anticipate recognizing an aggregate of $9.6 million of tax credits over the next thirteen years. FINANCIAL CONDITION The following table presents ending balances (dollars in millions), the dollar amount of change and the percentage change during the past year: [[GREPCENT_TABLE]] [["","","2022 Balance","","","Increase","","","% Change","","","2021 Balance"],["Total assets","","$","2,333.4","","","$","189.5","","","","8.8","","","$","2,143.9"],["Total investments","","","439.5","","","","27.1","","","","6.6","","","","412.4"],["Total loans, net","","","1,706.4","","","","282.2","","","","19.8","","","","1,424.2"],["Total deposits","","","1,844.2","","","","8.0","","","","0.4","","","","1,836.2"],["Total borrowings","","","257.3","","","","183.3","","","","247.7","","","","74.0"],["Total stockholders' equity","","","200.1","","","","(12.4",")","","","(5.8",")","","","212.5"]] [[/GREPCENT_TABLE]] Cash and Cash Equivalents Cash and cash equivalents totaled $26.2 million at December 31, 2022 compared to $172.8 million at December 31, 2021. Management actively measures and evaluates the Company’s liquidity through our Asset – Liability committee and believes its liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year.  Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due. Investments The following table shows the year-end composition of the investment portfolio, at fair value, for the two years ended December 31 (dollars in thousands): [[GREPCENT_TABLE]] [["","","2022 Amount","","","% of Total","","","2021 Amount","","","% of Total"],["Available-for-sale:"],["U. S. Agency securities","","$","70,677","","","","16.0","","","$","73,945","","","","17.8"],["U.S. Treasuries","","","148,570","","","","33.6","","","","115,347","","","","27.8"],["Obligations of state & political subdivisions","","","110,300","","","","25.0","","","","112,021","","","","27.0"],["Corporate obligations","","","9,383","","","","2.1","","","","10,333","","","","2.5"],["Mortgage-backed securities","","","100,576","","","","22.8","","","","100,756","","","","24.3"],["Equity securities","","","2,208","","","","0.5","","","","2,270","","","","0.6"],["Total","","$","441,714","","","","100.0","","","$","414,672","","","","100.0"]] [[/GREPCENT_TABLE]] 32 Index The Company’s investment portfolio increased during 2022 by $27.0 million. This growth was fueled by purchases made in the first half of 2022 to utilize portions of the cash position. During 2022, we purchased $53.8 million of U.S. Treasuries, $12.3 million of U.S. agencies, $33.4 million of mortgage backed securities, $18.4 million of state and local obligations and $218,000 of equity securities, which helped to offset the $19.5 million of principal repayments and $14.1 million of calls and maturities that occurred during the year. We also sold $7.5 million of bonds at a net loss of $14,000. The fair value of our investment portfolio decreased approximately $47.9 million in 2022 due to increases in market interest rates. Excluding our short term investments consisting of monies held primarily at the Federal Reserve, the effective yield on our investment portfolio for 2022 was 1.90% compared to 1.96% for 2021 on a tax equivalent basis. Interest rates increased dramatically in 2022 in response to historically high inflation forcing the Federal Reserve to aggressively tighten monetary policy at a pace and levels not seen in decades. The year began with accelerating inflation that was exacerbated by the Russian invasion of Ukraine driving energy prices higher with crude oil peaking at $130 a barrel in early March. Other commodities prices followed oils lead reaching extremely high levels and adding to inflationary fears.  The Federal Reserve completely abandoned their belief that inflation would prove transitory and began to tighten monetary policy by both reducing the size of its balance sheet and increasing over-night borrowing rates. Coming into the year the Central Bank’s official forecast was for a total increase in rates by 0.75%, but inflation continued to climb to levels not seen since the early 1980’s pushing the Fed Reserve into a series of 75-basis point increases then ending the year with a 50-basis point hike in December for a total increase of 4.25%. The result of these moves created an inverted Treasury yield curve with every maturity from 1 month T-Bills to 7 year Treasuries all yielding more than the 10 year Treasury. The closely followed 2-year to 10-year Treasury spread started the year at a positive 88-basis points and ended the year at a negative 55-basis points.  The 2-year Treasury started the year at 0.78% and ended the year at 4.43% while the 10-year Treasury’s move was from 1.56% to 3.88%. Commodities prices eased in the second half of the year and inflation measures fell as a result, but a strong labor market kept wage inflation high pressuring the Federal Reserve to remain resolute in maintaining an aggressive tightening monetary policy.  Treasury yields ended the year well below the peak as the inverted yield curve increased concerns the Federal Reserve would make a policy error and tighten to much. The investment strategy for 2022 has been to utilize excess cash, cashflows from the investment portfolio and deposit inflows to purchase U.S. treasury securities, due to a limited spread between US treasuries and agencies, mortgage backed securities issued by government sponsored entities and obligations of state and political securities. The increase in the investment portfolio was in response to the deposit inflows that occurred in 2021 and the first half of 2022. We continually monitor interest rate trading ranges and try to focus purchases to times when rates are in the top of the trading range. The Bank believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, while providing sufficient cashflows to meet liquidity needs. At December 31, 2022, the Company did not own any securities, other than government-sponsored and government-guaranteed mortgage-backed securities, that had an aggregate book value in excess of 10% of its consolidated stockholders’ equity at that date. The expected principal repayments at amortized cost and average weighted yields for the investment portfolio (excluding equity securities) as of December 31, 2022, are shown below (dollars in thousands). Expected principal repayments, which include prepayment speed assumptions for mortgage-backed securities, are significantly different than the contractual maturities detailed in Note 4 of the consolidated financial statements. Yields on tax-exempt securities are presented on a fully taxable equivalent basis, assuming a 21% tax rate, which was the rate in effect at December 31, 2022. [[GREPCENT_TABLE]] [["","","One Year or Less","","","After One Year to Five years","","","After Five Years to Ten Years","","","After Ten Years","","","Total"],["","","Amortized Cost","","","Yield %","","","Amortized Cost","","","Yield %","","","Amortized Cost","","","Yield %","","","Amortized Cost","","","Yield %","","","Amortized Cost","","","Yield %"],["Available-for-sale securities:"],["U.S. agency securities","","$","16,660","","","","3.4","","","$","32,447","","","","1.9","","","$","23,354","","","","1.8","","","$","6,095","","","","1.5","","","$","78,556","","","","2.2"],["U.S. treasuries","","","9,972","","","","1.0","","","","139,459","","","","1.1","","","","12,805","","","","1.6","","","","-","","","","-","","","","162,236","","","","1.1"],["Obligations of state & political Subdivisions","","","4,635","","","","3.7","","","","14,549","","","","2.5","","","","26,558","","","","1.8","","","","74,820","","","","1.9","","","","120,562","","","","2.0"],["Corporate obligations","","","-","","","","-","","","","10,335","","","","3.6","","","","-","","","","-","","","","-","","","","-","","","","10,335","","","","3.6"],["Mortgage-backed securities","","","19,121","","","","1.0","","","","36,394","","","","1.5","","","","42,271","","","","1.4","","","","17,518","","","","1.4","","","","115,304","","","","1.4"],["Total available-for-sale","","$","50,388","","","","2.0","","","$","233,184","","","","1.5","","","$","104,988","","","","1.6","","","$","98,433","","","","1.8","","","$","486,993","","","","1.6"]] [[/GREPCENT_TABLE]] 33 Index  At December 31, 2022, approximately 58.2% of the amortized cost of debt securities is expected to mature, call or pre-pay within five years or less.  The Company expects that earnings from operations, the levels of cash held at the Federal Reserve and other correspondent banks, the high liquidity level of the available-for-sale securities, growth of deposits and the availability of borrowings from the Federal Home Loan Bank and other third party banks will be sufficient to meet future liquidity needs. Loans Held for Sale Loans held for sale decreased $3.8 million to $725,000 as of December 31, 2022 from December 31, 2021. The decrease in loans held for sale was due to the reduced amount of refinancings occurring in 2022 compared to 2021 due to the higher rate environment. Loans The Bank’s lending efforts have historically focused on north central Pennsylvania and southern New York. With the acquisition of FNB and the opening of offices in Lancaster County, this focus has grown to include Lebanon, Schuylkill, Berks and Lancaster County markets of south central, Pennsylvania. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities and offices in State College and Mill Hall to support commercial opportunities in central Pennsylvania, especially Centre and Clinton Counties. In April 2020, we completed the MidCoast acquisition, which expanded our markets into the State of Delaware with activity centered around the cities of Wilmington and Dover, Delaware. In November of 2020, we opened a branch in Kennett Square, Pennsylvania, to further serve customers obtained as part of the MidCoast acquisition, as well as to expand operations into Chester County, Pennsylvania. During 2022, expansion efforts continued in both Lancaster, Pennsylvania with the opening of an office in Ephrata, Pennsylvania and in Delaware with the opening of an office in Greenville, Delaware, which is near Wilmington, Delaware. The Bank has also received approval to open a full service branch in Williamsport, Pennsylvania that is expected to open during the summer of 2023. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships that our lending teams have with their customers, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank’s website.  The Bank offers a variety of loans, although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans.  As of December 31, 2022, approximately 85.9% of our loan portfolio consisted of real estate loans.  All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors. The Bank primarily offers fixed rate residential mortgage loans with terms of up to 25 years and adjustable rate mortgage loans (with amortization schedules up to 30 years) with interest rates and payments that adjust based on one, three, five and 15 year fixed periods.  Loan to value ratios are usually 80% or less with exceptions for individuals with excellent credit and low debt to income and/or high net worth. Adjustable rate mortgages are tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate.  Home equity loans are written with terms of up to 15 years at fixed rates.  Home equity lines of credit are variable rate loans tied to the Prime Rate generally with a ten year draw period followed by a ten year repayment period. Home equity loans are typically written with a maximum 80% loan to value. Commercial real estate loan terms are generally 20 years or less, with one to five year adjustable interest rates.  The adjustable rates are typically tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate with a typical loan to value ratio of 80% or less. During 2022 and 2021, the Bank offered certain customers derivative contracts that allowed the customer to obtain a fixed interest rate for a period up to 10 years.  Where feasible, the Bank participates in the United States Department of Agriculture’s (USDA) and Small Business Administration (SBA) guaranteed loan programs to offset credit risk and to further promote economic growth in our market area. Agriculture is an important industry throughout our market areas. Therefore, the Bank has not only developed an agriculture lending team with significant experience that has a thorough understanding of this industry, but also continually looks for additional employees with a thorough understanding of agriculture. We have an agricultural loan policy to assist in underwriting agricultural loans.  Agricultural loans are made to a diversified customer base that include dairy, swine and poultry farmers and their support businesses.  Agricultural loans focus on character, cash flow and collateral, while also considering the particular risks of the industry.  Loan terms are generally 20 years or less, with one to five year adjustable interest rates.  The adjustable rates are typically tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate with a typical loan to value of less than 80%. We evaluate the financial strength of the integrators we have exposure to with our poultry and swine agricultural customers.  The Bank is a preferred lender under the USDA’s Farm Service Agency (FSA) and participates in the FSA guaranteed loan program. 34 Index The Bank, as part of its commitment to the communities it serves, is an active lender for projects by our local municipalities and school districts. These loans range from short term bridge financing to 20 year term loans for specific projects. These loans are typically written at rates that adjust at least every five years. Due to the size of certain municipal loans, we have developed participation lending relationships with other community banks that allow us to meet regulatory compliance issues, while meeting the needs of the customer. At December 31, 2022, the aggregate balance of our participation loans, in which a portion was sold to other lender’s totaled $195.95 million, of which $102.6 million was sold. Activity associated with exploration for natural gas in 2022 was higher than 2021. Certain entities drilled new wells and created new pad sites and pipelines, while other companies only maintained their existing wells. Natural gas prices increased during 2022, but still experienced significant volatility in 2022. While the Bank has loaned to companies that service the exploration activities, the Bank has not originated any loans to companies performing the actual drilling and exploration activities. Loans made by the Company were to service industry customers which included trucking companies, stone quarries and other support businesses. We also originated loans to businesses and individuals for restaurants, hotels and apartment rentals that were developed and expanded to meet the housing and living needs of the gas workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities were originated in a prudent and cautious manner and were subject to specific policies and procedures for lending to these entities, which included lower loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity. The following table shows the year-end composition of the loan portfolio as of December 31, 2022 and 2021 (dollars in thousands): [[GREPCENT_TABLE]] [["","","2022","","","2021"],["","","Amount","","","%","","","Amount","","","%"],["Real estate:"],["Residential","","$","210,213","","","","12.2","","","$","201,097","","","","14.0"],["Commercial","","","876,569","","","","50.8","","","","687,338","","","","47.7"],["Agricultural","","","313,614","","","","18.2","","","","312,011","","","","21.6"],["Construction","","","80,691","","","","4.7","","","","55,036","","","","3.8"],["Consumer","","","86,650","","","","5.0","","","","25,858","","","","1.8"],["Other commercial loans","","","63,222","","","","3.7","","","","74,585","","","","5.2"],["Other agricultural loans","","","34,832","","","","2.0","","","","39,852","","","","2.8"],["State & political subdivision loans","","","59,208","","","","3.4","","","","45,756","","","","3.1"],["Total loans","","","1,724,999","","","","100.0","","","","1,441,533","","","","100.0"],["Less allowance for loan losses","","","18,552","","","","","","","","17,304"],["Net loans","","$","1,706,447","","","","","","","$","1,424,229"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","2022/2021 Change"],["","","Amount","","","%"],["Real estate:"],["Residential","","$","9,116","","","","4.5"],["Commercial","","","189,231","","","","27.5"],["Agricultural","","","1,603","","","","0.5"],["Construction","","","25,655","","","","46.6"],["Consumer","","","60,792","","","","235.1"],["Other commercial loans","","","(11,363",")","","","(15.2",")"],["Other agricultural loans","","","(5,020",")","","","(12.6",")"],["State & political subdivision loans","","","13,452","","","","29.4"],["Total loans","","$","283,466","","","","19.7"]] [[/GREPCENT_TABLE]] 35 Index Total loans grew $283.5 million in 2022 and total $1.72 billion at the end of 2022. The primary driver of growth during 2022 was growth in commercial and construction real estate in the Delaware market, student loans and state and political loans. This growth was offset by a decrease in other commercial and other agricultural loans of $11.4 million and $5.0 million, respectively,  due to a decrease in PPP loans and other loan paydowns during the year. Residential real estate loans increased $9.1 million even as refinancing activity decreased during 2022 due to higher rates  During 2022, $10.0 million of residential real estate loans were originated for sale on the secondary market, which compares to $44.7 million for 2021.  For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income. The following table presents the maturity distribution of our loan portfolio as of December 31, 2022 (in thousands).  The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.  Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. [[GREPCENT_TABLE]] [["","","Due in One year or less","","","After one year through five years","","","After five years through fifteen years","","","After fifteen years","","","Total"],["Real estate:"],["Residential","","$","736","","","$","8,003","","","$","74,912","","","$","126,562","","","$","210,213"],["Commercial","","","86,776","","","","267,583","","","","357,755","","","","164,455","","","","876,569"],["Agricultural","","","20,260","","","","17,031","","","","156,043","","","","120,280","","","","313,614"],["Construction","","","2,193","","","","29,675","","","","33,395","","","","15,428","","","","80,691"],["Consumer","","","18,336","","","","65,279","","","","2,903","","","","132","","","","86,650"],["Other commercial loans","","","28,933","","","","28,483","","","","5,806","","","","-","","","","63,222"],["Other agricultural loans","","","19,232","","","","13,257","","","","2,343","","","","-","","","","34,832"],["State & political subdivision loans","","","768","","","","1,461","","","","27,687","","","","29,292","","","","59,208"],["","","$","177,234","","","$","430,772","","","$","660,844","","","$","456,149","","","$","1,724,999"]] [[/GREPCENT_TABLE]] The following table presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of loans in accordance with changes in the interest rate index that mature after December 31, 2023. [[GREPCENT_TABLE]] [["Sensitivity of loans to changes in interest rates - loans due after December 31, 2023:","","Predetermined interest rate","","","Floating or adjustable interest rate","","","Total"],["Real estate:"],["Residential","","$","116,160","","","$","93,317","","","$","209,477"],["Commercial","","","383,030","","","","406,763","","","","789,793"],["Agricultural","","","13,923","","","","279,431","","","","293,354"],["Construction","","","32,657","","","","45,841","","","","78,498"],["Consumer","","","4,823","","","","63,491","","","","68,314"],["Other commercial loans","","","19,711","","","","14,578","","","","34,289"],["Other agricultural loans","","","10,736","","","","4,864","","","","15,600"],["State & political subdivision loans","","","35,770","","","","22,670","","","","58,440"],["","","$","616,810","","","$","930,955","","","$","1,547,765"]] [[/GREPCENT_TABLE]] Allowance for Loan Losses and Credit Quality Risk The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable future loan losses inherent in the loan portfolio.  The provision for loan losses is charged against current income.  Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance.  The allowance for loan losses was $18,552,000 or 1.08% of total loans as of December 31, 2022 as compared to $17,304,000 or 1.20% of loans as of December 31, 2021. The $1,248,000 increase is a result of a $1,683,000 provision for loan losses less net charge-offs of $435,000. During 2022, net charge-offs were low with the majority related to one charge-off. The following table shows the distribution of the allowance for loan losses and the percentage of loans compared to total loans by loan category (dollars in thousands) as of December 31: 36 Index [[GREPCENT_TABLE]] [["","","2022","","","2021"],["","","Amount","","","%","","","Amount","","","%"],["Real estate loans:"],["Residential","","$","1,056","","","","12.2","","","$","1,147","","","","14.0"],["Commercial","","","10,120","","","","50.8","","","","8,099","","","","47.7"],["Agricultural","","","4,589","","","","18.2","","","","4,729","","","","21.6"],["Construction","","","801","","","","4.7","","","","434","","","","3.8"],["Consumer","","","135","","","","5.0","","","","262","","","","1.8"],["Other commercial loans","","","1,040","","","","3.7","","","","1,023","","","","5.2"],["Other agricultural loans","","","489","","","","2.0","","","","558","","","","2.8"],["State & political subdivision loans","","","322","","","","3.4","","","","281","","","","3.1"],["Unallocated","","","-","","","","N/A","","","","771","","","","N/A"],["Total allowance for loan losses","","$","18,552","","","","100.0","","","$","17,304","","","","100.0"]] [[/GREPCENT_TABLE]] The following table provides information related to credit loss experience and net (charge-offs) recoveries for 2022, 2021 and  2020. [[GREPCENT_TABLE]] [["2022","","Credit Loss Expense (Benefit)","","","Net (charge-offs) Recoveries","","","Average Loans","","","Ratio of net (charge-offs) recoveries to Average loans","","","Allowance to total loans","","","Non-accrual loans as a percent of loans","","","Allowance to total non-accrual loans"],["Real estate:"],["Residential","","$","(91",")","","","-","","","$","204,063","","","","0.00","%","","","0.50","%","","","0.28","%","","","178.68","%"],["Commercial","","","2,018","","","","3","","","","782,016","","","","0.00","%","","","1.15","%","","","0.32","%","","","364.29","%"],["Agricultural","","","(140",")","","","-","","","","312,999","","","","0.00","%","","","1.46","%","","","1.03","%","","","142.43","%"],["Construction","","","367","","","","-","","","","73,214","","","","0.00","%","","","0.99","%","","","0.00","%","","NA"],["Consumer","","","(111",")","","","(16",")","","","58,715","","","","-0.03","%","","","0.16","%","","","0.00","%","","NA"],["Other commercial loans","","","439","","","","(422",")","","","72,444","","","","-0.58","%","","","1.64","%","","","0.10","%","","","1677.42","%"],["Other agricultural loans","","","(69",")","","","-","","","","34,421","","","","0.00","%","","","1.40","%","","","0.82","%","","","171.58","%"],["State & political subdivision loans","","","41","","","","-","","","","56,004","","","","0.00","%","","","0.54","%","","","0.00","%","","NA"],["Unallocated","","","(771",")","","","-","","","","-","","","NA","","","NA","","","NA","","","NA"],["Total","","$","1,683","","","$","(435",")","","$","1,593,876","","","","-0.03","%","","","1.08","%","","","0.40","%","","","267.40","%"],["2021"],["Real estate:"],["Residential","","$","(27",")","","","-","","","$","203,062","","","","0.00","%","","","0.57","%","","","0.30","%","","","192.77","%"],["Commercial","","","1,848","","","","35","","","","639,161","","","","0.01","%","","","1.18","%","","","0.43","%","","","275.01","%"],["Agricultural","","","(224",")","","","-","","","","312,770","","","","0.00","%","","","1.52","%","","","1.00","%","","","150.94","%"],["Construction","","","312","","","","-","","","","56,315","","","","0.00","%","","","0.79","%","","","0.00","%","","NA"],["Consumer","","","(53",")","","","(6",")","","","24,125","","","","-0.02","%","","","1.01","%","","","0.00","%","","NA"],["Other commercial loans","","","(113",")","","","(90",")","","","99,839","","","","-0.09","%","","","1.37","%","","","0.19","%","","","730.71","%"],["Other agricultural loans","","","(306",")","","","-","","","","37,181","","","","0.00","%","","","1.40","%","","","2.01","%","","","69.49","%"],["State & political subdivision loans","","","(198",")","","","-","","","","52,804","","","","0.00","%","","","0.61","%","","","0.00","%","","NA"],["Unallocated","","","311","","","","-","","","","-","","","NA","","","NA","","","NA","","","NA"],["Total","","$","1,550","","","$","(61",")","","$","1,425,257","","","","0.00","%","","","1.20","%","","","0.53","%","","","227.21","%"],["2020"],["Real estate:"],["Residential","","$","46","","","","14","","","$","210,696","","","","0.01","%","","","0.58","%","","","0.40","%","","","144.58","%"],["Commercial","","","2,065","","","","(398",")","","","478,415","","","","-0.08","%","","","1.04","%","","","0.76","%","","","137.25","%"],["Agricultural","","","(84",")","","","15","","","","311,100","","","","0.00","%","","","1.57","%","","","0.99","%","","","158.09","%"],["Construction","","","79","","","","0","","","","26,343","","","","0.00","%","","","0.34","%","","","0.00","%","","NA"],["Consumer","","","238","","","","(29",")","","","20,986","","","","-0.14","%","","","1.06","%","","","0.00","%","","NA"],["Other commercial loans","","","3","","","","(32",")","","","112,054","","","","-0.03","%","","","1.07","%","","","1.12","%","","","95.48","%"],["Other agricultural loans","","","(97",")","","","-","","","","46,101","","","","0.00","%","","","1.77","%","","","2.00","%","","","88.71","%"],["State & political subdivision loans","","","(57",")","","","-","","","","86,143","","","","0.00","%","","","0.76","%","","","0.00","%","","NA"],["Unallocated","","","207","","","","-","","","","-","","","NA","","","NA","","","NA","","","NA"],["Total","","$","2,400","","","$","(430",")","","$","1,291,838","","","","-0.03","%","","","1.13","%","","","0.76","%","","","147.36","%"]] [[/GREPCENT_TABLE]] 37 Index The Company believes it utilizes a disciplined and thorough loan review process based upon its internal loan policy approved by the Company’s Board of Directors.  The purpose of the review is to assess loan quality, analyze delinquencies, identify problem loans, evaluate potential charge-offs and recoveries, and assess general overall economic conditions in the markets served.  An external independent loan review is performed on our commercial portfolio at least semi-annually for the Company.  The external consultant is engaged to 1) review a minimum of 50%  of the dollar volume of the commercial loan portfolio on an annual basis, 2) new loans originated for over $1.0 million in the last year, 3) a majority of borrowers with commitments greater than or equal to $1.0 million,  4) selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate. As part of this review, our underwriting process and loan grading system is evaluated. Management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate as of December 31, 2022. However, future adjustments could be required if circumstances differ substantially from assumptions and estimates used in making the initial determination.  A prolonged downturn in the economy, changes in the economies of various segments of our agricultural and commercial portfolios, high unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, loan loss provisions and reduction in income.  Additionally, bank regulatory agencies periodically examine the Bank’s allowance for loan losses.  The banking agencies could require the recognition of additions to the allowance for loan losses based upon their judgment of information available to them at the time of their examination. On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports.  Based on data surrounding the collection process of each identified loan, the loan may be added or deleted from the monthly watch list.  The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may choose to include.  Watch list loans are continually monitored going forward until satisfactory conditions exist that allow management to upgrade and remove the loan from the watchlist.  In certain cases, loans may be placed on non-accrual status or charged-off based upon management’s evaluation of the borrower’s ability to pay.  All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans, other commercial loans and other agricultural loans, on non-accrual are evaluated quarterly for impairment. The adequacy of the allowance for loan losses is subject to a formal, quarterly analysis by management of the Company.  In order to better analyze the risks associated with the loan portfolio, the entire portfolio is divided into several categories.  As stated above, loans on non-accrual status are specifically reviewed for impairment and given a specific reserve, if appropriate.  Loans evaluated and not found to be impaired are included with other performing loans, by category, by their respective homogenous pools.  Three year average historical loss factors were calculated for each pool and applied to the performing portion of the loan category for each year presented. The historical loss factors for both reviewed and homogeneous pools are adjusted based upon the following qualitative factors: [[GREPCENT_TABLE]] [["","\u2022","Level of and trends in delinquencies, impaired/classified loans"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Change in volume and severity of past due loans"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Volume of non-accrual loans"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Volume and severity of classified, adversely or graded loans"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Level of and trends in charge-offs and recoveries"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Trends in volume, terms and nature of the loan portfolio"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Changes in the quality of the Bank\u2019s loan review system"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Experience, ability and depth of lending management and other relevant staff"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","National, state, regional and local economic trends and business conditions"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","General economic conditions"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Unemployment rates"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Inflation / CPI"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Changes in values of underlying collateral for collateral-dependent loans"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Existence and effect of any credit concentrations, and changes in the level of such concentrations"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Any change in the level of board oversight"]] [[/GREPCENT_TABLE]] 38 Index See also “Note 5 – Loans and Related Allowance for Loan Losses” to the consolidated financial statements. As a result of previous loss experiences and other risk factors utilized in determining the allowance, the Bank’s allocation of the allowance does not directly correspond to the actual balances of the loan portfolio. While commercial and agricultural real estate loans total 69.0% of the loan portfolio at December 31 2022, 79.3% of the allowance is assigned to these portions of the loan portfolio as these loans have more inherent risks than residential real estate or loans to state and political subdivisions. Residential real estate loans comprise 12.2% of the loan portfolio as of December 31, 2022 and 5.7% of the allowance is assigned to this segment as generally there are less inherent risks then commercial and agricultural loans. The following table is a summary of our non-performing assets for the years ended December 31, 2022 and 2021. All non-accruing troubled debt restructurings (TDRs) are also included the non-accruing loans totals. [[GREPCENT_TABLE]] [["","","2022","","","2021"],["Non-performing assets:"],["Non-accruing loans","","$","6,938","","","$","7,616"],["Accrual loans - 90 days or more past due","","","7","","","","46"],["Total non-performing loans","","$","6,945","","","$","7,662"],["Foreclosed assets held for sale","","","543","","","","1,180"],["Total non-performing assets","","$","7,488","","","$","8,842"],["Troubled debt restructurings (TDR)"],["Non-accruing TDRs","","$","3,333","","","$","4,295"],["Accrual TDRs","","","4,358","","","","6,810"],["Total troubled debt restructurings","","$","7,691","","","$","11,105"]] [[/GREPCENT_TABLE]] The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2021 to December 31, 2022 in non-performing loans (in thousands).  Non-performing loans include those accruing loans that are contractually past due 90 days or more and non-accrual loans.  Interest does not accrue on non-accrual loans.  Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest. [[GREPCENT_TABLE]] [["","","December 31, 2022","","","December 31, 2021"],["","","","","","Non-Performing Loans","","","","","","Non-Performing Loans"],["","","30 - 89 Days Past Due","","","90 Days Past Due Accruing","","","Non- accrual","","","Total Non- Performing","","","30 - 89 Days Past Due","","","90 Days Past Due Accruing","","","Non- accrual","","","Total Non- Performing"],["Real estate:"],["Residential","","$","469","","","$","-","","","$","591","","","$","591","","","$","492","","","$","46","","","$","595","","","$","641"],["Commercial","","","1,018","","","","-","","","","2,778","","","","2,778","","","","243","","","","-","","","","2,945","","","","2,945"],["Agricultural","","","-","","","","-","","","","3,222","","","","3,222","","","","31","","","","-","","","","3,133","","","","3,133"],["Construction","","","-","","","","-","","","","-","","","","-","","","","-","","","","-","","","","-","","","","-"],["Consumer","","","147","","","","7","","","","-","","","","7","","","","163","","","","-","","","","-","","","","-"],["Other commercial loans","","","1,695","","","","-","","","","62","","","","62","","","","28","","","","-","","","","140","","","","140"],["Other agricultural loans","","","-","","","","-","","","","285","","","","285","","","","10","","","","-","","","","803","","","","803"],["Total nonperforming loans","","$","3,329","","","$","7","","","$","6,938","","","$","6,945","","","$","967","","","$","46","","","$","7,616","","","$","7,662"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Change in Non-Performing Loans"],["","","2022 / 2021"],["","","Amount","","","%"],["Real estate:"],["Residential","","$","(17",")","","","(2.8",")"],["Commercial","","","(200",")","","","(6.7",")"],["Agricultural","","","89","","","","2.8"],["Construction","","","-","","","","-"],["Consumer","","","7","","","NA"],["Other commercial loans","","","(78",")","","","(55.7",")"],["Other agricultural loans","","","(518",")","","","(64.5",")"],["Total nonperforming loans","","$","(717",")","","","(9.4",")"]] [[/GREPCENT_TABLE]] 39 Index The Company worked with customers directly affected by the COVID-19 pandemic. The Company offered assistance in accordance with regulator guidelines. As a result of the COVID-19 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience increases in non-performing loans and further increases in its required allowance for loan losses and record additional provision expense. It is possible that the Company's asset quality measures could worsen at future measurement periods if the effects of the COVID-19 pandemic are prolonged. For the year ended December 31, 2022, we recorded a provision for loan losses of $1,683,000 which compares to $1,550,000 for the same period in 2021, an increase of $133,000. The increase is primarily attributable to the organic loan growth that occurred during 2022  offset by the improved economic conditions in relation to the COVID-19 pandemic in 2022 compared to 2021. Non-performing loans decreased $717,000 from December 31, 2021 to December 31, 2022 with the decrease being primarily due to two customer relationships that made payments on the outstanding loans balances during 2022. At December 31, 2022, approximately 55.2% of the Bank’s non-performing loans are associated with the following three customer relationships: [[GREPCENT_TABLE]] [["","\u2022","A commercial loan relationship with $804,000 outstanding, and additional letters of credit of $1.2 million available, secured by undeveloped land, stone quarries and equipment, was on non-accrual status as of December 31, 2022. The Company services the natural gas industry, as well as local municipalities. As a result, the reduced exploration for natural gas in north central Pennsylvania has significantly impacted the cash flows of the customer, who provides excavation services and stone for pad construction related to these activities. During 2020, the Company had the underlying equipment collateral appraised and in the first quarter of 2022, the Company had the quarry appraised. The appraisals indicated a decrease in collateral values compared to the appraisal ordered for the loan origination, however, the loan was still considered well secured on a loan to value basis at December 31, 2022. In 2021 and 2022, the customer has liquidated some excess equipment and the funds have been utilized to pay down a portion of the loans. Management determined that no specific reserve was required as of December 31, 2022."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","An agricultural loan customer with a total loan relationship of $1.9 million, secured by real estate, equipment and cattle, was on non-accrual status as of December 31, 2022. The customer declared bankruptcy during the fourth quarter of 2018 and developed a workout plan that was approved by the bankruptcy court in the fourth quarter of 2019 and resulted in monthly payments resuming in late 2019 that have continued through 2022. Included within these loans to this customer are $758,000 of loans which are subject to Farm Service Agency guarantees. Absent a sizable and sustained increase in milk prices, which is not assured, we will need to rely upon the collateral for repayment of interest and principal. During 2020, the Company had the underlying collateral appraised. Management determined that no specific reserve was required as of December 31, 2022."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","An agricultural loan customer with a total loan relationship of $1.2 million, secured by real estate was on non-accrual status as of December 31, 2022. The COVID-19 pandemic has escalated the cash flow difficulties this customer was experiencing. We expect that we will need to rely upon the collateral for repayment of interest and principal. Management reviewed the collateral and determined that no specific reserve was required as of December 31, 2022."]] [[/GREPCENT_TABLE]] Management believes that the allowance for loan losses at December 31, 2022 was adequate at that date, which was based on the following factors: [[GREPCENT_TABLE]] [["","\u2022","Three loan relationships comprise 55.2% of the non-performing loan balance, which did not require any specific reserves as of December 31, 2022."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The Company has a history of low charge-offs, which were 0.03% and 0.00% of average loans for 2022 and 2021, respectively."]] [[/GREPCENT_TABLE]] 40 Index Bank Owned Life Insurance The Company holds bank owned life insurance policies to offset current and future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits.  As of December 31, 2022 and 2021, the cash surrender value of the life insurance was $39.4 million and $38.5 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations.  The amounts recorded as non-interest income totaled $852,000, $1,828,000 and $695,000 in 2022, 20210 and 2020, respectively with the decrease due to the death benefits received in 2021 upon the  passing of two former employees. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers’ credit ratings. Effective January 1, 2015, the Company restructured its agreements so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy.  Under the restructured agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The policies acquired as part of the acquisition of MidCoast are only for the benefit of the Bank. The net amount at risk is the total death benefit payable less the cash surrender value of the policy as of the date of death. The policies acquired as part of the acquisition of FNB, provide a fixed dollar benefit for the beneficiary’s’ estate, which is dependent on several factors including whether the covered individual was a Director of FNB or an employee of FNB and their salary level. As of December 31, 2022 and 2021, included in other liabilities on the Consolidated Balance sheet is a liability of $660,000 and $696,000, respectively, for the obligation under the split-dollar benefit agreements. Fair Value of Derivative Instruments - asset The Company holds derivative instruments to hedge interest rate risk and to offer customers longer term fixed rate loans through a program similar to a back to back swap, which results in both a derivative asset and liability on the Consolidated Balance Sheet. (See Note 17 for additional information). As of December 31, 2022 and 2021, the fair value for the derivatives instruments was $16.6 million and $4.0 million, respectively. The change in the fair value of financial instruments was due to the rise in market interest rates during 2022. The effective portion of changes in the fair value of the cash flow interest hate hedge derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Deferred Tax Asset Deferred tax assets are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates.  Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period. (See note 12 for additional information) As of December 31, 2022 and 2021, the balance for deferred tax assets was $12.9 million and $4.1 million, respectively. The change was due to the impact market interest rates had on the fair values of the Company’s available for sale investment portfolio and cashflow hedges for interest rate risk. Other Assets Other assets increased $11.1 million in 2022 to $25.8 million from $14.7 million in 2021. Due to increased borrowing levels with FHLB of Pittsburgh, regulatory stock increased $7.3 million during 2022. We entered into and extended several leases during the year, which resulted in the right of use asset for facilities increasing $1.7 million. As a result of the discount rates utilized for the pension plan, the pension asset increased $1.2 million. The balance in investments in low income housing projects increased $1.0 million due to investments made in three partnerships during 2022. Foreclosed properties were sold during 2022, which resulted in a decrease to other assets of $637,000. 41 Index  Deposits The following table shows the breakdown of deposits by deposit type (dollars in thousands) at December 31: [[GREPCENT_TABLE]] [["","","2022","","","2021","","","2020"],["","","Amount","","","%","","","Amount","","","%","","","Amount","","","%"],["Non-interest-bearing deposits","","$","396,261","","","","21.5","","","$","358,073","","","","19.5","","","$","303,762","","","","19.1"],["NOW accounts","","","512,501","","","","27.8","","","","485,292","","","","26.4","","","","422,083","","","","26.6"],["Savings deposits","","","321,917","","","","17.5","","","","313,048","","","","17.0","","","","255,853","","","","16.1"],["Money market deposit accounts","","","335,838","","","","18.2","","","","350,122","","","","19.1","","","","225,968","","","","14.2"],["Certificates of deposit","","","277,691","","","","15.0","","","","329,616","","","","18.0","","","","381,192","","","","24.0"],["Total","","$","1,844,208","","","","100.0","","","$","1,836,151","","","","100.0","","","$","1,588,858","","","","100.0"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","2022/2021 Change","","","2021/2020 Change"],["","","Amount","","","%","","","Amount","","","%"],["Non-interest-bearing deposits","","$","38,188","","","","10.7","","","$","54,311","","","","17.9"],["NOW accounts","","","27,209","","","","5.6","","","","63,209","","","","15.0"],["Savings deposits","","","8,869","","","","2.8","","","","57,195","","","","22.4"],["Money market deposit accounts","","","(14,284",")","","","(4.1",")","","","124,154","","","","54.9"],["Certificates of deposit","","","(51,925",")","","","(15.8",")","","","(51,576",")","","","(13.5",")"],["Total","","$","8,057","","","","0.4","","","$","247,293","","","","15.6"]] [[/GREPCENT_TABLE]] 2022 Total deposits increased $8.1 million in 2022, or 0.4%. Deposit levels remained consistent during 2022 after significant growth in 2021 that was due to government stimulus funds in response to the COVID-19 pandemic. With the increase in market interest rates, customer are moving funds to obtain additional liquidity and higher rates. We continue to enhance our cash management services to improve our customer services. Brokered certificates of deposit increased $16.0 million as new brokered CDs were issued during 2022. As a percentage of total deposits, non-interest-bearing deposits totaled 21.5% as of the end of 2022, which compares to 19.5% at the end of 2021. The rates paid on certificates of deposit by the Company remain competitive with rates paid by our competition. 2021 Total deposits increased $247.3 million in 2021, or 15.6%. The driver of the increase was government stimulus funds in response to the COVID 19 pandemic, which included individuals, businesses and municipalities and all markets of Company. We continue to enhance our cash management services to improve our customer services and to grow deposits through our current customers. Brokered certificates of deposit decreased $23.8 million as maturing certificates were not replaced in 2021. As a percentage of total deposits, non-interest-bearing deposits totaled 19.5% as of the end of 2021, which compares to 19.1% at the end of 2020. Remaining maturities of certificates of deposit in excess of FDIC insurance limits are as follows for December 31, 2022 (dollars in thousands): [[GREPCENT_TABLE]] [["3 months or less","","$","6,166"],["Over 3 months through 6 months","","","7,602"],["Over 6 months through 12 months","","","18,275"],["Over 12 months","","","22,244"],["Total","","$","54,287"],["As a percent of total certificates of deposit","","","19.55","%"]] [[/GREPCENT_TABLE]] Uninsured deposits as of December 31, 2022 and 2021, are estimated based on regulatory reporting requirements to be $732,173,000 and $742,304,000, respectively. 42 Index Deposits by type of depositor are as follows (dollars in thousands) at December 31: [[GREPCENT_TABLE]] [["","","2022","","","2021","","","2020"],["","","Amount","","","%","","","Amount","","","%","","","Amount","","","%"],["Individuals","","$","921,404","","","","50.0","","","$","938,331","","","","51.1","","","$","865,041","","","","54.4"],["Businesses and other organizations","","","586,531","","","","31.8","","","","534,402","","","","29.1","","","","467,159","","","","29.4"],["State & political subdivisions","","","336,273","","","","18.2","","","","363,418","","","","19.8","","","","256,658","","","","16.2"],["Total","","$","1,844,208","","","","100.0","","","$","1,836,151","","","","100.0","","","$","1,588,858","","","","100.0"]] [[/GREPCENT_TABLE]] Borrowed Funds Borrowed funds increased $183.3 million during 2022 to fund loan growth during the year. Short term borrowings from the FHLB increased $187.1 million and totaled $212.1 million as of December 31, 2022 compared to $25.0 million as of December 31, 2021. Long term borrowings from the FHLB decreased $4.7 million and total $10.0 million. Term loans from the FHLB totaled $10.0 million and $14.7 million as of December 31, 2022 and 2021, respectively. The change in term loans was due to $4.7 million of term loans maturing during 2022. The Company did not issue any long term debt during 2022. In the fourth quarter of 2022, the Company entered into a line of credit with a Pennsylvania community bank for $20.0 million that is unused as of December 31, 2022. Management continually monitors interest rates in order to minimize interest rate risk in future years and as part of this may extend some of the short term borrowings via term notes. The Bank has five interest rate swap agreements outstanding to convert floating-rate debt to fixed rate debt on notional amounts of $15.0 million, $10.0 million and three agreements of $6.0 million. The $15.0 million and $10.0 million were originated on April 1, 2020 and expire on April 1, 2025 and April 1, 2027. The three $6.0 million agreements originated on May 14, 2020 with a two year forward start date and expire on May 14, 2027, 2029 and 2032 The Company has an interest rate swap agreement outstanding that was entered into on April 13, 2020, to convert floating-rate debt to fixed rate debt on a notional amount of $7.5 million. The interest rate swap agreement expires on June 17, 2027.  The interest rate swap instruments involve an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amounts. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The fair value of the interest rate swaps at December 31, 2022 was $ 6,873,000 and is included within fair value of derivative instruments – asset on the consolidated balance sheets. Fair Value of Derivative Instruments - liability The Company holds derivative instruments to hedge interest rate risk and to offer customers longer term fixed rate loans through a program similar to a back to back swap, which results in both a derivative asset and liability on the Consolidated Balance Sheet. (See Note 17 for additional information). As of December 31, 2022 and 2021, the fair value for the derivatives instruments was $9.7 million and $2.1 million, respectively. The change in the fair value of financial instruments was due to rise in market interest rates during 2022. The effective portion of changes in the fair value of the cash flow interest hate hedge derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Other Liabilities Other liabilities increased $2.4 million to $20.8 million during 2022. We entered into and extended several leases during the year, which resulted in the right of use asset for facilities increasing $1.7 million. Employee benefit accruals, including profit sharing increased $477,000. Stockholders’ Equity We evaluate stockholders’ equity in relation to total assets and the risk associated with those assets. The greater our capital resources, the greater the likelihood of meeting our cash obligations and absorbing unforeseen losses.  For these reasons, capital adequacy has been, and will continue to be, of paramount importance.  Due to its importance, we develop a capital plan and stress test capital levels using various techniques and assumptions annually to ensure that in the event of unforeseen circumstances, we would remain in compliance with our capital plan approved by the Board of Directors and regulatory requirement levels. 43 Index Our Board of Directors determines our cash dividend rate after considering our capital requirements, current and projected net income, and other factors. In 2022 and 2021, the Company paid out 26.11% and 25.36% of net income in cash dividends, respectively. As of December 31, 2022, the total number of common shares outstanding was 3,971,209. For comparative purposes, outstanding shares for prior periods were adjusted for the June 2022 stock dividend in computing earnings and cash dividends per share as detailed in Note 1 of the consolidated financial statements. During 2022, we purchased 18,700 shares of treasury stock at a weighted average cost of $68.40 per share. The Company awarded 3,333 shares of restricted stock to employees at a weighted average cost per share of $68.69 under an equity incentive plan. The Board of Directors was awarded 1,800 shares at a cost of $67.53 per share under an incentive plan. Stockholders’ equity decreased 5.8% in 2022 to $200.1 million.  Excluding accumulated other comprehensive income (loss), stockholders’ equity increased $20.6 million, or 9.7%., Net income for 2022 was $29.1 million, offset by net cash dividends of $7,588,000 and net treasury stock activity of $826,000. All of the Company’s debt investment securities are classified as available-for-sale, making this portion of the Company’s balance sheet more sensitive to the changing market value of investments. Accumulated other comprehensive loss decreased $32,986,000 from December 31, 2021, primarily as result of the decrease in the fair market value of the investment portfolio. Total stockholders’ equity was approximately 8.6% of total assets as of December 31, 2022, compared to 9.9% of total assets as of December 31, 2021. LIQUIDITY Liquidity is a measure of the Company’s ability to efficiently meet normal cash flow requirements of both borrowers and depositors. Liquidity is needed to meet depositors’ withdrawal demands, extend credit to meet borrowers’ needs, provide funds for normal operating expenses and cash dividends, and fund future capital expenditures. To maintain proper liquidity, we use funds management policies along with our investment and asset liability policies to assure we can meet our financial obligations to depositors, credit customers and stockholders.  Management monitors liquidity by reviewing loan demand, investment opportunities, deposit pricing and the cost and availability of borrowing funds. Additionally, the bank has established various limits and ratios to monitor liquidity. On a quarterly basis, we stress test our liquidity position to ensure that the Bank has the capability of meeting its cash flow requirements in the event of unforeseen circumstances. The Company’s historical activity in this area can be seen in the Consolidated Statement of Cash Flows from investing and financing activities. Cash generated by operating activities, investing activities and financing activities influences liquidity management. The most important source of funds is the deposits that are primarily core deposits (deposits from customers with other relationships). Short-term debt from the Federal Home Loan Bank supplements the Company’s availability of funds as well as a line of credit arrangement with a corresponding bank.  Other sources of short-term funds include brokered CDs and the sale of loans, if needed. The Company’s use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is detailed. Other significant uses of funds are capital expenditures, purchase of loans and acquisition premiums. Surplus funds are then invested in investment securities. Capital expenditures, including software purchases in 2022 totaled $1,635,000, which included: [[GREPCENT_TABLE]] [["","\u25a0","Branch facility, Ephrata, Pennsylvania totaling $1,011,000"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Branch facility, Greenville, Delaware $73,000"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Signage upgrades and rebranding purchases totaling $71,000"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","ATM upgrades totaling $40,000"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Building security improvements totaling $78,000"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Computers, servers and copier purchases $96,000"]] [[/GREPCENT_TABLE]] Capital expenditures, including software purchases in 2021 totaled $1,105,000, which included: 44 Index [[GREPCENT_TABLE]] [["","\u25a0","Operations building in Wellsboro, Pennsylvania totaling $753,000"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Vehicle purchases totaling $82,000"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","ATM upgrades totaling $124,000"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25a0","Building and ground improvements totaling $96,000"]] [[/GREPCENT_TABLE]] We expect these expenditures will support our initiatives and will create operating efficiencies, while providing quality customer service. In addition to the Bank’s cash balances, the Bank achieves additional liquidity primarily from its investment in the FHLB of Pittsburgh and the resulting borrowing capacity obtained through this investment, investments that mature in less than one year and expected principal repayments from mortgage backed securities.  The Bank has a maximum borrowing capacity at the Federal Home Loan Bank of approximately $871.2 million, inclusive of any outstanding amounts, as a source of liquidity.  The Bank also has two federal funds line with third party providers in the total amount of $34.0 million as of December 31, 2022, which is unsecured and a borrower in custody agreement was established with the FRB in the amount of $1.0 million, which is collateralized by $1.4 million of municipal loans. The Company has a $20.0 million line of credit with a Pennsylvania community bank, which is unutilized as of December 31, 2022. The Company is a separate legal entity from the Bank and must provide for its own liquidity.  In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders.  The Company also has repurchased shares of its common stock.  The Company’s primary source of income is dividends received from the Bank.  The Bank may not declare a dividend without approval of the FRB, unless the dividend to be declared by the Bank’s Board of Directors does not exceed the total of:  (i) the Bank’s net profits for the current year to date, plus (ii) its retained net profits for the preceding two current years, less any required transfers to surplus.  In addition, the Bank can only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed its bad debts.  The FRB, the OCC, the PDB and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions.  The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends, because banks which are not classified as well capitalized or adequately capitalized may not pay dividends and no dividend may be paid which would make the Bank undercapitalized after the dividend.  At December 31, 2022, the Company (unconsolidated basis) had liquid assets of $15.6 million. CONTRACTUAL OBLIGATIONS The Company has various financial obligations, including contractual obligations which may require cash payments. The following table (in thousands) presents as of December 31, 2022, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the obligations can be found in Notes 9, 10 and 18 to the Consolidated Financial Statements. [[GREPCENT_TABLE]] [["Contractual Obligations","","One year or Less","","","One to Three Years","","","Three to Five Years","","","Over Five Years","","","Total"],["Deposits without a stated maturity","","$","1,566,517","","","$","-","","","$","-","","","$","-","","","$","1,566,517"],["Time deposits","","","153,926","","","","82,643","","","","35,356","","","","5,766","","","","277,691"],["FHLB Advances","","","169,110","","","","-","","","","-","","","","-","","","","169,110"],["Term borrowings - FHLB","","","43,000","","","","10,000","","","","-","","","","-","","","","53,000"],["Note Payable","","","-","","","","-","","","","-","","","","7,500","","","","7,500"],["Subordinated Debt","","","-","","","","-","","","","-","","","","10,000","","","","10,000"],["Repurchase agreements","","","17,776","","","","-","","","","-","","","","-","","","","17,776"],["Operating leases","","","847","","","","1,466","","","","1,277","","","","2,354","","","","5,944"],["Total","","$","1,951,176","","","$","94,109","","","$","36,633","","","$","25,620","","","$","2,107,538"]] [[/GREPCENT_TABLE]] OFF-BALANCE SHEET ARRANGEMENTS In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit. For information about our loan commitments, unused lines of credit and letters of credit, see Note 16 of the notes to consolidated financial statements. 45 Index For the year ended December 31, 2022, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows. INTEREST RATE AND MARKET RISK MANAGEMENT The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities. Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, since the Company has no trading portfolio, it is not subject to trading risk. At December 31, 2022, the Company had equity securities that represent only 0.09% of our total assets, and therefore market risk related to equity securities is not significant. The primary factors that make assets interest-sensitive include adjustable-rate features on loans and investments, loan repayments, investment maturities and money market investments. The primary components of interest-sensitive liabilities include maturing certificates of deposit, IRA certificates of deposit, repurchase agreements and short-term borrowings. Savings deposits, NOW accounts and money market investor accounts, with the exception of top interest tier money market and NOW accounts, are considered core deposits and are not short-term interest sensitive and therefore are included in the table below in the over five year column.  Top interest tier money market and NOW accounts are included in the table below in the within three month column. Borrowings subject to swap arrangements are included in the table below based on the swap arrangement maturity. The following table shows the cumulative static gap (at amortized cost) for various time intervals (dollars in thousands): [[GREPCENT_TABLE]] [["Maturity or Re-pricing of Company Assets and Liabilities as of December 31, 2022"],["","","Within Three Months","","","Four to Twelve Months","","","One to Two Years","","","Two to Three Years","","","Three to Five Years","","","Over Five Years","","","Total"],["Interest-earning assets:"],["Interest-bearing deposits at banks","","$","1,397","","","$","2,085","","","$","250","","","$","-","","","$","3,720","","","$","-","","","$","7,452"],["Investment securities","","","24,724","","","","31,141","","","","62,981","","","","58,072","","","","108,856","","","","201,219","","","","486,993"],["Residential mortgage loans","","","35,195","","","","34,287","","","","34,429","","","","28,925","","","","39,802","","","","37,575","","","","210,213"],["Construction loans","","","31,326","","","","24,196","","","","25,169","","","","-","","","","-","","","","-","","","","80,691"],["Commercial and farm loans","","","220,874","","","","205,114","","","","177,534","","","","222,950","","","","374,199","","","","87,566","","","","1,288,237"],["Loans to state & political subdivisions","","","7,628","","","","3,900","","","","5,059","","","","4,831","","","","14,404","","","","23,386","","","","59,208"],["Other loans","","","66,460","","","","4,299","","","","4,468","","","","3,216","","","","3,835","","","","4,372","","","","86,650"],["Total interest-earning assets","","$","387,604","","","$","305,022","","","$","309,890","","","$","317,994","","","$","544,816","","","$","354,118","","","$","2,219,444"],["Interest-bearing liabilities:"],["NOW accounts","","$","338,542","","","$","-","","","$","-","","","$","-","","","$","-","","","$","173,959","","","$","512,501"],["Savings accounts","","","-","","","","-","","","","-","","","","-","","","","-","","","","321,917","","","","321,917"],["Money Market accounts","","","309,211","","","","-","","","","-","","","","-","","","","-","","","","26,627","","","","335,838"],["Certificates of deposit","","","43,299","","","","110,627","","","","50,951","","","","31,692","","","","35,356","","","","5,766","","","","277,691"],["Long-term borrowing","","","186,886","","","","-","","","","10,000","","","","15,000","","","","33,392","","","","12,000","","","","257,278"],["Total interest-bearing liabilities","","$","877,938","","","$","110,627","","","$","60,951","","","$","46,692","","","$","68,748","","","$","540,269","","","$","1,705,225"],["Excess interest-earning assets (liabilities)","","$","(490,334",")","","$","194,395","","","$","248,939","","","$","271,302","","","$","476,068","","","$","(186,151",")"],["Cumulative interest-earning assets","","$","387,604","","","$","692,626","","","$","1,002,516","","","$","1,320,510","","","$","1,865,326","","","$","2,219,444"],["Cumulative interest-bearing liabilities","","","877,938","","","","988,565","","","","1,049,516","","","","1,096,208","","","","1,164,956","","","","1,705,225"],["Cumulative gap","","$","(490,334",")","","$","(295,939",")","","$","(47,000",")","","$","224,302","","","$","700,370","","","$","514,219"],["Cumulative interest rate sensitivity ratio (1)","","","0.44","","","","0.70","","","","0.96","","","","1.20","","","","1.60","","","","1.30"]] [[/GREPCENT_TABLE]] The previous table and the simulation models discussed below are presented assuming money market investment accounts and NOW accounts in the top interest rate tier are re-priced within the first three months. The loan amounts reflect the principal balances expected to be re-priced as a result of contractual amortization and anticipated early payoffs. 46 Index Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on the Bank’s net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competition and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis. The Bank currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management and asset liability management processes that we believe will effectively identify, measure, and monitor the Bank’s risk exposure.  In this analysis, the Bank examines the results of movements in interest rates with additional assumptions made concerning the timing of interest rate changes, prepayment speeds on mortgage loans and mortgage securities and deposit pricing movements.   Shock scenarios, which assume a parallel shift in interest rates and is instantaneous, typically have the greatest impact on net interest income. The following is a rate shock analysis and the impact on net interest income as of December 31, 2022 (dollars in thousands): [[GREPCENT_TABLE]] [["Changes in Rates","","Prospective One-Year Net Interest Income","","","Change In Prospective Net Interest Income","","","% Change In Prospective Net Interest Income"],["-400 Shock","","$","75,244","","","$","(2,002",")","","","-2.59","%"],["-300 Shock","","","76,146","","","","(1,100",")","","","-1.42","%"],["-200 Shock","","","77,035","","","","(211",")","","","-0.27","%"],["-100 Shock","","","77,559","","","","313","","","","0.41","%"],["Base","","","77,246","","","","-","","","","-"],["+100 Shock","","","75,649","","","","(1,597",")","","","-2.07","%"],["+200 Shock","","","73,838","","","","(3,408",")","","","-4.41","%"],["+300 Shock","","","72,281","","","","(4,965",")","","","-6.43","%"],["+400 Shock","","","70,704","","","","(6,542",")","","","-8.47","%"]] [[/GREPCENT_TABLE]] The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage backed securities, call activity of other investment securities, and deposit selection, re-pricing and maturity structure.  Because of these assumptions, actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change on net interest income. Additionally, the changes 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. The projections above utilize a static balance sheet and do not include any changes that may result from the growth of the Bank. Management has developed policy limits for acceptable changes in net interest income for multiple scenarios, including shock scenarios. As of December 31, 2022, changes in net interest income projected for all scenarios, including the shock scenarios noted above are in line with Bank policy limits for interest rate risk. CRITICAL ACCOUNTING POLICIES; CRITICAL ACCOUNTING ESTIMATES The Company’s accounting policies are integral to understanding the results reported.  The accounting policies are described in detail in Note 1 of the consolidated financial statements.  Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies.  We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period.   In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.  The following is a brief description of our current accounting policies involving significant management valuation judgments and critical accounting estimates. Other than Temporary Impairment All securities are evaluated periodically to determine whether a decline in their value is other than temporary and is a matter of judgment.  For debt securities, management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in fair value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income (loss), net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. 47 Index Allowance for Loan Losses Arriving at an adequate level of allowance for loan losses involves a high degree of judgment.  The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen.  This evaluation is inherently subjective as it requires significant estimates that may be susceptible to significant change, subjecting the Bank to volatility of earnings.  The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off.  For a full discussion of the Company’s methodology of assessing the adequacy of the allowance for loan losses, refer to Note 1 of the consolidated financial statements. Goodwill and Other Intangible Assets As discussed in Note 1 of the consolidated financial statements, the Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company performed a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Based on the fair value of the reporting unit, no impairment of goodwill was recognized in 2022, 2021 or 2020. Pension Benefits Pension costs and liabilities are dependent on assumptions used in calculating such amounts.  These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors.  In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods.  While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense.  Our pension benefits are described further in Note 11 of the “Notes to Consolidated Financial Statements.” Deferred Tax Assets We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. Management also evaluates deferred tax assets to determine if it is more likely than not that the deferred tax benefit will be utilized in future periods.  If not, a valuation allowance is recorded.  Our deferred tax assets are described further in Note 12 of the consolidated financial statements. Business Combinations Business combinations are accounted for by applying the acquisition method. As of acquisition date, the identifiable assets acquired and liabilities assumed are measured at fair value and recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statement of income from the date of acquisition. The calculation of intangible assets including core deposits and the fair value of loans are based on significant judgements. Core deposits intangibles are calculated using a discounted cash flow model based on various factors including discount rate, attrition rate, interest rate, cost of alternative funds and net maintenance costs. Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment. 48 Index