In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) ~~2016-13,~~ 2016-13,Financial Instruments – Credit Losses (Topic ~~326)~~326) Measurement of Credit Losses on Financial Instruments (CECL). The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown.

In November 2018, the FASB issued ASU ~~2018-19,~~ 2018-19,Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. In April 2019, the FASB issued ASU ~~2019-04,~~ 2019-04,Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. As it relates to CECL, this guidance amends certain provisions contained in ASU ~~2016-13,~~2016-13, particularly in regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses.

The amendments in this update are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 for public companies. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption (modified-retrospective approach). Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company to record loan losses more rapidly. On October 16, 2019, the FASB decided to move forward with finalizing its proposal to defer the effective date for ASU ~~2016-13~~2016-13 for smaller reporting companies to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Since the Company currently meets the SEC definition of a smaller reporting company, the delay will be applicable to the Company. The Company has engaged the services of a qualified ~~third-party~~third-party service provider to assist management in estimating credit allowances under this ~~standard and is currently evaluating~~standard. Starting in the ~~impact~~3^rd quarter of ~~ASU 2016-13 on~~2022, the Company ran its ~~consolidated financial statements. The~~CECL model parallel to the current allowance for loan losses calculation ~~is expected to be run side-by-side with the CECL model in the 2~~^nd~~, 3~~^rd~~and 4~~^th ~~quarters of 2022~~ to gain a better understanding of the effects of the change. The Company expects a change in the allowance for loan losses upon adoption of CECL at January 1, 2023 and the magnitude of the change will depend on the composition, characteristics and quality of its loan and lease portfolio, as well as economic conditions and forecasts at the time of adoption. The Company continues to work on the process of finalizing the review of the most recent model run and of finalizing certain assumptions, including qualitative adjustments and economic forecasts, which have resulted in adjustments to previous estimates. In the 3^rd quarter of 2022, the Company engaged a third-party service provider to run a model validation, which will commence in the 4^th quarter of 2022 and conclude in the 1^st quarter of 2023. The Company has also run a CECL analysis on its held-to-maturity investment securities as of September 30, 2022 and the estimated CECL reserve is immaterial.

In March 2022, the FASB issued ASU ~~2022-02,~~ 2022-02,Financial Instruments-Credit Losses (Topic ~~326)~~326) Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for TDRs by creditors in Subtopic ~~310-40,~~ 310-40,Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in this update also require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic ~~326-20,~~ 326-20,Financial Instruments-Credit Losses-Measured at Amortized Cost. The amendments in this update are effective for the Company upon adoption of ASU ~~2016-13.~~2016-13. The amendments in this update should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, the Company has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

In March 2020, the FASB issued ASU ~~2020-04,~~ 2020-04,Reference Rate Reform (Topic ~~848)~~ 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in this update are elective and apply to all entities that have contracts that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. An optional expedient simplifies accounting for contract modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. The amendments in ASU ~~2020-04~~2020-04 are effective as of March 12, 2020 through December 31, 2022. The Company expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU ~~2020-04.~~2020-04. As of ~~March 31,~~September 30, 2022, the Company had ~~approximately $43~~approximately $46 million in ~~loans~~loans with rates tied to LIBOR. The Company is working on modifying each of these ~~contracts to have all modifications completed by December 31, 2022.~~existing contracts.

The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated:

Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

The municipal securities are general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

The amortized cost and fair value of investment securities at ~~March 31,~~September 30, 2022 and December 31, 2021 are summarized as follows:

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Gross
Gross
Amortized
unrealized
unrealized
Fair
(dollars in thousands)
cost
gains
losses
value
December 31, 2021
Available-for-sale debt securities:
Agency - GSE
$
119,399
$
204
$
(2,600)
$
117,003
Obligations of states and political subdivisions
360,680
6,708
(2,678)
364,710
MBS - GSE residential
258,674
1,654
(3,061)
257,267
Total available-for-sale debt securities
$
738,753
$
8,566
$
(8,339)
$
738,980

The amortized cost and fair value of debt securities at ~~March 31,~~September 30, 2022 by contractual maturity are summarized below:

Amortized
Fair
(dollars in thousands)
cost
value
Available-for-sale securities:
Debt securities:
Due in one year or less
$
6,134
$
6,155
Due after one year through five years
16,210
15,783
Due after five years through ten years
119,144
109,081
Due after ten years
347,335
321,836
MBS - GSE residential
276,553
258,728
Total available-for-sale debt securities
$
765,376
$
711,583

	Amortized		Fair
(dollars in thousands)	cost		value
Held-to-maturity securities:
Due in one year or less	$	-	$	-
Due after one year through five years		4,698		4,302
Due after five years through ten years		66,667		58,901
Due after ten years		151,009		119,037
Total held-to-maturity securities	$	222,374	$	182,240

Available-for-sale securities:
Debt securities:
Due in one year or less	$	2,999	$	2,982
Due after one year through five years		18,773		17,087
Due after five years through ten years		44,734		37,101
Due after ten years		169,078		138,768

MBS - GSE residential		259,209		217,475
Total available-for-sale debt securities	$	494,793	$	413,413

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of ~~March 31,~~September 30, 2022 and December 31, ~~2021:~~2021:

	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	value		losses			value		losses			value		losses

September 30, 2022
Agency - GSE	$	29,095	$	(2,933	)	$	72,706	$	(11,355	)	$	101,801	$	(14,288	)
Obligations of states and political subdivisions		178,491		(40,043	)		91,109		(25,773	)		269,600		(65,816	)
MBS - GSE residential		100,151		(15,013	)		117,324		(26,721	)		217,475		(41,734	)
Total	$	307,737	$	(57,989	)	$	281,139	$	(63,849	)	$	588,876	$	(121,838	)
Number of securities		320					163					483

December 31, 2021
Agency - GSE	$	84,308	$	(1,460	)	$	26,516	$	(1,140	)	$	110,824	$	(2,600	)
Obligations of states and political subdivisions		193,124		(2,662	)		12,796		(399	)		205,920		(3,061	)
MBS - GSE residential		137,495		(2,351	)		9,469		(327	)		146,964		(2,678	)
Total	$	414,927	$	(6,473	)	$	48,781	$	(1,866	)	$	463,708	$	(8,339	)
Number of securities		187					26					213

Less than 12 months
More than 12 months
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(dollars in thousands)
value
losses
value
losses
value
losses
March 31, 2022
Agency - GSE
$
64,808
$
(5,309)
$
43,387
$
(4,652)
$
108,195
$
(9,961)
Obligations of states and political subdivisions
257,752
(23,838)
29,713
(3,660)
287,465
(27,498)
MBS - GSE residential
219,792
(14,985)
28,377
(2,956)
248,169
(17,941)
Total
$
542,352
$
(44,132)
$
101,477
$
(11,268)
$
643,829
$
(55,400)
Number of securities
341
54
395
December 31, 2021
Agency - GSE
$
84,308
$
(1,460)
$
26,516
$
(1,140)
$
110,824
$
(2,600)
Obligations of states and political subdivisions
193,124
(2,662)
12,796
(399)
205,920
(3,061)
MBS - GSE residential
137,495
(2,351)
9,469
(327)
146,964
(2,678)
Total
$
414,927
$
(6,473)
$
48,781
$
(1,866)
$
463,708
$
(8,339)
Number of securities
187
26
213

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The Company had ~~395~~483 debt securities in an unrealized loss position at ~~March 31,~~September 30, 2022, including 4651 agency-GSE securities, ~~122~~143 MBS – GSE residential securities and ~~227~~289 municipal securities. The severity of these unrealized losses based on their underlying cost basis

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was as follows at ~~March 31, 2022: 8.43%~~September 30, 2022: 12.31% for agency - GSE, ~~6.74%~~16.10% for total MBS-GSE residential; and ~~8.73%~~19.62% for municipals. ~~NaN~~163 of these securities had been in an unrealized loss position in excess of 12 months. Management has no intent to sell any securities in an unrealized loss position as of ~~March 31, 2022.~~September 30, 2022.

During the second quarter of 2022, the Company transferred investment securities with a book value of $245.5 million from available-for-sale to held-to-maturity. The accounting for securities held-to-maturity on this transfer will mitigate the effect on the other comprehensive income (OCI) component of stockholders’ equity from the price risk of rising interest rates which will result in further future unrealized losses in the available-for-sale portfolio.

Management believes the cause of the unrealized losses is related to changes in interest rates and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: ~~(1)~~(1) the entity has the intent to sell the security; ~~(2)~~(2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or ~~(3)~~(3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in OCI. Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt securities.

For all debt securities, as of ~~March 31,~~September 30, 2022, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.

5. Loans and leases

The classifications of loans and leases at ~~March 31,~~September 30, 2022 and December 31, 2021 are summarized as follows:



(dollars in thousands)	March 31, 2022		December 31, 2021		*September 30, 2022*			December 31, 2021
Commercial and industrial	$	252,963	$	236,304	$	221,911		$	236,304
Commercial real estate:
Non-owner occupied		310,663		312,848		315,323			312,848
Owner occupied		250,578		248,755		256,053			248,755
Construction		22,779		21,147		26,015			21,147
Consumer:
Home equity installment		47,852		47,571		56,814			47,571
Home equity line of credit		55,340		54,878		53,632			54,878
Auto loans		119,082		118,029		132,802			118,029
Direct finance leases		27,138		26,232		32,526			26,232
Other		8,307		8,013		7,733			8,013
Residential:
Real estate		343,360		325,861		384,493			325,861
Construction		36,247		34,919		37,433			34,919
Total		1,474,309		1,434,557		1,524,735			1,434,557
Less:
Allowance for loan losses		(16,081)		(15,624)		(16,779	)		(15,624	)
Unearned lease revenue		(1,431)		(1,429)		(1,793	)		(1,429	)
Loans and leases, net	$	1,456,797	$	1,417,504	$	1,506,163		$	1,417,504

As of ~~March 31,~~September 30, 2022, total loans of $1.5 billion were reflected ~~combined with~~including deferred loan costs of ~~$3.6~~$4.5 million, ~~including $0.6~~comprised of $4.6 million in deferred loan costs partially offset by $0.1 million in deferred fee income from Paycheck Protection Program (PPP) ~~loans and $4.2 million in deferred loan costs.~~loans. As of December 31, 2021, total loans of $1.4 billion were reflected ~~combined with~~including deferred loan costs of $3.0 million, ~~including~~comprised of $4.2 million in deferred loan costs partially offset by $1.2

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million in deferred fee income from PPP ~~loans and $4.2 million in deferred loan costs.~~loans.

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Commercial and industrial (C&I) loan balances were ~~$253.0~~$221.9 million at ~~March 31,~~September 30, 2022 and $236.3 million at December 31, 2021. ~~As of March 31, 2022,~~The decrease was due to the ~~commercial and industrial loan balance included $21.8 million~~decrease in PPP loans (net of deferred fees) ~~compared~~which declined by $38.1 million to ~~$39.9~~$1.8 million asat September 30, 2022 due to standard forgiveness under the SBA program. As of ~~December 31, 2021. Excluding PPP loans,~~September 30, 2022, the Company increased the balance of C&I loans ~~at March 31, 2022 increased $34.8~~by $23.6 million (excluding PPP loans) primarily from several large C&I loans originated during ~~the first quarter of~~ 2022.

Direct finance leases include the lease receivable and the guaranteed lease residual. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced for others amounted to ~~$449.9~~$465.5 million as of ~~March 31,~~September 30, 2022 and $430.9 million as of December 31, 2021. Mortgage servicing rights amounted to ~~$1.8~~$1.7 million ~~and $1.7 million~~both as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Paycheck Protection Program Loans

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over ~~$2.0~~$2.0 trillion in emergency economic relief to individuals and businesses impacted by the ~~COVID-19~~COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new ~~7(a)~~7(a) loan program called the Paycheck Protection Program (PPP).

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The SBA guaranteed 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted, extending the authority to make PPP loans through May 31, 2021, revising certain PPP requirements, and permitting second draw PPP loans. On March 11, 2021, the American Rescue Plan Act of 2021 (American Rescue Plan Act) was enacted expanding eligibility for first and second draw PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness.

Acquired loans

Acquired loans are marked to fair value on the date of acquisition. For detailed information on calculating the fair value of acquired loans, see Footnote 9, “Acquisition.”

The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no longer expected to be collected.

The Company reported fair value adjustments regarding the acquired MNB and Landmark loan portfolios. Therefore, the Company did not record an allowance on the acquired non-purchased credit impaired loans. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the calculation of the allowance for loan losses after the initial valuation and provide reserves accordingly.

Upon acquisition, in accordance with U.S. GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC ~~310-30~~310-30 deemed as purchased credit impaired (PCI). As part of this process, the Company’s senior management and other relevant individuals reviewed the seller’s loan portfolio on a loan-by-loan basis to determine if any loans met the ~~two-part~~two-part definition of an impaired loan as defined by ASC ~~310-30: 1)~~310-30:1) Credit deterioration on the loan from its inception until the acquisition date, and 2)2) It is probable that not all contractual cash flows will be collected on the loan.

With regards to ASC ~~310-30~~310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value result in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the

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loan's acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.

Over the life of the acquired ASC ~~310-30~~310-30 loan, the Company continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized after acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life.

Acquired ASC ~~310-30~~310-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent if the Company can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Company does not consider acquired contractually delinquent loans to be non-accruing and continues to recognize accretable yield on these loans which is recognized as interest income on a level yield method over the life of the loan.

Acquired ASC ~~310-20~~310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Company used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, and environment factors to estimate the expected cash flow for each loan pool.

Within the ASC ~~310-20~~310-20 loans, the Company identified certain loans that have higher risk. Although performing at the time of acquisition and likely will continue making payments in accordance with contractual terms, management elected a higher credit adjustment on these loans to reflect the greater inherent risk that the borrower will default on payments. Risk factors used to identify these loans included: loans that received ~~COVID-19~~COVID-19 related forbearance consistent with the regulatory guidance, loans that were in industries determined to be at greater risk to economic disruption due to ~~COVID-19,~~COVID-19, loans that had a prior history of delinquency greater than 60 days at any point in the lifetime of the loan; loans with a Special Mention or Substandard risk rating; and/or loans borrowers in the Gasoline Station industry due to the environmental risk potential of these loans.

The following table provides changes in accretable yield for all acquired loans accounted for under ASC ~~310-30.~~310-30. Loans accounted for under ASC ~~310-20~~310-20 are not included in this table.



	For the three months ended March 31,				For the nine months ended September 30,
(dollars in thousands)	2022		2021		*2022*			2021
Balance at beginning of period	$	1,088	$	563	$	1,088		$	563
Accretable yield on acquired loans		-		-		-			589
Reclassification from non-accretable difference		15		13		543			197
Reclassification to loan balance due to charge-off						(3	)		-
Accretion of accretable yield		(178)		(103)		(335	)		(350	)
Balance at end of period	$	925	$	473	$	1,293		$	999

The above table excludes the $269 thousand in non-accretable yield accreted to interest income for the ~~three~~nine months ended ~~March 31, 2021.~~September 30, 2021.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, management performed an analysis of all loans acquired from mergers, consistent with and applicable to ASC ~~310-30~~310-30 (Purchased Credit Impaired loans – PCI). ~~NaN loans had actual payments exceed estimates resulting in a $15~~During this period, the accretable yield increased $205 thousand from $1,088 thousand to $1,293 thousand due to $540 thousand reclassification from non-accretable discount to accretable ~~discount. During the three months ended March 31, 2021, 2~~discount resulting from five loans that had actual payments exceed estimates ~~resulting~~and one loan that had a positive change in ~~a $13~~collateral value, which was offset by yield accretion of $335 thousand.

During the nine months ended September 30, 2021, the accretable yield increased $436 thousand from $563 thousand to $999 thousand due to $589 thousand of accretable yield from the Landmark acquisition and $197 thousand reclassification from non-accretable discount to accretable ~~discount.~~discount resulting from two loans with actual payments exceeding estimates and three loans that had a positive change in collateral value, which was offset by accretion of $350 thousand.

Expected cash flows on acquired loans are estimated quarterly by incorporating several key assumptions. These key assumptions include probability of default and the number of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured.

‎

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Non-accrual loans

Non-accrual loans, segregated by class, at ~~March 31,~~September 30, 2022 and December 31, 2021, were as follows:



(dollars in thousands)	March 31, 2022		December 31, 2021		*September 30, 2022*		December 31, 2021
Commercial and industrial	$	49	$	154	$	628	$	154
Commercial real estate:
Non-owner occupied		478		478		732		478
Owner occupied		1,300		1,570		1,303		1,570
Consumer:
Home equity installment		-		-		-		-
Home equity line of credit		171		97		119		97
Auto loans		172		78		201		78
Residential:
Real estate		137		572		37		572
Total	$	2,307	$	2,949	$	3,020	$	2,949

The table above excludes ~~$4.6~~$4.7 million and $4.7 million in purchased credit impaired loans, net of unamortized fair value adjustments as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 90 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

Troubled Debt Restructuring (TDR)

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company typically considers the following concessions when modifying a loan, which may include lowering interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when granting a TDR modification.

There were no loans modified in a TDR for the three and nine months ended ~~March 31,~~September 30, 2022 and ~~2021.~~2021. Of the TDRs outstanding as of ~~March 31,~~September 30, 2022 and 2021, when modified, the concessions granted consisted of temporary interest-only payments, extensions of maturity date, or a reduction in the rate of interest to a below-market rate for a contractual period of time. Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms.

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. There were 0no loans modified as a TDR within the previous twelve months that subsequently defaulted (i.e. 90 days or more past due following a modification) during the three and nine months ended ~~March 31,~~September 30, 2022 and ~~2021.~~2021.

The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance.

As of ~~March 31,~~September 30, 2022 and 2021, the balance of outstanding TDRs was $1.7 million and $3.1 million, respectively. As of ~~March 31,~~September 30, 2022 and 2021, the allowance for impaired loans that have been modified in a TDR was ~~$0.1 million~~$49 thousand and $0.7 million, respectively.

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Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date. For loans reported ~~30-59~~30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears for two payments or billing cycles. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
September 30, 2022	past due		past due		or more (1)		past due		Current		loans (3)			and accruing

Commercial and industrial	$	132	$	2	$	628	$	762	$	221,149	$	221,911		$	-
Commercial real estate:
Non-owner occupied		-		-		732		732		314,591		315,323			-
Owner occupied		-		-		1,303		1,303		254,750		256,053			-
Construction		-		-		-		-		26,015		26,015			-
Consumer:
Home equity installment		232		-		-		232		56,582		56,814			-
Home equity line of credit		51		-		119		170		53,462		53,632			-
Auto loans		243		24		251		518		132,284		132,802			50
Direct finance leases		92		37		-		129		30,604		30,733	*(2)*		-
Other		32		7		-		39		7,694		7,733			-
Residential:
Real estate		-		-		37		37		384,456		384,493			-
Construction		-		-		-		-		37,433		37,433			-
Total	$	782	$	70	$	3,070	$	3,922	$	1,519,020	$	1,522,942		$	50

⁽¹⁾

Recorded
Past due
investment past
30 - 59 Days
60 - 89 Days
90 days
Total
Total
due ≥ 90 days
March 31, 2022
past due
past due
or more ⁽¹⁾
past due
Current
loans ⁽³⁾
and accruing
Commercial and industrial
$
773
$
-
$
49
$
822
$
252,141
$
252,963
$
-
Commercial real estate:
Non-owner occupied
-
-
478
478
310,185
310,663
-
Owner occupied
-
82
1,443
1,525
249,053
250,578
143
Construction
-
-
-
-
22,779
22,779
-
Consumer:
Home equity installment
58
-
-
58
47,794
47,852
-
Home equity line of credit
-
-
171
171
55,169
55,340
-
Auto loans
339
85
172
596
118,486
119,082
-
Direct finance leases
149
-
31
180
25,527
25,707
⁽²⁾
31
Other
26
-
-
26
8,281
8,307
-
Residential:
Real estate
-
-
137
137
343,223
343,360
-
Construction
-
-
-
-
36,247
36,247
-
Total
$
1,345
$
167
$
2,481
$
3,993
$
1,468,885
$
1,472,878
$
174

⁽¹⁾ Includes non-accrual loans. ⁽²⁾⁽²⁾ Net of unearned lease revenue of $1.8 million. ⁽³⁾ Includes net deferred loan costs of $4.5 million.

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2021	past due		past due		or more (1)		past due		Current		loans ⁽³⁾			and accruing

Commercial and industrial	$	-	$	4	$	154	$	158	$	236,146	$	236,304		$	-
Commercial real estate:
Non-owner occupied		-		675		478		1,153		311,695		312,848			-
Owner occupied		-		-		1,570		1,570		247,185		248,755			-
Construction		-		-		-		-		21,147		21,147			-
Consumer:
Home equity installment		87		32		-		119		47,452		47,571			-
Home equity line of credit		-		-		97		97		54,781		54,878			-
Auto loans		410		45		78		533		117,496		118,029			-
Direct finance leases		173		38		64		275		24,528		24,803	⁽²⁾		64
Other		49		17		-		66		7,947		8,013			-
Residential:
Real estate		-		452		572		1,024		324,837		325,861			-
Construction		-		-		-		-		34,919		34,919			-
Total	$	719	$	1,263	$	3,013	$	4,995	$	1,428,133	$	1,433,128		$	64

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of $1.4 million. ⁽³⁾⁽³⁾ ~~Includes net deferred loan costs of $3.6 million.~~

Recorded
Past due
investment past
30 - 59 Days
60 - 89 Days
90 days
Total
Total
due ≥ 90 days
December 31, 2021
past due
past due
or more ⁽¹⁾
past due
Current
loans ⁽³⁾
and accruing
Commercial and industrial
$
-
$
4
$
154
$
158
$
236,146
$
236,304
$
-
Commercial real estate:
Non-owner occupied
-
675
478
1,153
311,695
312,848
-
Owner occupied
-
-
1,570
1,570
247,185
248,755
-
Construction
-
-
-
-
21,147
21,147
-
Consumer:
Home equity installment
87
32
-
119
47,452
47,571
-
Home equity line of credit
-
-
97
97
54,781
54,878
-
Auto loans
410
45
78
533
117,496
118,029
-
Direct finance leases
173
38
64
275
24,528
24,803
⁽²⁾
64
Other
49
17
-
66
7,947
8,013
-
Residential:
Real estate
-
452
572
1,024
324,837
325,861
-
Construction
-
-
-
-
34,919
34,919
-
Total
$
719
$
1,263
$
3,013
$
4,995
$
1,428,133
$
1,433,128
$
64

⁽¹⁾ ~~Includes non-accrual loans.~~ ⁽²⁾ ~~Net of unearned lease revenue of $1.4 million.~~ ⁽³⁾ Includes net deferred loan costs of $3.0 million.

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Table Ofof Contents

Impaired loans

Impaired loans, segregated by class, as of the period indicated are detailed below:

Recorded
Recorded
Unpaid
investment
investment
Total
principal
with
with no
recorded
Related
(dollars in thousands)
balance
allowance
allowance
investment
allowance
March 31, 2022
Commercial and industrial
$
49
$
49
$
-
$
49
$
49
Commercial real estate:
Non-owner occupied
866
73
793
866
1
Owner occupied
2,904
1,361
922
2,283
551
Consumer:
Home equity installment
33
-
-
-
-
Home equity line of credit
210
20
151
171
4
Auto loans
232
20
152
172
5
Residential:
Real estate
184
-
137
137
-
Total
$
4,478
$
1,523
$
2,155
$
3,678
$
610

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
September 30, 2022
Commercial and industrial	$	861	$	18	$	610	$	628	$	18
Commercial real estate:
Non-owner occupied		1,114		322		792		1,114		97
Owner occupied		2,887		1,691		577		2,268		362
Consumer:										-
Home equity installment		33		-		-		-		-
Home equity line of credit		162		29		90		119		-
Auto loans		239		95		106		201		25
Residential:
Real estate		84		-		37		37		-
Total	$	5,380	$	2,155	$	2,212	$	4,367	$	502

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2021
Commercial and industrial	$	218	$	18	$	136	$	154	$	18
Commercial real estate:
Non-owner occupied		2,470		1,674		796		2,470		474
Owner occupied		3,185		1,802		762		2,564		763
Consumer:
Home equity installment		33		-		-		-		-
Home equity line of credit		137		-		97		97		-
Auto loans		98		10		68		78		4
Residential:
Real estate		699		-		572		572		-
Total	$	6,840	$	3,504	$	2,431	$	5,935	$	1,259

At ~~March 31,~~September 30, 2022, impaired loans totaled ~~$3.7~~$4.4 million consisting of $1.4 million in accruing TDRs and ~~$2.3~~$3.0 million in non-accrual loans. At December 31, 2021, impaired loans totaled $5.9 million consisting of $3.0 million in accruing TDRs and $2.9 million in non-accrual loans. As of ~~March 31,~~September 30, 2022, the non-accrual loans included 1one TDR totaling $0.4 million compared with 3three TDRs to 2two unrelated borrowers totaling $0.6 million as of December 31, ~~2021.~~2021.

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

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Table Ofof Contents

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.


													For the nine months ended
	March 31, 2022						March 31, 2021						*September 30, 2022*						September 30, 2021
					Cash basis						Cash basis						Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest		Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income		recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	272	$	-	$	-	$	438	$	-	$	-	$	376	$	-	$	-	$	433	$	3	$	-
Commercial real estate:
Non-owner occupied		2,302		46		-		2,318		22		-		1,630		57		-		2,838		133		-
Owner occupied		2,001		27		-		1,853		4		-		2,175		78		-		1,711		27		-
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Consumer:
Home equity installment		16		-		-		46		4		-		5		-		-		35		4		-
Home equity line of credit		157		-		-		366		4		-		130		7		-		268		20		-
Auto loans		70		1		-		51		-		-		141		4		-		30		-		-
Direct finance leases		-		-		-		-		-		-		-		-		-		-		-		-
Other		-		-		-		-		-		-		-		-		-		-		-		-
Residential:
Real estate		564		25		-		761		-		-		297		39		-		717		-		-
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	5,382	$	99	$	-	$	5,833	$	34	$	-	$	4,754	$	185	$	-	$	6,032	$	187	$	-

Average recorded investment refers to the five quarter average of impaired loans preceding the reporting period.

	For the three months ended
	*September 30, 2022*						September 30, 2021
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	709	$	-	$	-	$	325	$	-	$	-
Commercial real estate:
Non-owner occupied		1,108		5		-		2,676		73		-
Owner occupied		2,262		24		-		1,555		7		-
Construction		-		-		-		-		-		-
Consumer:
Home equity installment		-		-		-		27		-		-
Home equity line of credit		143		7		-		114		-		-
Auto loans		203		2		-		44		-		-
Direct finance leases		-		-				-		-		-
Other		-		-		-		-		-		-
Residential:
Real estate		40		-		-		699		-		-
Construction		-		-		-		-		-		-
Total	$	4,465	$	38	$	-	$	5,440	$	80	$	-

Average recorded investment refers to the two quarter average of impaired loans preceding the reporting period.

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.

The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:

~~Pass~~

Pass

Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements.

~~Substandard~~

Substandard

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard.

Table of Contents

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot

~~Table Of Contents~~

be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is considered to be uncollectible and charged-off.

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity and history in assessing performance. Non-performing loans are comprised of non-accrual loans and loans past due 90 days or more and accruing. All loans not classified as non-performing are considered performing.

The following table presents loans including ~~$3.6~~$4.5 million and $3.0 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively:

Commercial credit exposure

Credit risk profile by creditworthiness category

March 31, 2022
(dollars in thousands)
Pass
Special mention
Substandard
Doubtful
Total
Commercial and industrial
$
250,718
$
329
$
1,916
$
-
$
252,963
Commercial real estate - non-owner occupied
290,314
16,257
4,092
-
310,663
Commercial real estate - owner occupied
234,123
6,579
9,876
-
250,578
Commercial real estate - construction
22,779
-
-
-
22,779
Total commercial
$
797,934
$
23,165
$
15,884
$
-
$
836,983

	*September 30, 2022*
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	219,371	$	78	$	2,462	$	-	$	221,911
Commercial real estate - non-owner occupied		297,017		9,564		8,742		-		315,323
Commercial real estate - owner occupied		241,752		1,153		13,148		-		256,053
Commercial real estate - construction		26,015		-		-		-		26,015
Total commercial	$	784,155	$	10,795	$	24,352	$	-	$	819,302

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	*September 30, 2022*
(dollars in thousands)		Performing		Non-performing		Total
Consumer
Home equity installment	$	56,814	$	-	$	56,814
Home equity line of credit		53,513		119		53,632
Auto loans		132,551		251		132,802
Direct finance leases ⁽¹⁾		30,733		-		30,733
Other		7,733		-		7,733
Total consumer		281,344		370		281,714
Residential
Real estate		384,456		37		384,493
Construction		37,433		-		37,433
Total residential		421,889		37		421,926
Total consumer & residential	$	703,233	$	407	$	703,640

⁽¹⁾Net of unearned lease revenue of $1.8 million.

Commercial credit exposure

Credit risk profile by creditworthiness category

	December 31, 2021
(dollars in thousands)		Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	233,565	$	339	$	2,400	$	-	$	236,304
Commercial real estate - non-owner occupied		289,679		16,614		6,555		-		312,848
Commercial real estate - owner occupied		230,146		7,089		11,520		-		248,755
Commercial real estate - construction		21,147		-		-		-		21,147
Total commercial	$	774,537	$	24,042	$	20,475	$	-	$	819,054

March 31, 2022
(dollars in thousands)
Performing
Non-performing
Total
Consumer
Home equity installment
$
47,852
$
-
$
47,852
Home equity line of credit
55,169
171
55,340
Auto loans
118,910
172
119,082
Direct finance leases ⁽¹⁾
25,676
31
25,707
Other
8,307
-
8,307
Total consumer
255,914
374
256,288
Residential
Real estate
343,223
137
343,360
Construction
36,247
-
36,247
Total residential
379,470
137
379,607
Total consumer & residential
$
635,384
$
511
$
635,895
22

Table of Contents

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	December 31, 2021
(dollars in thousands)	Performing		Non-performing		Total

Consumer
Home equity installment	$	47,571	$	-	$	47,571
Home equity line of credit		54,781		97		54,878
Auto loans		117,951		78		118,029
Direct finance leases ⁽²⁾		24,739		64		24,803
Other		8,013		-		8,013
Total consumer		253,055		239		253,294
Residential
Real estate		325,289		572		325,861
Construction		34,919		-		34,919
Total residential		360,208		572		360,780
Total consumer & residential	$	613,263	$	811	$	614,074

⁽¹⁾⁽²⁾Net of unearned lease revenue of $1.4 million.

~~Commercial credit exposure~~

~~Credit risk profile by creditworthiness category~~

December 31, 2021
(dollars in thousands)
Pass
Special mention
Substandard
Doubtful
Total
Commercial and industrial
$
233,565
$
339
$
2,400
$
-
$
236,304
Commercial real estate - non-owner occupied
289,679
16,614
6,555
-
312,848
Commercial real estate - owner occupied
230,146
7,089
11,520
-
248,755
Commercial real estate - construction
21,147
-
-
-
21,147
Total commercial
$
774,537
$
24,042
$
20,475
$
-
$
819,054

‎

~~Table Of Contents~~

~~Consumer & Mortgage lending credit exposure~~

~~Credit risk profile based on payment activity~~

December 31, 2021
(dollars in thousands)
Performing
Non-performing
Total
Consumer
Home equity installment
$
47,571
$
-
$
47,571
Home equity line of credit
54,781
97
54,878
Auto loans
117,951
78
118,029
Direct finance leases⁽²⁾
24,739
64
24,803
Other
8,013
-
8,013
Total consumer
253,055
239
253,294
Residential
Real estate
325,289
572
325,861
Construction
34,919
-
34,919
Total residential
360,208
572
360,780
Total consumer & residential
$
613,263
$
811
$
614,074

⁽²⁾~~Net of unearned lease revenue of $1.4 million.~~

Allowance for loan losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows:

~~identification of specific impaired loans by loan category;~~

	■	identification of specific impaired loans by loan category;
	■	identification of specific loans that are not impaired, but have an identified potential for loss;
	■	calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;
	■	determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;
	■	application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;
	■	application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.
	■	Qualitative factor adjustments include:

	o	levels of and trends in delinquencies and non-accrual loans;
	o	levels of and trends in charge-offs and recoveries;
	o	trends in volume and terms of loans;
	o	changes in risk selection and underwriting standards;
	o	changes in lending policies and legal and regulatory requirements;
	o	experience, ability and depth of lending management;
	o	national and local economic trends and conditions; and
	o	changes in credit concentrations.

~~identification of specific loans that are not impaired, but have an identified potential for loss;~~

~~calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;~~

~~determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;~~

~~application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;~~

~~application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.~~

~~Qualitative factor adjustments include:~~

o~~levels of and trends in delinquencies and non-accrual loans;~~

o~~levels of and trends in charge-offs and recoveries;~~

o~~trends in volume and terms of loans;~~

o~~changes in risk selection and underwriting standards;~~

o~~changes in lending policies and legal and regulatory requirements;~~

o~~experience, ability and depth of lending management;~~

o~~national and local economic trends and conditions; and~~

o~~changes in credit concentrations.~~

Allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans. C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The credit risk grades for the C&I and CRE loan portfolios are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies.

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Each quarter, management performs an assessment of the allowance. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

Information related to the change in the allowance and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows:

*As of and for the nine months ended September 30, 2022*
	Commercial &			Commercial							Residential
(dollars in thousands)	industrial			real estate			Consumer				real estate		Unallocated			Total
Allowance for Loan Losses:
Beginning balance	$	2,204		$	7,422		$	2,404			$	3,508	$	86		$	15,624
Charge-offs		(323	)		(1	)		(226	)			-		-			(550	)
Recoveries		8			61			59				2		-			130
Provision		785			(320	)		604				512		(6	)		1,575
Ending balance	$	2,674		$	7,162		$	2,841			$	4,022	$	80		$	16,779
Ending balance: individually evaluated for impairment	$	18		$	459		$	25			$	-	$	-		$	502
Ending balance: collectively evaluated for impairment	$	2,656		$	6,703		$	2,816			$	4,022	$	80		$	16,277
Loans Receivables:
Ending balance ⁽²⁾	$	221,911		$	597,391		$	281,714		*(1)*	$	421,926	$	-		$	1,522,942
Ending balance: individually evaluated for impairment	$	628		$	3,382		$	320			$	37	$	-		$	4,367
Ending balance: collectively evaluated for impairment	$	221,283		$	594,009		$	281,394			$	421,889	$	-		$	1,518,575

⁽¹⁾ Net of unearned lease revenue of $1.8 million. ⁽²⁾ Includes $4.5 million of net deferred loan costs.

*As of and for the three months ended September 30, 2022*
	Commercial &			Commercial					Residential
(dollars in thousands)	industrial			real estate		Consumer			real estate			Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	2,745		$	6,963	$	2,770		$	4,037		$	75	$	16,590
Charge-offs		(291	)		-		(91	)		-			-		(382	)
Recoveries		5			33		8			-			-		46
Provision		215			166		154			(15	)		5		525
Ending balance	$	2,674		$	7,162	$	2,841		$	4,022		$	80	$	16,779

As of and for the year ended December 31, 2021
	Commercial &			Commercial							Residential
(dollars in thousands)	industrial			real estate			Consumer				real estate			Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	2,407		$	6,383		$	2,552			$	2,781		$	79	$	14,202
Charge-offs		(130	)		(491	)		(206	)			(162	)		-		(989	)
Recoveries		23			250			138				-			-		411
Provision		(96	)		1,280			(80	)			889			7		2,000
Ending balance	$	2,204		$	7,422		$	2,404			$	3,508		$	86	$	15,624
Ending balance: individually evaluated for impairment	$	18		$	1,237		$	4			$	-		$	-	$	1,259
Ending balance: collectively evaluated for impairment	$	2,186		$	6,185		$	2,400			$	3,508		$	86	$	14,365
Loans Receivables:
Ending balance ⁽²⁾	$	236,304		$	582,750		$	253,294		⁽¹⁾	$	360,780		$	-	$	1,433,128
Ending balance: individually evaluated for impairment	$	154		$	5,034		$	175			$	572		$	-	$	5,935
Ending balance: collectively evaluated for impairment	$	236,150		$	577,716		$	253,119			$	360,208		$	-	$	1,427,193

⁽¹⁾

As of and for the three months ended March 31, 2022
Commercial &
Commercial
Residential
(dollars in thousands)
industrial
real estate
Consumer
real estate
Unallocated
Total
Allowance for Loan Losses:
Beginning balance
$
2,204
$
7,422
$
2,404
$
3,508
$
86
$
15,624
Charge-offs
-
(1)
(94)
-
-
(95)
Recoveries
2
9
14
2
-
27
Provision
574
(608)
223
341
(5)
525
Ending balance
$
2,780
$
6,822
$
2,547
$
3,851
$
81
$
16,081
Ending balance: individually evaluated for impairment
$
49
$
552
$
9
$
-
$
-
$
610
Ending balance: collectively evaluated for impairment
$
2,731
$
6,270
$
2,538
$
3,851
$
81
$
15,471
Loans Receivables:
Ending balance ⁽²⁾
$
252,963
$
584,020
$
256,288
⁽¹⁾
$
379,607
$
-
$
1,472,878
Ending balance: individually evaluated for impairment
$
49
$
3,149
$
343
$
137
$
-
$
3,678
Ending balance: collectively evaluated for impairment
$
252,914
$
580,871
$
255,945
$
379,470
$
-
$
1,469,200

⁽¹⁾ Net of unearned lease revenue of $1.4 million. ⁽²⁾⁽²⁾ ~~Includes $3.6. million of net deferred loan costs.~~

As of and for the year ended December 31, 2021
Commercial &
Commercial
Residential
(dollars in thousands)
industrial
real estate
Consumer
real estate
Unallocated
Total
Allowance for Loan Losses:
Beginning balance
$
2,407
$
6,383
$
2,552
$
2,781
$
79
$
14,202
Charge-offs
(130)
(491)
(206)
(162)
-
(989)
Recoveries
23
250
138
-
-
411
Provision
(96)
1,280
(80)
889
7
2,000
Ending balance
$
2,204
$
7,422
$
2,404
$
3,508
$
86
$
15,624
Ending balance: individually evaluated for impairment
$
18
$
1,237
$
4
$
-
$
-
$
1,259
Ending balance: collectively evaluated for impairment
$
2,186
$
6,185
$
2,400
$
3,508
$
86
$
14,365
Loans Receivables:
Ending balance⁽²⁾
$
236,304
$
582,750
$
253,294
⁽¹⁾
$
360,780
$
-
$
1,433,128
Ending balance: individually evaluated for impairment
$
154
$
5,034
$
175
$
572
$
-
$
5,935
Ending balance: collectively evaluated for impairment
$
236,150
$
577,716
$
253,119
$
360,208
$
-
$
1,427,193

⁽¹⁾ ~~Net of unearned lease revenue of $1.4 million.~~ ⁽²⁾ Includes $3.0 million of net deferred loan costs.

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As of and for the nine months ended September 30, 2021
	Commercial &			Commercial						Residential
(dollars in thousands)	industrial			real estate			Consumer			real estate			Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	2,407		$	6,383		$	2,552		$	2,781		$	79	$	14,202
Charge-offs		(120	)		(209	)		(110	)		(43	)		-		(482	)
Recoveries		20			241			70			-			-		331
Provision		134			870			(66	)		275			337		1,550
Ending balance	$	2,441		$	7,285		$	2,446		$	3,013		$	416	$	15,601

As of and for the three months ended September 30, 2021
	Commercial &			Commercial						Residential
(dollars in thousands)	industrial			real estate			Consumer			real estate			Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	2,324		$	7,228		$	2,497		$	3,070		$	126	$	15,245
Charge-offs		(14	)		(77	)		(28	)		-			-		(119	)
Recoveries		5			6			14			-			-		25
Provision		126			128			(37	)		(57	)		290		450
Ending balance	$	2,441		$	7,285		$	2,446		$	3,013		$	416	$	15,601

As of and for the three months ended March 31, 2021
Commercial &
Commercial
Residential
(dollars in thousands)
industrial
real estate
Consumer
real estate
Unallocated
Total
Allowance for Loan Losses:
Beginning balance
$
2,407
$
6,383
$
2,552
$
2,781
$
79
$
14,202
Charge-offs
(7)
(124)
(28)
(43)
-
(202)
Recoveries
4
11
24
-
-
39
Provision
(62)
810
(133)
177
8
800
Ending balance
$
2,342
$
7,080
$
2,415
$
2,915
$
87
$
14,839

Direct finance leases

~~On January 1, 2019, the Company adopted ASU 2016-02,~~ ~~Leases (Topic 842)~~, and subsequent related updates to revise the accounting for leases. Lessor accounting was largely unchanged as a result of the standard. Additional disclosures required under the standard are included in this section and in Footnote 12, “Leases”.

The Company originates direct finance leases through 2two automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was ~~$7.7~~$8.4 million and $7.7 million as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to ~~$18.0~~$22.3 million and $17.1 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, and are included in the carrying value of direct finance leases.

The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:

(dollars in thousands)	Amount

2022	$	1,892
2023		9,256
2024		9,887
2025		10,401
2026		1,062
2027 and thereafter		28
Total future minimum lease payments receivable		32,526
Less: Unearned income		(1,793	)
Undiscounted cash flows to be received	$	30,733

(dollars in thousands)
Amount
2022
$
5,609
2023
7,287
2024
8,669
2025
5,333
2026
240
2027 and thereafter
-
Total future minimum lease payments receivable
27,138
Less: Unearned income
(1,431)
Undiscounted cash flows to be received
$
25,707

6. ~~Ear~~~~nings~~ Earnings per share

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards. The Company maintains 2one active share-based compensation ~~plans~~plan that may generate additional potentially dilutive common shares. For granted and unexercised stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued SSARs were exercised and converted into common stock. As of the three and nine months ended ~~March 31,~~September 30, 2022, there were ~~23,299~~17,996 and 19,636 potentially dilutive shares related to issued and unexercised SSARs compared to ~~31,934~~26,346 and 29,378 for the same 2021 ~~period,~~ periods, respectively. The calculation did not include ~~11,073~~50,014 unexercised SSARs that could potentially dilute earnings per share but their effect was antidilutive as of ~~March 31, 2022.~~the three and nine months ended September 30, 2022. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were ~~15,246~~13,404 and 12,360 potentially dilutive shares related to unvested restricted share grants as of the three and nine months ended ~~March 31,~~September 30, 2022 compared to ~~10,875~~12,515 and 11,345 for the same 2021 ~~period,~~ periods, respectively. The calculation did not include 31,906 and 27,356 weighted average unvested restricted shares that could potentially dilute earnings per share but their effect was antidilutive as of the three and nine months ended September 30, 2022.

In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock. Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock. Proceeds include amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings. The Company does not consider awards from share-based grants in the computation of basic EPS.

‎

Table Ofof Contents

The following table illustrates the data used in computing basic and diluted EPS for the periods indicated:

	Three months ended September 30,				Nine months ended September 30,
	*2022*		2021		*2022*		2021
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders	$	7,689	$	4,859	$	22,875	$	16,222
Weighted-average common shares outstanding		5,634,182		5,643,897		5,649,332		5,212,500
Basic EPS	$	1.36	$	0.86	$	4.05	$	3.11

Diluted EPS:
Net income available to common shareholders	$	7,689	$	4,859	$	22,875	$	16,222
Weighted-average common shares outstanding		5,634,182		5,643,897		5,649,332		5,212,500
Potentially dilutive common shares		31,400		38,861		31,996		40,723
Weighted-average common and potentially dilutive shares outstanding		5,665,582		5,682,758		5,681,328		5,253,223
Diluted EPS	$	1.36	$	0.85	$	4.03	$	3.09

Three months ended March 31,
2022
2021
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders
$
7,522
$
5,667
Weighted-average common shares outstanding
5,655,192
4,990,768
Basic EPS
$
1.33
$
1.14
Diluted EPS:
Net income available to common shareholders
$
7,522
$
5,667
Weighted-average common shares outstanding
5,655,192
4,990,768
Potentially dilutive common shares
38,545
42,809
Weighted-average common and potentially dilutive shares outstanding
5,693,737
5,033,577
Diluted EPS
$
1.32
$
1.13

7. Stock plans

The Company has 2one stock-based compensation ~~plans~~plan (the stock compensation ~~plans)~~plan) from which it can grant stock-based compensation awards and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance. The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. The Company’s stock compensation ~~plans were~~plan was shareholder-approved and ~~permit~~permits the grant of share-based compensation awards to its employees and directors. The Company believes that the stock-based compensation ~~plans~~plan will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock. In return, the Company hopes to secure, retain and motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders. In the stock compensation ~~plans,~~plan, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.

At the ~~2012~~2022 annual ~~shareholders’~~shareholders' meeting, the ~~Company’s~~Company's shareholders approved and the Company adopted the 2022 Omnibus Stock Incentive Plan which replaced the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans). The 2012 stock incentive plans expired in 2022. Unless terminated by the Company’s board of directors, the ~~2012 stock incentive plans~~2022 Omnibus Stock Incentive Plan will expire on and no stock-based awards shall be granted after the year ~~2022~~.2032.

In ~~each of~~ the ~~2012 stock incentive plans,~~2022 Omnibus Stock Incentive Plan, the Company has reserved ~~750,000~~500,000 shares of its no-par common stock for future issuance. The Company recognizes share-based compensation expense over the requisite service or vesting period. ~~During 2015,~~Since 2019, the Company ~~created~~has approved a Long-Term Incentive Plan (LTIP) each year that awarded restricted stock ~~and~~and/or stock-settled stock appreciation rights (SSARs) to senior officers and managers based on the attainment of performance goals. The service requirement was the participant’s continued employment throughout the LTIP with a three year vesting period. Under this plan, the restricted stock had a two year post vesting holding period requirement. The SSAR awards have a ten ~~year~~-year term from the date of each grant.

During the first quarter of 2022, the Company approved a ~~1-year~~ LTIP and awarded restricted stock to senior officers and managers in February 2022 based on 2021 performance.

During the first quarter of 2021, the Company approved a ~~1-year~~ LTIP and awarded restricted stock to senior officers and managers in February and March 2021 based on 2020 performance.

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The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended ~~March 31,~~September 30, 2022 and 2021 under the 2022 and 2012 stock incentive plans:

	*September 30, 2022*					September 30, 2021
				*Weighted-*					*Weighted-*
	*Shares*			*average grant*		*Shares*			*average grant*
	*granted*			*date fair value*		*granted*			*date fair value*

Director plan		18,000	⁽²⁾	$	49.85		12,500	⁽²⁾	$	52.00
Omnibus plan		16,520	⁽³⁾		49.85		13,552	⁽³⁾		52.00
Omnibus plan		50	⁽¹⁾		35.91		50	⁽¹⁾		58.17
Omnibus plan		-					36	⁽³⁾		58.17
Omnibus plan		-					476	⁽²⁾		52.62
Total		34,570		$	49.83		26,614		$	52.03

⁽¹⁾

March 31, 2022
March 31, 2021
Weighted-
Weighted-
Shares
average grant
Shares
average grant
granted
date fair value
granted
date fair value
Director plan
18,000
⁽²⁾
$
49.85
12,500
⁽²⁾
$
52.00
Omnibus plan
16,520
⁽³⁾
49.85
13,552
⁽³⁾
52.00
Omnibus plan
-
50
⁽¹⁾
58.17
Omnibus plan
-
36
⁽³⁾
58.17
Total
34,520
$
49.85
26,138
$
52.02

⁽¹⁾ Vest after 1 year ⁽²⁾⁽²⁾Vest after 3 years – 33% each year ⁽³⁾⁽³⁾ Vest fully after 3 years

The fair value of the shares granted in 2022 and 2021 was calculated using the grant date stock price.

A summary of the status of the Company’s non-vested restricted stock as of and changes during the period indicated are presented in the following table:

	2012 & 2022 Stock incentive plans
	Director			Omnibus			Total			Weighted- average grant date fair value
Non-vested balance at December 31, 2021		14,920			28,123			43,043		$	53.20
Granted		18,000			16,570			34,570			49.83
Forfeited		-			(3,323	)		(3,323	)		52.20
Vested		(9,048	)		(2,651	)		(11,699	)		52.83
Non-vested balance at September 30, 2022		23,872			38,719			62,591		$	51.46

2012 Stock incentive plans
Director
Omnibus
Total
Weighted- average grant date fair value
Non-vested balance at December 31, 2021
14,920
28,123
43,043
53.20
Granted
18,000
16,520
34,520
49.85
Forfeited
-
(47)
(47)
52.00
Vested
(6,164)
(2,326)
(8,490)
53.81
Non-vested balance at March 31, 2022
26,756
42,270
69,026
$
51.45

A summary of the status of the Company’s SSARs as of and changes during the period indicated are presented in the following table:

	Awards		Weighted-average grant date fair value		Weighted-average remaining contractual term (years)
Outstanding December 31, 2021		94,332	$	9.66		5.5
Granted		-
Exercised		-
Forfeited		-
Outstanding September 30, 2022		94,332	$	9.66		4.8

Awards
Weighted-average grant date fair value
Weighted-average remaining contractual term (years)
Outstanding December 31, 2021
94,332
9.66
5.5
Granted
-
Exercised
-
Forfeited
-
Outstanding March 31, 2022
94,332
$
9.66
5.3

Of the SSARs outstanding at ~~March 31,~~September 30, 2022, all SSARs vested and were exercisable.

There were 0no SSARs exercised during the first ~~quarter~~nine months of 2022. During the first ~~quarter~~nine months of 2021, there were 2,932 SSARs exercised. The intrinsic value recorded for these SSARs was $10,190. The tax deduction realized from the exercise of these SSARs was $125,810 resulting in a tax benefit of $26,420.

Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the three and nine months ended ~~March 31,~~September 30, 2022 and 2021 and the unrecognized stock-based compensation expense as of ~~March 31, 2022:~~September 30, 2022:



	Three months ended March 31,				Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2022			2021	*2022*		2021		*2022*		2021
Stock-based compensation expense:
Director stock incentive plan	$	109	$	75
Omnibus stock incentive plan		165		157
2012 Director stock incentive plan					$	126	$	170	$	497	$	339
2012 Omnibus stock incentive plan						132		163		447		477
2022 Omnibus stock incentive plan						-		-		1		-
Employee stock purchase plan		32		44		-		-		32		44
Total stock-based compensation expense	$	306	$	276	$	258	$	333	$	977	$	860

In addition, during the ~~three~~nine months ended ~~March 31,~~September 30, 2021, the Company reversed accruals of ($10 thousand) in stock-based compensation expense for restricted stock and SSARs awarded under the 2012Omnibus Stock Incentive Plan.

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	As of
(dollars in thousands)	*September 30, 2022*
Unrecognized stock-based compensation expense:
2012 Director stock incentive plan	$	898
2012 Omnibus stock incentive plan		985
2022 Omnibus stock incentive plan		1
Total unrecognized stock-based compensation expense	$	1,884

~~As of~~

~~(dollars in thousands)~~

~~March 31, 2022~~

~~Unrecognized stock-based compensation expense:~~

~~Director plan~~

~~1,287~~

~~Omnibus plan~~

~~1,438~~

~~Total unrecognized stock-based compensation expense~~

~~2,725~~

The unrecognized stock-based compensation expense as of ~~March 31,~~September 30, 2022 will be recognized ratably over the periods ended February 2025 and February 2025 for the 2012Director Stock Incentive Plan and the 2012Omnibus Stock Incentive Plan, respectively.

In addition to the ~~2012~~2022 stock incentive ~~plans,~~plan, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 165,000 shares of its un-issued capital stock for issuance under the plan. The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company. Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined. As of ~~March 31,~~September 30, 2022, 94,533 shares have been issued under the ESPP. The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance. The Company recognizes compensation expense on its ESPP on the date the shares are purchased, and it is included as a component of salaries and employee benefits in the consolidated statements of income.

During the second quarter of 2022, the Company announced that the Board of Directors approved a plan to purchase, in open market and privately negotiated transactions, up to 3% of its outstanding common stock. As of September 30,2022, the Company had repurchased 31,839 shares of common stock at an average price of $38.79 under the treasury stock repurchase plan.

8. Fair value measurements

The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements. The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value. Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting. Thus, the Company uses fair value for AFS securities. Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, other real estate owned (ORE) and other repossessed assets.

The following table represents the carrying amount and estimated fair value of the Company’s financial instruments as of the periods indicated:

*September 30, 2022*
					*Quoted prices*		*Significant*		*Significant*
					*in active*		*other*		*other*
	*Carrying*		*Estimated*		*markets*		*observable inputs*		*unobservable inputs*
(dollars in thousands)	*amount*		*fair value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Financial assets:
Cash and cash equivalents	$	134,042	$	134,042	$	134,042	$	-	$	-
Held-to-maturity securities		222,374		182,240		-		182,240		-
Available-for-sale debt securities		413,413		413,413		-		413,413		-
Restricted investments in bank stock		3,639		3,639		-		3,639		-
Loans and leases, net		1,506,163		1,393,596		-		-		1,393,596
Loans held-for-sale		1,386		1,405		-		1,405		-
Accrued interest receivable		7,780		7,780		-		7,780		-
Interest rate swaps		213		213		-		213		-
Financial liabilities:
Deposits with no stated maturities		2,132,227		2,132,227		-		2,132,227		-
Time deposits		121,006		116,989		-		116,989		-
Short-term borrowings		10		10		-		10		-
Secured borrowings		7,688		7,078		-		-		7,078
Accrued interest payable		163		163		-		163		-
Interest rate swaps		213		213		-		213		-

March 31, 2022
Quoted prices
Significant
Significant
in active
other
other
Carrying
Estimated
markets
observable inputs
unobservable inputs
(dollars in thousands)
amount
fair value
(Level 1)
(Level 2)
(Level 3)
Financial assets:
Cash and cash equivalents
$
97,403
$
97,403
$
97,403
$
-
$
-
Available-for-sale debt securities
711,583
711,583
-
711,583
-
Restricted investments in bank stock
3,231
3,231
-
3,231
-
Loans and leases, net
1,456,797
1,408,647
-
-
1,408,647
Loans held-for-sale
6,236
6,315
-
6,315
-
Accrued interest receivable
7,424
7,424
-
7,424
-
Interest rate swaps
18
18
-
18
-
Financial liabilities:
Deposits with no stated maturities
2,079,581
2,079,581
-
2,079,581
-
Time deposits
130,424
128,361
-
128,361
-
Secured borrowings
10,572
9,853
-
-
9,853
Accrued interest payable
114
114
-
114
-
Interest rate swaps
18
18
-
18
-

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December 31, 2021
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	96,877	$	96,877	$	96,877	$	-	$	-
Available-for-sale debt securities		738,980		738,980		-		738,980		-
Restricted investments in bank stock		3,206		3,206		-		3,206		-
Loans and leases, net		1,417,504		1,404,103		-		-		1,404,103
Loans held-for-sale		31,727		32,013		-		32,013		-
Accrued interest receivable		7,526		7,526		-		7,526		-
Financial liabilities:
Deposits with no stated maturities		2,031,072		2,031,072		-		2,031,072		-
Time deposits		138,793		138,291		-		138,291		-
Secured borrowings		10,620		10,690		-		-		10,690
Accrued interest payable		155		155		-		155		-

December 31, 2021
Quoted prices
Significant
Significant
in active
other
other
Carrying
Estimated
markets
observable inputs
unobservable inputs
(dollars in thousands)
amount
fair value
(Level 1)
(Level 2)
(Level 3)
Financial assets:
Cash and cash equivalents
$
96,877
$
96,877
$
96,877
$
-
$
-
Available-for-sale debt securities
738,980
738,980
-
738,980
-
Restricted investments in bank stock
3,206
3,206
-
3,206
-
Loans and leases, net
1,417,504
1,404,103
-
-
1,404,103
Loans held-for-sale
31,727
32,013
-
32,013
-
Accrued interest receivable
7,526
7,526
-
7,526
-
Financial liabilities:
Deposits with no stated maturities
2,031,072
2,031,072
-
2,031,072
-
Time deposits
138,793
138,291
-
138,291
-
Secured borrowings
10,620
10,690
-
-
10,690
Accrued interest payable
155
155
-
155
-

The carrying value of short-term financial instruments, as listed below, approximates their fair value. These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand:

~~Cash and cash equivalents;~~

	●	Cash and cash equivalents;
	●	Non-interest bearing deposit accounts;
	●	Savings, interest-bearing checking and money market accounts and
	●	Short-term borrowings.

~~Non-interest bearing deposit accounts;~~

~~Savings, interest-bearing checking and money market accounts and~~

~~Short-term borrowings.~~

Securities: Fair values on investment securities are determined by prices provided by a ~~third-party~~third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

Originated loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected cash flows discounted using the exit price notion. The discount rate is based upon current offering rates, with an additional discount for expected potential charge-offs. Additionally, an environmental general credit risk adjustment is subtracted from the net present value to arrive at the total estimated fair value of the accruing loan portfolio.

The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

Non-accrual loans: Loans which the Company has measured as non-accruing are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent ~~third-party~~third-party appraisals of the properties. These loans are classified within Level 3 of the fair value hierarchy. The fair value consists of loan balances less the valuation allowance.

Acquired loans: Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. For more information on the calculation of the fair value of acquired loans, see Footnote 9, “Acquisition.”

Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).

Interest rate swaps: Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

Certificates of deposit: The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities.

Secured borrowings: The fair value for these obligations uses an income approach based on expected cash flows on a pooled basis.

‎

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The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:

	*Total carrying value*		*Quoted prices in active markets*		*Significant other observable inputs*		*Significant other unobservable inputs*
(dollars in thousands)	*September 30, 2022*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Available-for-sale securities:
Agency - GSE	$	32,336	$	-	$	32,336	$	-
Obligations of states and political subdivisions		163,602		-		163,602		-
MBS - GSE residential		217,475		-		217,475		-
Total available-for-sale debt securities	$	413,413	$	-	$	413,413	$	-

	Total carrying value		Quoted prices in active markets		Significant other observable inputs		Significant other unobservable inputs
(dollars in thousands)	December 31, 2021		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	117,003	$	-	$	117,003	$	-
Obligations of states and political subdivisions		364,710		-		364,710		-
MBS - GSE residential		257,267		-		257,267		-
Total available-for-sale debt securities	$	738,980	$	-	$	738,980	$	-

Quoted prices
in active
Significant other
Significant other
Total carrying value
markets
observable inputs
unobservable inputs
(dollars in thousands)
March 31, 2022
(Level 1)
(Level 2)
(Level 3)
Available-for-sale securities:
Agency - GSE
$
114,232
$
-
$
114,232
$
-
Obligations of states and political subdivisions
338,623
-
338,623
-
MBS - GSE residential
258,728
-
258,728
-
Total available-for-sale debt securities
$
711,583
$
-
$
711,583
$
-

Quoted prices
in active
Significant other
Significant other
Total carrying value
markets
observable inputs
unobservable inputs
(dollars in thousands)
December 31, 2021
(Level 1)
(Level 2)
(Level 3)
Available-for-sale securities:
Agency - GSE
$
117,003
$
-
$
117,003
$
-
Obligations of states and political subdivisions
364,710
-
364,710
-
MBS - GSE residential
257,267
-
257,267
-
Total available-for-sale debt securities
$
738,980
$
-
$
738,980
$
-

Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a ~~third-party~~third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.

There were 0no changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending ~~March 31,~~September 30, 2022 and December 31, 2021, respectively.

The following table illustrates the financial instruments newly measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:

			*Quoted prices in*		*Significant other*		*Significant other*
	*Total carrying value*		*active markets*		*observable inputs*		*unobservable inputs*
(dollars in thousands)	*at September 30, 2022*		*(Level 1)*		*(Level 2)*		*(Level 3)*

Impaired loans	$	1,653	$	-	$	-	$	1,653
Other real estate owned		103		-		-		103
Total	$	1,756	$	-	$	-	$	1,756

			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2021		(Level 1)		(Level 2)		(Level 3)

Impaired loans	$	2,245	$	-	$	-	$	2,245
Other real estate owned		198		-		-		198
Total	$	2,443	$	-	$	-	$	2,443

Quoted prices in
Significant other
Significant other
Total carrying value
active markets
observable inputs
unobservable inputs
(dollars in thousands)
at March 31, 2022
(Level 1)
(Level 2)
(Level 3)
Impaired loans
$
913
$
-
$
-
$
913
Other real estate owned
151
-
-
151
Total
$
1,064
$
-
$
-
$
1,064

Quoted prices in
Significant other
Significant other
Total carrying value
active markets
observable inputs
unobservable inputs
(dollars in thousands)
at December 31, 2021
(Level 1)
(Level 2)
(Level 3)
Impaired loans
$
2,245
$
-
$
-
$
2,245
Other real estate owned
198
-
-
198
Total
$
2,443
$
-
$
-
$
2,443

From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets. The fair value of impaired loans was calculated using the value of the impaired loans with an allowance less the related allowance.

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component

~~Table Of Contents~~

of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.

Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows. Both techniques include various Level 3 inputs which are not identifiable. The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value.

At ~~March 31,~~September 30, 2022 and December 31, 2021, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from ~~-9.06%~~-24.06% and ~~-9.06%~~-37.70% and from -33.08% to -47.66%, respectively. The weighted average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to ~~-9.06%~~-32.53% as of ~~March 31,~~September 30, 2022 and -44.50% as of December 31, 2021, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed. Accordingly, fair value estimates for impaired loans are classified as Level 3.

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At ~~March 31,~~September 30, 2022 and December 31, 2021, the discounts applied to the appraised values of ORE ranged from ~~-20.16% and~~-24.61% to -77.60% and from -20.16% ~~and~~to -77.60%, respectively. As of ~~March 31,~~September 30, 2022 and December 31, 2021, the weighted average of discount to the appraisal values of ORE amounted to ~~-22.87%~~-26.10% and -28.21%, respectively.

At ~~March 31,~~September 30, 2022 and December 31, 2021, there were 0no other repossessed assets. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.

9. Acquisition

On July 1, 2021, the Company completed its previously announced acquisition of Landmark. Landmark was a ~~1-bank~~one-bank holding company organized under the laws of the Commonwealth of Pennsylvania and was headquartered in Pittston, PA. Its wholly owned subsidiary, Landmark Community Bank, was an independent community bank chartered under the laws of the Commonwealth of Pennsylvania. Landmark Community Bank conducted full-service commercial banking services through 5five bank centers located in Lackawanna and Luzerne Counties, Pennsylvania. The acquisition expanded Fidelity Deposit and Discount Bank’s full-service footprint in Luzerne County, Pennsylvania. The Company transacted the acquisition to complement the Company’s existing operations, while consistent with the Company’s strategic plan of enhancing long-term shareholder value. The fair value of total assets acquired as a result of the merger totaled $375.5 million (net of cash consideration), loans totaled $298.9 million and deposits totaled $308.5 million. Goodwill recorded in the merger was $12.6 million.

In accordance with the terms of the Reorganization Agreement, on July 1, 2021 each share of Landmark common stock was converted into the right to receive 0.272 shares of the Company’s common stock and $3.26 in cash. As a result of the ~~aquisition,~~acquisition, the Company issued 647,990 shares of its common stock, valued at $35.1 million, and $7.8 million in cash based upon $54.10, the determined market price of the Company’s common stock in accordance with the Reorganization Agreement. The results of the combined entity’s operations are included in the Company’s Consolidated Financial Statements from the date of acquisition. The acquisition of Landmark was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the acquisition date.

Effective July 1, 2021, in connection with the acquisition and pursuant to the terms of the Reorganization Agreement, Paul C. Woelkers was appointed as a Class C Director of Fidelity’s Board of Directors. Mr. Woelkers was also appointed as a Director of Fidelity Bank’s Board of Directors.

‎

Table Ofof Contents

The following table summarizes the consideration paid for Landmark and the fair value of assets acquired, and liabilities assumed as of the acquisition date:

Purchase Price Consideration in Common Stock
Landmark shares settled for stock		2,382,695
Exchange ratio		0.272
Total FDBC shares issued		647,990
Value assigned to FDBC common share (9/30/2021 closing price)	$	54.10
	��
Purchase price assigned to Landmark common shares exchanged for FDBC common shares	$	35,056,259

Purchase Price Consideration - Cash for Common Stock
Landmark shares exchanged for cash, excluding fractional shares		2,382,695
Cash consideration (per Landmark share)	$	3.26
Cash portion of purchase price	$	7,767,586

Cash portion of purchase price (cash paid fractional shares)	$	5,559

Cash for outstanding Landmark stock options	$	69,250

Total consideration paid	$	42,898,654

Allocation of Purchase Price	In thousands
Total Purchase Price			$	42,899

Estimated Fair Value of Assets Acquired
Cash and cash equivalents		4,090
Investment securities		49,430
Loans		298,860
Restricted investments in bank stock		1,186
Premises and equipment		3,405
Lease property under finance leases		1,188
Core deposit intangible asset		597
Other real estate owned		488
Other assets		11,629
Total assets acquired		370,873

Estimated Fair Value of Liabilities Assumed
Non-interest bearing deposits		100,472
Interest bearing deposits		208,057
Short-term borrowings		2,224
FHLB borrowings		4,602
Secured borrowings		20,619
Finance lease obligation		1,188
Other liabilities		3,387
Total liabilities assumed		340,549

Net Assets Acquired				30,324
Goodwill Recorded in Acquisition			$	12,575

~~Purchase Price Consideration in Common Stock~~

~~Landmark shares settled for stock~~

~~2,382,695~~

~~Exchange ratio~~

~~0.272~~

~~Total FDBC shares issued~~

~~647,990~~

~~Value assigned to FDBC common share (6/30/2021 closing price)~~

~~54.10~~

~~Purchase price assigned to Landmark common shares exchanged for FDBC common shares~~

~~35,056,259~~

~~Purchase Price Consideration - Cash for Common Stock~~

~~Landmark shares exchanged for cash, excluding fractional shares~~

~~2,382,695~~

~~Cash consideration (per Landmark share)~~

~~3.26~~

~~Cash portion of purchase price~~

~~7,767,586~~

~~Cash portion of purchase price (cash paid fractional shares)~~

~~5,559~~

~~Cash for outstanding Landmark stock options~~

~~69,250~~

~~Total consideration paid~~

~~42,898,654~~

~~Allocation of Purchase Price~~

~~In thousands~~

~~Total Purchase Price~~

~~42,899~~

~~Estimated Fair Value of Assets Acquired~~

~~Cash and cash equivalents~~

~~4,090~~

~~Investment securities~~

~~49,430~~

~~Loans~~

~~298,860~~

~~Restricted investments in bank stock~~

~~1,186~~

~~Premises and equipment~~

~~3,405~~

~~Lease property under finance leases~~

~~1,188~~

~~Core deposit intangible asset~~

~~597~~

~~Other real estate owned~~

~~488~~

~~Other assets~~

~~11,629~~

~~Total assets acquired~~

~~370,873~~

~~Estimated Fair Value of Liabilities Assumed~~

~~Non-interest bearing deposits~~

~~100,472~~

~~Interest bearing deposits~~

~~208,057~~

~~Short-term borrowings~~

~~2,224~~

~~FHLB borrowings~~

~~4,602~~

~~Secured borrowings~~

~~20,619~~

~~Finance lease obligation~~

~~1,188~~

~~Other liabilities~~

~~3,387~~

~~Total liabilities assumed~~

~~340,549~~

~~Net Assets Acquired~~

~~30,324~~

~~Goodwill Recorded in Acquisition~~

~~12,575~~

Pursuant to the accounting requirements, the Company assigned a fair value to the assets acquired and liabilities assumed of Landmark. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Table of Contents

The assets acquired and liabilities assumed in the acquisition of Landmark were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year

~~Table Of Contents~~

after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, any material adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition. The items most susceptible to adjustment are the fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition. Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Investment securities available-for-sale

The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using Level 1 and Level 2 inputs in the fair value hierarchy. The fair values were determined using executable market bids or independent pricing services. The Company’s independent pricing service utilized matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather relying on the security’s relationship to other benchmark quoted prices. Management reviewed the data and assumptions used in pricing the securities.

Loans

Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Company has prepared 3three separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC ~~820-10~~820-10 for the acquired loan portfolio. The ~~3-separate~~three-separate fair valuation methodology employed are: 1)1) an interest rate loan fair value adjustment, 2)2) a general credit fair value adjustment, and 3)3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC ~~310-30~~310-30 procedures. The acquired loans were recorded at fair value at the acquisition date without carryover of Landmark’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $309.8 million.

The table below illustrates the fair value adjustments made to the amortized cost basis in order to present the fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC ~~310-30~~310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan.

*Dollars in thousands*
Gross amortized cost basis at September 30, 2021	$	309,767
Interest rate fair value adjustment on pools of homogeneous loans		(1,855	)
Credit fair value adjustment on pools of homogeneous loans		(7,915	)
Credit fair value adjustment on purchased credit impaired loans		(1,137	)
Fair value of acquired loans at September 30, 2021	$	298,860

~~Dollars in thousands~~

~~Gross amortized cost basis at June 30, 2021~~

~~309,767~~

~~Interest rate fair value adjustment on pools of homogeneous loans~~

~~(1,855)~~

~~Credit fair value adjustment on pools of homogeneous loans~~

~~(7,915)~~

~~Credit fair value adjustment on purchased credit impaired loans~~

~~(1,137)~~

~~Fair value of acquired loans at June 30, 2021~~

~~298,860~~

For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral, and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $1.9 million. Additionally, for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a ~~two-part~~two-part credit fair value analysis: 1)1) expected lifetime credit migration losses; and 2)2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed by the Company, Landmark and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents the potential discount which may arise due to general credit and economic factors. A credit fair value discount of $7.9 million was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.

The following table presents the acquired purchased credit impaired loans receivable at the acquisition date:

Dollars in thousands
Contractual principal and interest at acquisition	$	5,306
Non-accretable difference		(1,691	)
Expected cash flows at acquisition		3,615
Accretable yield		(588	)
Fair value of purchased impaired loans	$	3,027


~~Dollars in thousands~~
~~Contractual principal and interest at acquisition~~	$	~~5,306~~
~~Non-accretable difference~~		~~(1,691)~~
~~Expected cash flows at acquisition~~		~~3,615~~
~~Accretable yield~~		~~(588)~~
~~Fair value of purchased impaired loans~~	$	~~3,027~~

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Premises and Equipment

The Company assumed leases on 2 branch facilities of Landmark. The Company compared the lease contract obligations to comparable market rental rates determined by ~~third-party~~third-party licensed appraisers. The Company believed that the leased contract rates were in a reasonable range of market rental rates and concluded that no fair market value adjustment related to leasehold interest was necessary. The fair value of Landmark’s premises, including land, buildings and improvements, was determined based upon independent ~~third-party~~third-party appraisals performed by licensed appraisers or sales agreements.

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a discounted cash flow (present value) analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the higher cost of alternative funding sources available through national brokered CD offering rates and FHLB advance rates. The projected cash flows were developed using projected deposit attrition rates based on the average rate experienced by both institutions. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.

Time Deposits

The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit premium is being amortized into income on a level yield amortization method over the contractual life of the deposits.

Secured Borrowings

The Company identified 19 sold participations acquired from Landmark that did not meet the criteria for sales treatment under ASC ~~860-10-40~~860-10-40 and should be recorded as obligations from secured borrowing arrangements. The Company has estimated the fair value of these obligations using an income approach based on the expected cash flows method on a pooled basis using Level 3 assumptions.

FHLB Borrowings

The Company assumed FHLB borrowings in connection with the merger. The fair value of FHLB Borrowings was determined by using FHLB prepayment penalty as a proxy for the fair value adjustment. The Company decided to pay off the borrowing post acquisition date therefore no amortization is warranted.

Merger-related expenses

The Company did not incur any merger-related expenses for the three and nine months ended ~~March 31, 2022.~~September 30, 2022. For the three and nine months ended ~~March 31,~~September 30, 2021, the Company incurred ~~$0.5~~$2.2 million and $3.1 million in merger-related expenses related to the merger with Landmark, primarily consisting of data processing, salaries and employee benefits, and professional fee expenses.

10. Employee Benefits

Bank-Owned Life Insurance (BOLI)

The Company has purchased single premium BOLI policies on certain officers. The policies are recorded at their cash surrender values. Increases in cash surrender values are included in non-interest income in the consolidated statements of income. As a result of the acquisition of Landmark, the Company added BOLI with a value of $7.2 million during 2021. The policies’ cash surrender value totaled ~~$53.1~~$53.7 million and $52.7 million, respectively, as of ~~March 31,~~September 30, 2022 and December 31, 2021 and is reflected as an asset on the consolidated balance sheets. For the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, the Company has recorded income of ~~$319~~$965 thousand and ~~$296~~$899 thousand, respectively.

Officer Life Insurance

In 2017, the Bank entered into separate split dollar life insurance arrangements (Split Dollar Agreements) with 11eleven officers. This plan provides each officer a specified death benefit should the officer die while in the Bank’s employ. The Bank paid the insurance premiums in March 2017 and the arrangements were effective in March 2017. In March 2019, the Bank entered into a new Split Dollar Agreement with 1one officer. In January 2021, the Bank entered into Split Dollar Agreements with 15fifteen officers. The Bank owns the policies and all cash values thereunder. Upon death of the covered employee, the agreed-upon amount of death proceeds from the policies will be paid directly to the insured’s beneficiary. As of ~~March 31,~~September 30, 2022, the policies had total death benefits of ~~$53.1~~$53.7 million of which ~~$8.4~~$7.8 million would have been paid to the officer’s beneficiaries and the remaining ~~$44.7~~$45.9 million would have been paid to the Bank. In addition, 4four executive officers have the opportunity to retain a split dollar benefit equal to two times their highest base salary after separation from service if the vesting requirements are met. As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had a balance in accrued expenses of ~~$217~~$252 thousand and $200 thousand for the split dollar benefit.

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Supplemental Executive Retirement plan (SERP)

On March 29, 2017, the Bank entered into separate supplemental executive retirement agreements (individually the “SERP Agreement”) with 5five officers, pursuant to which the Bank will credit an amount to a SERP account established on each participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2017 until retirement. On March 20,

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2019, the Bank entered into a SERP Agreement with 1one officer, pursuant to which the Bank will credit an amount to a SERP account established for the participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2019 until normal retirement age. As a result of the acquisition of Landmark, the Company added $1.0 million in accrued SERP expenses to the consolidated balance sheets. As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had a balance in accrued expenses of ~~$3.7~~$3.9 million and $3.6 million in connection with the SERP.

11. Revenue Recognition

~~As of January 1, 2018, the~~

The Company adopted ASU ~~2014-09,~~2014-09, Revenue from Contracts with Customers (Topic ~~606)~~606) and all subsequent ASUs that modified Topic 606. The Company has elected to use the modified retrospective approach with prior period financial statements unadjusted and presented with historical revenue recognition methods. The implementation of the new standard had no material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

The majority of the Company’s revenues are generated through interest earned on securities and loans, which is explicitly excluded from the scope of the guidance. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, loan service charges, life insurance earnings, rental income and gains/losses on the sale of loans and securities are not in the scope of the new guidance. The main types of contracts with customers that are in the scope of the new guidance are:

Service charges on deposit accounts – Deposit service charges represent fees charged by the Company for the performance obligation of providing services to a customer’s deposit account. The transaction price for deposit services includes both fixed and variable amounts based on the Company’s fee schedules. Revenue is recognized and payment is received either at a point in time for transactional fees or on a monthly basis for non-transactional fees.

●

Service charges on deposit accounts – Deposit service charges represent fees charged by the Company for the performance obligation of providing services to a customer’s deposit account. The transaction price for deposit services includes both fixed and variable amounts based on the Company’s fee schedules. Revenue is recognized and payment is received either at a point in time for transactional fees or on a monthly basis for non-transactional fees.

●

Interchange fees – Interchange fees represent fees charged by the Company for customers using debit cards. The contract is between the Company and the processor and the performance obligation is the ability of customers to use debit cards to make purchases at a point in time. The transaction price is a percentage of debit card usage and the processor pays the Company and revenue is recorded throughout the month as the performance obligations are being met.

●

Fees from trust fiduciary activities – Trust fees represent fees charged by the Company for the management, custody and/or administration of trusts. These are mostly monthly fees based on the market value of assets in the trust account at the prior month end. Payment is generally received a few weeks after month end through a direct charge to customers’ accounts. Estate fees are recognized and charged as the Company reaches each of six different stages of the estate administration process.

●

Fees from financial services – Financial service fees represent fees charged by the Company for the performance obligation of providing various services for an investment account. Revenue is recognized twice monthly for fees on sales transactions and on a monthly basis for advisory fees and quarterly for trail fees.

●

Gain/loss on ORE sales – Gain/loss on the sale of ORE is recognized at the closing date when the sales proceeds are received. In seller-financed ORE transactions, the contract is made subject to our normal underwriting standards and pricing. The Company does not have any obligation or right to repurchase any sales of ORE.

Interchange fees – Interchange fees represent fees charged by the Company for customers using debit cards. The contract is between the Company and the processor and the performance obligation is the ability of customers to use debit cards to make purchases at a point in time. The transaction price is a percentage of debit card usage and the processor pays the Company and revenue is recorded throughout the month as the performance obligations are being met.

Fees from trust fiduciary activities – Trust fees represent fees charged by the Company for the management, custody and/or administration of trusts. These are mostly monthly fees based on the market value of assets in the trust account at the prior month end. Payment is generally received a few weeks after month end through a direct charge to customers’ accounts. Estate fees are recognized and charged as the Company reaches each of six different stages of the estate administration process.

Fees from financial services – Financial service fees represent fees charged by the Company for the performance obligation of providing various services for an investment account. Revenue is recognized twice monthly for fees on sales transactions and on a monthly basis for advisory fees and quarterly for trail fees.

Gain/loss on ORE sales – Gain/loss on the sale of ORE is recognized at the closing date when the sales proceeds are received. In seller-financed ORE transactions, the contract is made subject to our normal underwriting standards and pricing. The Company does not have any obligation or right to repurchase any sales of ORE.

Contract balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before the payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company typically does not enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Company did 0tnot have any significant contract balances.

Remaining performance obligations

The Company’s performance obligations have an original expected duration of less than one year and follow the relevant guidance for recognizing revenue over time. There is no variable consideration subject to constraint that is not included in information about transaction price.

Contract acquisition costs

An entity is required to capitalize and subsequently amortize into expense, certain incremental costs of obtaining a contract if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.

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12. Leases

ASU ~~2016-02~~2016-02 Leases (Topic ~~842)~~842) became effective for the Company on January 1, 2019. For all operating lease contracts where the Company is lessee, a right-of-use (ROU) asset and lease liability were recorded as of the effective date. The Company assumed all renewal terms will be exercised when calculating the ROU assets and lease liabilities. For leases existing at the transition date, any prepaid or deferred rent was added to the ROU asset to calculate the lease liability. The discount rate used to calculate the present value of future payments at the transition date was the Company’s incremental borrowing rate. The Company used the FHLB fixed rate borrowing rates as the discount rates. For all classes of underlying assets, the Company has elected not to record short-term leases (leases with a term of 12 months or less) on the balance sheet when the Company is lessee. Instead, the Company will recognize the lease payment on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. For all asset classes, the Company has elected, as a lessee, not to separate nonlease components from lease components and instead to account for each separate lease component and nonlease components associated with that lease component as a single lease component.

Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contains a lease, the Company recognizes a ROU asset and a lease liability when the asset is placed in service.

The Company’s operating leases, where the Company is lessee, include property, land and equipment. As of ~~March 31,~~September 30, 2022 11, ten of the Company’s branch properties, one administrative office and 1one future branch were leased under operating leases. In 4four of the branch leases, the Company leases the land from an unrelated third party, and the buildings are the Company’s own capital improvement. The Company also leases 3three standalone ATMs under operating leases. Additionally, the Company has 1one property lease and 4four equipment leases classified as finance leases. The Company acquired a leased property classified as a finance lease with a fair value of $1.2 million from the Landmark merger during 2021.

The following is an analysis of the leased property under finance leases:

(dollars in thousands)	*September 30, 2022*			December 31, 2021

Property and equipment	$	1,695		$	1,673
Less accumulated depreciation and amortization		(546	)		(366	)
Leased property under finance leases, net	$	1,149		$	1,307

(dollars in thousands)
March 31, 2022
December 31, 2021
Property and equipment
$
1,721
$
1,673
Less accumulated depreciation and amortization
(429)
(366)
Leased property under finance leases, net
$
1,292
$
1,307

The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of ~~March 31, 2022:~~September 30, 2022:

(dollars in thousands)	Amount

2022	$	64
2023		227
2024		171
2025		161
2026		150
2027 and thereafter		462
Total minimum lease payments (a)		1,235
Less amount representing interest (b)		(66	)
Present value of net minimum lease payments	$	1,169

(a)

The future minimum lease payments have not been reduced by estimated executory costs (such as taxes and maintenance) since this amount was deemed immaterial by management.

(b)

Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate upon lease inception.

(dollars in thousands)
Amount
2022
$
196
2023
235
2024
178
2025
165
2026
150
2027 and thereafter
463
Total minimum lease payments ^(a)
1,387
Less amount representing interest ^(b)
(78)
Present value of net minimum lease payments
$
1,309

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~~(a)The future minimum lease payments have not been reduced by estimated executory costs (such as taxes and maintenance) since this amount was deemed immaterial by management.~~

~~(b)Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate upon lease inception.~~

As of ~~March 31,~~September 30, 2022, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem ~~Martins Creek~~ and Wyoming branches under the terms of operating leases. During 2021, the Company entered into a new lease for the Bethlehem branch which will be relocated in 2022. During 2022, the Company also entered into a new lease of administrative office space in Scranton. Common area maintenance is included in variable lease payments in the table below. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest and are expensed as incurred. The Bethlehem and Easton branches have variable lease payments that increase annually and are expensed as incurred.

‎

(dollars in thousands)	*September 30, 2022*			September 30, 2021
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	180		$	105
Interest on lease liabilities		16			10
Operating lease cost		555			452
Short-term lease cost		112			30
Variable lease cost		23			3
Total lease cost	$	886		$	600

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	16		$	10
Operating cash flows from operating leases (Fixed payments)	$	470		$	413
Operating cash flows from operating leases (Liability reduction)	$	239		$	224
Financing cash flows from finance leases	$	173		$	103
Right-of-use assets obtained in exchange for new finance lease liabilities	$	119		$	1,188
Right-of-use assets obtained in exchange for new operating lease liabilities	$	22		$	1,644
Weighted-average remaining lease term - finance leases (in years)		6.66			7.39
Weighted average remaining lease term - operating leases (in years)		20.68			19.70
Weighted-average discount rate - finance leases		1.74	%		1.81	%
Weighted-average discount rate - operating leases		3.39	%		3.41	%

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(dollars in thousands)
March 31, 2022
March 31, 2021
Lease cost
Finance lease cost:
Amortization of right-of-use assets
$
63
$
24
Interest on lease liabilities
6
2
Operating lease cost
184
148
Short-term lease cost
37
5
Variable lease cost
10
1
Total lease cost
$
300
$
180
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases
$
6
$
2
Operating cash flows from operating leases (Fixed payments)
$
148
$
138
Operating cash flows from operating leases (Liability reduction)
$
74
$
77
Financing cash flows from finance leases
$
59
$
24
Right-of-use assets obtained in exchange for new finance lease liabilities
$
-
$
-
Right-of-use assets obtained in exchange for new operating lease liabilities
$
-
$
-
Weighted-average remaining lease term - finance leases
6.98 yrs
2.89 yrs
Weighted average remaining lease term - operating leases
21.25 yrs
21.13 yrs
Weighted-average discount rate - finance leases
1.77%
2.50%
Weighted-average discount rate - operating leases
3.39%
3.57%

During the first ~~three~~nine months of 2022, ~~$291~~ $862 thousand of the total lease cost iswas included in premises and equipment expense and $9$24 thousand iswas included in other expenses on the consolidated statements of income. During the firstnine months of 2021, $547 thousand of the total lease cost was included in premises and equipment expense and $26 thousand was included in other expenses on the consolidated statements of income. Operating lease expense is recognized on a straight-line basis over the lease term. We recognized both the interest expense and amortization expense for finance leases in premises and equipment expense since the interest expense portion was immaterial.

The future minimum lease payments for the Company’s branch network and equipment under operating leases that have lease terms in excess of one year as of ~~March 31,~~September 30, 2022 are as follows:

(dollars in thousands)	Amount

2022	$	176
2023		698
2024		655
2025		636
2026		643
2027 and thereafter		10,713
Total future minimum lease payments		13,521
Plus variable payment adjustment		1
Less amount representing interest		(4,016	)
Present value of net future minimum lease payments	$	9,506

(dollars in thousands)
Amount
2022
$
459
2023
608
2024
604
2025
612
2026
619
2027 and thereafter
10,500
Total future minimum lease payments
13,402
Plus variable payment adjustment
326
Less amount representing interest
(4,173)
Present value of net future minimum lease payments
$
9,555

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The Company leases several properties, where the Company is lessor, under operating leases to unrelated parties. ~~Some of these properties are residential properties surrounding the Main Branch that the Company leases on a month-to-month basis and are considered short-term leases.~~ The undiscounted cash flows to be received on an annual basis for the remaining 2two properties under long-term operating leases are as follows:


(dollars in thousands)	Amount		Amount

2022	$	50	$	12
2023		48		48
2024		51		51
2025		54		54
2026		54		54
2027 and thereafter		27		27
Total lease payments to be received	$	284	$	246

The Company also indirectly originates automobile leases classified as direct finance leases. See Footnote 5, “Loans and leases”, for more information about the Company’s direct finance leases.

Lease income recognized from direct finance leases was included in interest income from loans and leases on the consolidated statements of income. Lease income related to operating leases is included in fees and other revenue on the consolidated statements of income. The Company only receives a variable payment for taxes from one of its lessees, but the amount is immaterial and excluded from rental income. The amount of lease income recognized on the consolidated statements of income was as follows for the periods indicated:

	For the three months ended September 30,				For the nine months ended September 30,
(dollars in thousands)	*2022*		2021		*2022*		2021
Lease income - direct finance leases
Interest income on lease receivables	$	285	$	201	$	776	$	596

Lease income - operating leases		55		60		175		188
Total lease income	$	340	$	261	$	951	$	784

For the three months ended March 31,
(dollars in thousands)
2022
2021
Lease income - direct finance leases
Interest income on lease receivables
$
225
$
190
Lease income - operating leases
58
51
Total lease income
$
283
$
241

13. Derivative Instruments

The Company is a party to interest rate derivatives that are not designated as hedging instruments. The Company enters into interest rate swaps that allow certain commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a ~~third-party~~third-party financial institution, such that the Company minimizes its net interest rate risk exposure resulting from such transactions. The interest rate swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities). As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however there may be fair value adjustments related to credit-quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented. The Company had $1 million in investment securities pledged as collateral on its interest rate swaps with a ~~third-party~~third-party financial institution as of ~~March 31, 2022.~~September 30, 2022. There were 0no interest rate swaps as of December 31, ~~2021.~~2021.

Weighted

Notional

Average Maturity

Interest Rate

(dollars in thousands)

Amount

(Years)

Paid

Received

Fair Value

September 30, 2022

Classified in Other assets:

Customer interest rate swaps

2,000

15.16

30 Day SOFR + Margin

Fixed

213

Classified in Accrued interest payable and other liabilities:

Third party interest rate swaps

2,000

15.16

Fixed

30 Day SOFR + Margin

213

Weighted
Notional
Average Maturity
Interest Rate
Interest Rate
(dollars in thousands)
Amount
(Years)
Paid
Received
Fair Value
March 31, 2022
Classified in Other assets:
Customer interest rate swaps
$
2,000
15.67
30 Day SOFR + Margin
Fixed
$
18
Classified in Accrued interest payable and other liabilities:
Third party interest rate swaps
$
2,000
15.67
Fixed
30 Day SOFR + Margin
$
18

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

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of ~~March 31,~~September 30, 2022 compared to December 31, 2021 and a comparison of the results of operations for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s 2021 Annual Report filed on Form 10-K.

Forward-looking statements

Certain of the matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.

The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

~~the short-term and long-term effects of inflation, and rising costs to the Company, its customers and on the economy;~~

	■	local, regional and national economic conditions and changes thereto;
	■	the short-term and long-term effects of inflation, and rising costs to the Company, its customers and on the economy;
	■	the effects of economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of Coronavirus Disease 2019 (COVID-19) and any other pandemic, epidemic or other health-related crisis and responses thereto on current customers and the operations of the Company, specifically the effect of the economy on loan customers’ ability to repay loans;
	■	securities markets and monetary fluctuations and volatility;
	■	the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
	■	the impact of new or changes in existing laws and regulations, including laws and regulations concerning taxes, banking, securities and insurance and their application with which the Company and its subsidiaries must comply;
	■	impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules;
	■	governmental monetary and fiscal policies, as well as legislative and regulatory changes;
	■	effects of short- and long-term federal budget and tax negotiations and their effect on economic and business conditions;
	■	the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;
	■	the risks of changes and volatility of interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;
	■	the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;
	■	technological changes;
	■	the interruption or breach in security of our information systems, continually evolving cybersecurity and other technological risks and attacks resulting in failures or disruptions in customer account management, general ledger processing and loan or deposit updates and potential impacts resulting therefrom including additional costs, reputational damage, regulatory penalties, and financial losses;
	■	acquisitions and integration of acquired businesses;
	■	the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities;
	■	acts of war or terrorism;
	■	disruption of credit and equity markets; and
	■	the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

the effects of economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of Coronavirus Disease 2019 (COVID-19) and any other pandemic, epidemic or other health-related crisis and responses thereto on current customers and the operations of the Company, specifically the effect of the economy on loan customers’ ability to repay loans;

~~the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;~~

the impact of new or changes in existing laws and regulations, including laws and regulations concerning taxes, banking, securities and insurance and their application with which the Company and its subsidiaries must comply;

~~impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules;~~

~~governmental monetary and fiscal policies, as well as legislative and regulatory changes;~~

~~effects of short- and long-term federal budget and tax negotiations and their effect on economic and business conditions;~~

~~the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;~~

the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;

the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;

~~technological changes;~~

the interruption or breach in security of our information systems, continually evolving cybersecurity and other technological risks and attacks resulting in failures or disruptions in customer account management, general ledger processing and loan or deposit updates and potential impacts resulting therefrom including additional costs, reputational damage, regulatory penalties, and financial losses;

~~acquisitions and integration of acquired businesses;~~

~~the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities;~~

~~inflation, securities markets and monetary fluctuations and volatility;~~

~~acts of war or terrorism;~~

~~disruption of credit and equity markets; and~~

~~the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.~~

The Company cautions readers not to place undue reliance on forward-looking statements, which reflect analyses only as of the date of this document. The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

Readers should review the risk factors described in other documents that we file or furnish, from time to time, with the Securities and Exchange Commission, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and other current reports filed or furnished on Form 8-K.

‎

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Executive Summary

The Company is a Pennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank and trust company is The Fidelity Deposit and Discount Bank. The Company is headquartered in Dunmore, Pennsylvania. We consider Lackawanna, Northampton, Lehigh and Luzerne Counties our primary marketplace.

As a leading Northeastern and Eastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses. We continue to implement strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase the amount of low-cost core deposits (see “Funds Provided” section of this management’s discussion and analysis). These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new business prospects. The Bank has a personal and corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand and optimize our franchise footprint, consisting presently of our ~~22-branch~~21-branch network.

We are impacted by both national and regional economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, primarily in Lackawanna and Luzerne counties, and Eastern Pennsylvania, primarily Northampton ~~County.~~and Lehigh counties. The Federal Open Market Committee (FOMC) increased interest rates by 25 basis points in March 2022 in the first “tightening” move since December ~~2018.~~2018 followed by increases of 50 basis points and 75 basis points in May 2022 and June 2022, respectively. The FOMC increased interest rates another 75 basis points each in July 2022, September 2022 and November 2022, totaling 375 basis points increase thus far during 2022, and communicated inflation fighting expectations of further increases during the remainder of this year. According to the U.S. Bureau of Labor Statistics, the national unemployment rate for ~~March~~September 2022 was ~~3.6%~~3.5%, down ~~0.3~~0.4 percentage points from December ~~2021. However, the~~2021. The unemployment rates in the Scranton - Wilkes-Barre – Hazleton (market area north) and the Allentown – Bethlehem – Easton (market area south) Metropolitan Statistical Areas (local) ~~increased and have~~also decreased but the market area north remained at a higher ~~levels~~level than the national unemployment rate. The local unemployment rates at ~~March 31,~~September 30, 2022 were ~~5.7%~~4.2% in market area north and ~~4.5%~~3.3% in market area south, respectively, ~~an increase~~a decrease of ~~0.4~~1.1 percentage points and ~~0.2~~1.0 percentage ~~points~~point from the 5.3% and 4.3%, respectively, at December 31, 2021. The local unemployment rates have fluctuated as a result of the effects of the pandemic. The pandemic-related business restrictions have been lifted in our local area and employees started heading back to work. Stimulus payments and enhanced unemployment benefits have supported the economy throughout 2020 and 2021 and it is uncertain if the government could continue to provide this support in the future. TheThe median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro increased ~~21.2%~~15.8% and ~~17.7%~~13.3%, respectively, from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets. Values in the markets are expected to grow at a slower pace in the next year. In light of these expectations, we are uncertain if real estate values could continue to increase at these levels with the ~~pending~~ rising rate environment, however we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

On July 1, 2021, the Company completed its previously announced acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned bank subsidiary. Non-recurring costs to facilitate the merger and integrate systems of $3.0 million were incurred during 2021.

On May 1, 2020, the Company completed its previously announced acquisition of MNB Corporation (“MNB”) and its wholly-owned bank subsidiary. The merger expanded the Company’s full-service footprint into Northampton County, PA and the Lehigh Valley. Non-recurring costs to facilitate the merger and integrate systems of $2.5 million were incurred during 2020.

For the ~~three~~nine months ended ~~March 31,~~September 30, 2022, net income was ~~$7.5~~$22.9 million, or ~~$1.32~~$4.03 diluted earnings per share, compared to ~~$5.7~~$16.2 million, or ~~$1.13~~$3.09 diluted earnings per share, for the ~~three~~nine months ended ~~March 31,~~September 30, 2021. Non-recurring merger-related costs and Federal Home Loan Bank (FHLB) prepayment penalties incurred are not a part of the Company’s normal operations. If these expenses had not occurred, adjusted net income (non-GAAP) for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021 would have been ~~$7.5~~$22.9 million and ~~$6.5~~$19.1 million, respectively. Adjusted diluted EPS (non-GAAP) would have been ~~$1.32~~$4.03 and ~~$1.29~~$3.64 for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, respectively.

As of ~~March 31,~~September 30, 2022 and December 31, 2021, tangible common book value per share (non-GAAP) was ~~$27.17~~$22.24 and ~~$31.00,~~$32.57, respectively. The decrease in tangible book value was due to the decline in tangible common equity resulting within AOCI from the after tax net unrealized losses on available-for-sale securities. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located below within this management’s discussion and analysis.

Branch managers, relationship bankers, mortgage originators and our business service partners are all focused on developing a mutually profitable full banking relationship. We understand our markets, offer products and services along with financial advice that is appropriate for our community, clients and prospects. The Company continues to focus on the trusted financial advisor model by utilizing the team approach of experienced bankers that are fully engaged and dedicated towards maintaining and growing profitable relationships.

In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years. As described more fully in Part II, Item 1A, “Risk Factors” below, as well as Part I, Item 1A, “Risk Factors,” and in the “Supervisory and Regulation” section of management’s discussion and analysis of financial condition and results

~~Table Of Contents~~

of operations in our 2021 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us.

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Non-GAAP Financial Measures

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare the Company’s financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company’s tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% at ~~March 31,~~September 30, 2022 and 2021.

The following table reconciles the non-GAAP financial measures of FTE net interest income:

	Three months ended				Nine months ended
(dollars in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Interest income (GAAP)	$	20,135	$	18,173	$	57,378	$	46,680
Adjustment to FTE		687		577		2,038		1,480
Interest income adjusted to FTE (non-GAAP)		20,822		18,750		59,416		48,160
Interest expense (GAAP)		1,625		999		3,431		2,730
Net interest income adjusted to FTE (non-GAAP)	$	19,197	$	17,751	$	55,985	$	45,430

(dollars in thousands)
March 31, 2022
March 31, 2021
Interest income (GAAP)
$
18,178
$
14,340
Adjustment to FTE
668
416
Interest income adjusted to FTE (non-GAAP)
18,846
14,756
Interest expense (GAAP)
887
890
Net interest income adjusted to FTE (non-GAAP)
$
17,959
$
13,866

The efficiency ratio is non-interest expenses as a percentage of FTE net interest income plus non-interest income. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP:

	Three months ended						Nine months ended
(dollars in thousands)	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Efficiency Ratio (non-GAAP)
Non-interest expenses (GAAP)	$	13,028		$	15,185		$	38,484		$	37,492

Net interest income (GAAP)		18,510			17,174			53,947			43,950
Plus: taxable equivalent adjustment		687			577			2,038			1,480
Non-interest income (GAAP)		3,911			4,009			12,722			14,102
Net interest income (FTE) plus non-interest income (non-GAAP)	$	23,108		$	21,760		$	68,707		$	59,532
Efficiency ratio (non-GAAP)		56.38	%		69.79	%		56.01	%		62.98	%

(dollars in thousands)
March 31, 2022
March 31, 2021
Efficiency Ratio (non-GAAP)
Non-interest expenses (GAAP)
$
12,654
$
11,456
Net interest income (GAAP)
17,291
13,450
Plus: taxable equivalent adjustment
668
416
Non-interest income (GAAP)
4,554
5,516
Net interest income (FTE) plus non-interest income (non-GAAP)
$
22,514
$
19,382
Efficiency ratio (non-GAAP)
56.21%
59.11%

The following table provides a reconciliation of the tangible common equity (non-GAAP) and the calculation of tangible book value per share:

(dollars in thousands)	September 30, 2022			September 30, 2021
Tangible Book Value per Share (non-GAAP)
Total assets (GAAP)	$	2,435,768		$	2,411,799
Less: Intangible assets, primarily goodwill		(21,264	)		(21,678	)
Tangible assets		2,414,504			2,390,121
Total shareholders' equity (GAAP)		146,487			205,569
Less: Intangible assets, primarily goodwill		(21,264	)		(21,678	)
Tangible common equity	$	125,223		$	183,891

Common shares outstanding, end of period		5,630,332			5,645,687
Tangible Common Book Value per Share	$	22.24		$	32.57

(dollars in thousands)
March 31, 2022
March 31, 2021
Tangible Book Value per Share (non-GAAP)
Total assets (GAAP)
$
2,420,774
$
1,913,092
Less: Intangible assets, primarily goodwill
(21,462)
(8,697)
Tangible assets
2,399,312
1,904,395
Total shareholders' equity (GAAP)
175,243
163,582
Less: Intangible assets, primarily goodwill
(21,462)
(8,697)
Tangible common equity
$
153,781
$
154,885
Common shares outstanding, end of period
5,659,068
4,995,547
Tangible Common Book Value per Share
$
27.17
$
31.00

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The following table provides a reconciliation of the Company’s earnings results under GAAP to comparative non-GAAP results excluding merger-related expenses:


																	Nine months ended
	March 31, 2022								March 31, 2021								September 30, 2022								September 30, 2021
(dollars in thousands except per share data)	Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before income taxes		Provision for income taxes		Net income		Diluted earnings per share		Income before income taxes		Provision for income taxes		Net income		Diluted earnings per share
Results of operations (GAAP)	$	8,666	$	1,144	$	7,522	$	1.32	$	6,710	$	1,043	$	5,667	$	1.13	$	26,610	$	3,735	$	22,875	$	4.03	$	19,010	$	2,788	$	16,222	$	3.09
Add: Merger-related expenses		-		-		-		-		523		8		515		0.10		-		-		-		-		3,143		514		2,629		0.50
Add: FHLB prepayment penalty		-		-		-		-		369		78		291		0.06		-		-		-		-		369		78		291		0.05
Adjusted earnings (non-GAAP)	$	8,666	$	1,144	$	7,522	$	1.32	$	7,602	$	1,129	$	6,473	$	1.29	$	26,610	$	3,735	$	22,875	$	4.03	$	22,522	$	3,380	$	19,142	$	3.64

	Three months ended
	September 30, 2022								September 30, 2021
(dollars in thousands except per share data)	Income before income taxes		Provision for income taxes		Net income		Diluted earnings per share		Income before income taxes		Provision for income taxes		Net income		Diluted earnings per share
Results of operations (GAAP)	$	8,868	$	1,179	$	7,689	$	1.36	$	5,548	$	689	$	4,859	$	0.85
Add: Merger-related expenses		-		-		-		-		2,201		462		1,739		0.31
Adjusted earnings (non-GAAP)	$	8,868	$	1,179	$	7,689	$	1.36	$	7,749	$	1,151	$	6,598	$	1.16

General

The Company’s earnings depend primarily on net interest income. Net interest income is the difference between interest income and interest expense. Interest income is generated from yields earned on interest-earning assets, which consist principally of loans and investment securities. Interest expense is incurred from rates paid on interest-bearing liabilities, which consist of deposits and borrowings. Net interest income is determined by the Company’s interest rate spread (the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Interest rate spread is significantly impacted by: changes in interest rates and market yield curves and their related impact on cash flows; the composition and characteristics of interest-earning assets and interest-bearing liabilities; differences in the maturity and re-pricing characteristics of assets compared to the maturity and re-pricing characteristics of the liabilities that fund them and by the competition in the marketplace.

The Company’s earnings are also affected by the level of its non-interest income and expenses and by the provisions for loan losses and income taxes. Non-interest income mainly consists of: service charges on the Company’s loan and deposit products; interchange fees; trust and asset management service fees; increases in the cash surrender value of the bank owned life insurance and from net gains or losses from sales of loans and securities. Non-interest expense consists of: compensation and related employee benefit costs; occupancy; equipment; data processing; advertising and marketing; FDIC insurance premiums; professional fees; loan collection; net other real estate owned (ORE) expenses; supplies and other operating overhead.

Net interest income, net interest rate margin, net interest rate spread and the efficiency ratio are presented in the MD&A on a fully-taxable equivalent (FTE) basis. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.

Comparison of the results of operations

~~Three~~three and nine months ended ~~March 31,~~September 30, 2022 and 2021

Overview

For the ~~first~~third quarter of 2022, the Company generated net income of ~~$7.5~~$7.7 million, or ~~$1.32~~$1.36 per diluted share, compared to ~~$5.7~~$4.9 million, or ~~$1.13~~$0.85 per diluted share, for the ~~first~~third quarter of 2021. The ~~$1.8~~$2.8 million increase in net income was primarily the result of ~~$3.8~~$2.2 million lower non-interest expenses and $1.3 million higher net interest ~~income and $0.3 million lower provision for loan losses. These increases were partially offset by $1.2 million more non-interest expenses and $1.0 million less in non-interest~~ income. Non-interest expenses ~~increased~~decreased quarter over-quarter due to merger-related expenses incurred during the ~~increased bank scale~~third quarter of 2021 following the Landmark ~~merger.~~merger when compared to those incurred in the third quarter of 2022. In the year-to-date comparison, net income increased by $6.7 million to $22.9 million, or $4.03 per diluted share, from $16.2 million, or $3.09 per diluted share. The $10.0 million growth in net interest income was enough to offset $1.4 million lower non-interest income and $1.0 million higher non-interest expenses year-over-year.

Return on average assets (ROA) was ~~1.26%~~1.27% and ~~1.29%~~0.82% for the ~~first~~third quarters of 2022 and ~~2021.~~2021, respectively, and 1.27% and 1.08% for the nine months ended September 30, 2022 and 2021, respectively. During the same time periods, return on average shareholders’ equity (ROE) was ~~15.01%~~18.23% and ~~13.75%~~9.07%, respectively, and 17.01% and 11.88%, respectively. ROA ~~decreased due to the pace of the increase in average assets which grew more rapidly than net income. ROE~~ increased due to the growth in net income relative to the increase in average ~~equity.~~assets for the quarter and year-to-date comparisons. ROE increased due to net income growth as well as average equity decreases for the quarter and year-to-date comparisons.

Net interest income and interest sensitive assets / liabilities

For the ~~first~~third quarter of 2022, net interest income increased ~~$3.8~~$1.3 million, or ~~29%~~8%, to ~~$17.3~~$18.5 million from ~~$13.5~~$17.2 million for the ~~first~~third quarter of 2021 due to increased interest income. The ~~$3.8~~$2.0 million growth in interest income was produced by the addition of ~~$630.5~~$108.1 million in average interest-earning assets ~~partially offset~~supplemented by the effect of a 2720 basis point ~~decline~~increase in FTE ~~yield~~yields earned on those assets. The loan portfolio contributed the most to this growth by providing ~~$2.3~~$1.0 million more in interest income, which absorbed ~~$1.0~~$1.3 million lower fees earned under the Paycheck Protection Program (PPP), due to ~~$305.3~~$81.1 million more in average ~~loans.~~loans and a three basis point increase in the yields earned thereon. In the investment portfolio, the average balance of total securities grew $90.9 million earning 17 basis points higher FTE yields which produced $0.8 million in additional FTE interest income. Interest income on interest-bearing cash also increased $0.3 million due to an increase in yields. On the liability side, total interest-bearing liabilities grew $79.9 million, on average, with a 14 basis point increase in rates paid thereon. A $92.4 million higher average balance of interest-bearing deposits and 15 basis point increase in rates paid on deposits resulted in $0.7 million more interest expense on deposits for the third quarter of 2022 compared to the 2021 like period.

Net interest income increased $10.0 million, or 23%, from $43.9 million for the nine months ended September 30, 2021 to $53.9 million for the nine months ended September 30, 2022, due to $10.7 million higher interest income partially offset by a $0.7 million increase in interest expense. Total average interest-earning assets increased $401.9 million with six basis point higher yields resulting in $11.3 million of growth in FTE interest income. In the loan portfolio, the Company experienced average balance growth of $238.8 million which had the effect of producing $6.9 million more FTE interest income, despite $3.0 million less in fees earned under the PPP and a 7 basis point reduction in FTE yields during the first nine months of 2022. Interest income on loans also included ~~$0.4~~$0.9 million in additional fair value purchase accounting ~~accretion. In~~accretion during the ~~investment portfolio, an increase in the average balances~~first nine months of ~~each type of securities was the biggest driver of interest income growth.~~2022. The average balance of ~~total securities~~the investment portfolio grew ~~$344.0~~$227.1 million ~~producing $1.8~~supplemented by a 10 basis point increase in yields which resulted in $4.0 million in additional FTE interest income. On the liability side, total interest-bearing liabilities grew ~~$447.4~~$287.6 million, on average, with a ~~nine~~one basis point ~~decrease in rates paid thereon. A nine basis~~

~~Table Of Contents~~

~~point decrease~~increase in rates paid on ~~deposits offset the effect of $440.3 million higher~~these interest-bearing liabilities. Growth in average interest-bearing deposits ~~keeping~~of $286.2 million supplemented by a two basis point increase in the rates paid on deposits caused this increase in interest ~~expense from deposits flat for the first quarter~~expense.

Table of ~~2022 compared to the 2021 like period.~~Contents

The FTE net interest rate spread increased by 6 and 5 basis points and margin ~~decreased~~increased by 1810 and 215 basis points, respectively, for the three and nine months ended ~~March 31,~~September 30, 2022 compared to the same 2021 ~~period. The~~periods. In the quarter-over-quarter and year-to-date comparisons, the spread and margin ~~decreased~~increased due to the ~~reduction in~~ yields earned on interest-earning assets ~~which outpaced~~increasing faster than the ~~lower~~rise in rates paid on interest-bearing liabilities. The overall 1629 and 21 basis point cost of funds for the three and nine months ended September 30, 2022, which includes the impact of non-interest bearing deposits, ~~decreased seven~~increased 10 and 1 basis points ~~for the three months ended March 31, 2022~~ compared to the same 2021 ~~period.~~periods. The primary reason for the ~~decline~~increase was the ~~reduction in~~higher rates paid on ~~deposits coupled with the increased average balances of non-interest bearing~~ deposits compared to the same 2021 ~~period.~~periods.

For the remainder of 2022, the Company expects to operate in a rising interest rate environment. A rate environment with rising interest rates positions the Company to improve its interest income performance from new and repricing earning assets. For the remainder of 2022, the Company anticipates net interest income to ~~improve~~grow at a slower pace as growth in ~~interest-earning assets~~interest income would likely help mitigate an adverse impact of rate movements on the cost of funds. The risk to continuing net interest income improvement is rapid acceleration of deposit rates in the Company's marketplace. The FOMC began increasing the federal funds rate during ~~the first quarter of~~ 2022, the first ~~move~~moves since they cut rates during the first quarter of 2020, which ~~did not~~began to have ~~a significant~~an effect on rates paid on interest-bearing liabilities. On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans was also increased 25300 basis points during the first ~~quarter~~nine months of ~~2022. At the May~~ 2022 ~~meeting, the FOMC increased the federal funds rate~~and another 5075 basis ~~points.~~points in November 2022. Consensus economic forecasts are predicting increases in short-term rates throughout the rest of 2022. The 2022 focus is to manage net interest income and control deposit costs through a rising forecasted short-term rate cycle for primarily overnight to 12 month rates. ~~Interest income is projected to increase more than interest expense in 2022.~~ Continued growth in the loan portfolios complemented with the achieved investment security growth is expected to boost interest income, and when coupled with a proactive relationship approach to deposit cost setting strategies should help stop spread compression and contain the interest rate margin, preventing further reductions below acceptable levels.

The Company’s cost of interest-bearing liabilities was ~~0.22%~~0.40% and 0.29% for the three and nine months ended ~~March 31,~~September 30, 2022, or ~~nine~~14 and 1 basis points ~~lower~~higher than the cost for the same 2021 ~~period.~~periods. The ~~decrease~~increase in interest paid on deposits contributed to the ~~lower~~higher cost of interest-bearing liabilities. Management currently ~~expects~~believes the FOMC is expected to continue to raise the federal funds rate in the immediate future, so the Company may experience pressure to increase rates paid on deposits. To help mitigate the impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships, generate new loan volumes, and retain and generate higher levels of average non-interest bearing deposit balances. Strategically deploying no- and low-cost deposits into interest earning-assets is an effective margin-preserving strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin.

The Company’s Asset Liability Management (ALM) team meets regularly to discuss among other things, interest rate risk and when deemed necessary adjusts interest rates. ALM is actively addressing the Company's sensitivity to a changing rate environment to ensure interest rate risks are contained within acceptable levels. ALM also discusses revenue enhancing strategies to help combat the potential for a decline in net interest income. The Company’s marketing department, together with ALM, ~~lenders~~ and ~~deposit gatherers,~~relationship managers, continue to develop prudent strategies that will grow the loan portfolio and accumulate low-cost deposits to improve net interest income performance.

Table of Contents

The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% for ~~March 31,~~September 30, 2022 and 2021 to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. See “Non-GAAP Financial Measures” within this management’s discussion and analysis for the FTE adjustments. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans held-for-sale (HFS) and non-accrual loans but exclude the allowance for loan losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan (cost amortization)/fee accretion of ($0.2 million) and $1.0 million during the third quarters of 2022 and 2021 , respectively, and $0.4 million and ~~$1.4~~$3.2 million ~~during~~for the ~~first quarters of~~nine months ended September 30, 2022 and 2021, respectively, are included in interest income from loans. MNB and Landmark loan fair value purchase accounting adjustments of ~~$855 thousand~~$0.9 million and ~~$455 thousand~~$0.9 million are included in interest income from loans and $8$13 thousand and ~~$30~~$43 thousand reduced interest expense on deposits and borrowings for the three months ended ~~March 31,~~September 30, 2022 and 2021. MNB and Landmark loan fair value purchase accounting adjustments of $2.8 million and $1.8 million are included in interest income from loans and $149 thousand and $79 thousand reduced interest expense on deposits and borrowings for the nine months ended September 30, 2022 and 2021. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans. Net interest margin is calculated by dividing net interest income-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source:

‎

	Three months ended
(dollars in thousands)	September 30, 2022							September 30, 2021
	Average				Yield /			Average				Yield /
Assets	balance		Interest		rate			balance		Interest		rate

Interest-earning assets
Interest-bearing deposits	$	59,409	$	351		2.34	%	$	123,561	$	54		0.17	%
Restricted investments in bank stock		3,645		56		6.06			3,430		28		3.25
Investments:
Agency - GSE		116,914		445		1.51			110,131		382		1.37
MBS - GSE residential		264,249		1,157		1.74			219,391		795		1.44
State and municipal (nontaxable)		255,736		1,916		2.97			223,571		1,651		2.93
State and municipal (taxable)		86,262		449		2.06			79,084		377		1.89
Other		-		-		-			108		-		0.40
Total investments		723,161		3,967		2.18			632,285		3,205		2.01
Loans and leases:
C&I and CRE (taxable)		749,154		9,428		4.99			795,821		9,692		4.83
C&I and CRE (nontaxable)		70,700		620		3.48			53,632		513		3.79
Consumer		224,753		2,184		3.85			199,540		2,004		3.98
Residential real estate		466,661		4,216		3.58			381,149		3,254		3.39
Total loans and leases		1,511,268		16,448		4.32			1,430,142		15,463		4.29
Total interest-earning assets		2,297,483		20,822		3.60	%		2,189,418		18,750		3.40	%
Non-interest earning assets		110,404							168,838
Total assets	$	2,407,887						$	2,358,256

Liabilities and shareholders' equity

Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	703,101	$	577		0.33	%	$	674,146	$	464		0.27	%
Savings and clubs		245,589		59		0.10			222,077		25		0.04
MMDA		541,799		801		0.59			467,269		221		0.19
Certificates of deposit		124,083		113		0.36			158,657		168		0.42
Total interest-bearing deposits		1,614,572		1,550		0.38			1,522,149		878		0.23
Secured borrowings		7,708		75		3.85			20,140		121		2.37
Short-term borrowings		10		-		0.43			68		-		0.14
FHLB advances		-		-		-			49		-		0.06
Total interest-bearing liabilities		1,622,290		1,625		0.40	%		1,542,406		999		0.26	%
Non-interest bearing deposits		589,228							579,629
Non-interest bearing liabilities		29,030							23,798
Total liabilities		2,240,548							2,145,833
Shareholders' equity		167,339							212,423
Total liabilities and shareholders' equity	$	2,407,887						$	2,358,256
Net interest income - FTE			$	19,197						$	17,751

Net interest spread						3.20	%						3.14	%
Net interest margin						3.32	%						3.22	%
Cost of funds						0.29	%						0.19	%

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	Nine months ended
(dollars in thousands)	September 30, 2022							September 30, 2021
	Average				Yield /			Average				Yield /
Assets	balance		Interest		rate			balance		Interest		rate

Interest-earning assets
Interest-bearing deposits	$	55,571	$	464		1.12	%	$	119,827	$	114		0.13	%
Restricted investments in bank stock		3,472		120		4.62			3,160		96		4.08
Investments:
Agency - GSE		118,052		1,309		1.48			80,147		820		1.37
MBS - GSE residential		268,494		3,416		1.70			178,355		1,911		1.43
State and municipal (nontaxable)		260,855		5,811		2.98			188,955		4,271		3.02
State and municipal (taxable)		88,513		1,348		2.04			61,371		857		1.87
Other		-		-		-			36		-		0.40
Total investments		735,914		11,884		2.16			508,864		7,859		2.06
Loans and leases:
C&I and CRE (taxable)		754,781		27,387		4.85			694,274		24,873		4.79
C&I and CRE (nontaxable)		69,555		1,711		3.29			46,185		1,331		3.85
Consumer		211,031		6,070		3.85			174,869		5,126		3.92
Residential real estate		451,880		11,780		3.49			333,167		8,761		3.52
Total loans and leases		1,487,247		46,948		4.22			1,248,495		40,091		4.29
Total interest-earning assets		2,282,204		59,416		3.48	%		1,880,346		48,160		3.42	%
Non-interest earning assets		119,718							134,633
Total assets	$	2,401,922						$	2,014,979

Liabilities and shareholders' equity

Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	713,743	$	1,529		0.29	%	$	569,947	$	1,258		0.30	%
Savings and clubs		245,052		112		0.06			203,109		88		0.06
MMDA		507,693		1,346		0.35			407,106		738		0.24
Certificates of deposit		128,893		334		0.35			128,978		499		0.52
Total interest-bearing deposits		1,595,381		3,321		0.28			1,309,140		2,583		0.26
Secured borrowings		9,301		109		1.56			6,787		121		2.37
Short-term borrowings		72		1		1.06			129		-		0.33
FHLB advances		-		-		-			1,134		26		3.07
Total interest-bearing liabilities		1,604,754		3,431		0.29	%		1,317,190		2,730		0.28	%
Non-interest bearing deposits		589,581							494,582
Non-interest bearing liabilities		27,741							20,607
Total liabilities		2,222,076							1,832,379
Shareholders' equity		179,846							182,600
Total liabilities and shareholders' equity	$	2,401,922						$	2,014,979
Net interest income - FTE			$	55,985			��			$	45,430

Net interest spread						3.19	%						3.14	%
Net interest margin						3.28	%						3.23	%
Cost of funds						0.21	%						0.20	%

Three months ended
(dollars in thousands)
March 31, 2022
March 31, 2021
Average
Yield /
Average
Yield /
Assets
balance
Interest
rate
balance
Interest
rate
Interest-earning assets
Interest-bearing deposits
$
66,832
$
33
0.20
%
$
85,985
$
21
0.10
%
Restricted investments in bank stock
3,228
31
3.90
2,892
33
4.56
Investments:
Agency - GSE
120,658
420
1.41
53,068
181
1.38
MBS - GSE residential
268,479
1,088
1.64
146,487
519
1.44
State and municipal (nontaxable)
268,239
1,943
2.94
157,508
1,186
3.05
State and municipal (taxable)
93,121
449
1.96
49,414
224
1.84
Total investments
750,497
3,900
2.11
406,477
2,110
2.11
Loans and leases:
C&I and CRE (taxable)
761,353
8,785
4.68
645,596
7,805
4.90
C&I and CRE (nontaxable)
67,187
515
3.11
42,294
404
3.87
Consumer
198,012
1,873
3.84
162,325
1,574
3.93
Residential real estate
440,810
3,709
3.41
311,897
2,809
3.65
Total loans and leases
1,467,362
14,882
4.11
1,162,112
12,592
4.39
Total interest-earning assets
2,287,919
18,846
3.34
%
1,657,466
14,756
3.61
%
Non-interest earning assets
131,502
121,813
Total assets
$
2,419,421
$
1,779,279
Liabilities and shareholders' equity
Interest-bearing liabilities
Deposits:
Interest-bearing checking
$
727,707
$
449
0.25
%
$
484,245
$
376
0.31
%
Savings and clubs
243,300
27
0.04
186,473
32
0.07
MMDA
487,200
228
0.19
361,446
266
0.30
Certificates of deposit
133,966
118
0.36
119,691
190
0.64
Total interest-bearing deposits
1,592,173
822
0.21
1,151,855
864
0.30
Secured borrowings
10,584
65
2.49
-
-
-
Short-term borrowings
-
-
-
144
-
0.51
FHLB advances
-
-
-
3,389
26
3.12
Total interest-bearing liabilities
1,602,757
887
0.22
%
1,155,388
890
0.31
%
Non-interest bearing deposits
586,363
437,740
Non-interest bearing liabilities
27,008
18,944
Total liabilities
2,216,128
1,612,072
Shareholders' equity
203,293
167,207
Total liabilities and shareholders' equity
$
2,419,421
$
1,779,279
Net interest income - FTE
$
17,959
$
13,866
Net interest spread
3.12
%
3.30
%
Net interest margin
3.18
%
3.39
%
Cost of funds
0.16
%
0.23
%

‎

Table Ofof Contents

Changes in net interest income are a function of both changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which changes in interest rates and changes in volumes of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by the prior period rate), (2) the changes attributable to changes in interest rates (changes in rates multiplied by prior period volume) and (3) the net change. The combined effect of changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Tax-exempt income was not converted to a tax-equivalent basis on the rate/volume analysis:


	Three months ended March 31,												Nine months ended September 30,
(dollars in thousands)	2022 compared to 2021						2021 compared to 2020						2022 compared to 2021									2021 compared to 2020
	Increase (decrease) due to												Increase (decrease) due to
	Volume		Rate		Total		Volume		Rate		Total		Volume			Rate			Total			Volume			Rate			Total
Interest income:
Interest-bearing deposits	$	(6)	$	18	$	12	$	28	$	(19)	$	9	$	(92	)	$	442		$	350		$	54		$	(36	)	$	18
Restricted investments in bank stock		3		(5)		(2)		(9)		(23)		(32)		10			14			24			1			(29	)		(28	)
Investments:
Agency - GSE		235		4		239		169		(28)		141		415			74			489			665			(53	)		612
MBS - GSE residential		486		83		569		116		(403)		(287)		1,098			407			1,505			466			(890	)		(424	)
State and municipal		783		(31)		752		853		(203)		650		1,552			-			1,552			2,705			(551	)		2,154
Other		-		-		-		-		-		-		-			-			-			(1	)		(2	)		(3	)
Total investments		1,504		56		1,560		1,138		(634)		504		3,065			481			3,546			3,835			(1,496	)		2,339
Loans and leases:
Residential real estate		1,095		(195)		900		697		(355)		342		3,096			(77	)		3,019			1,547			(840	)		707
C&I and CRE		1,584		(515)		1,069		3,877		(34)		3,843		2,925			(110	)		2,815			7,251			609			7,860
Consumer		339		(40)		299		(16)		(21)		(37)		1,042			(98	)		944			237			(113	)		124
Total loans and leases		3,018		(750)		2,268		4,558		(410)		4,148		7,063			(285	)		6,778			9,035			(344	)		8,691
Total interest income		4,519		(681)		3,839		5,715		(1,086)		4,629		10,046			652			10,698			12,925			(1,905	)		11,020

Interest expense:
Deposits:
Interest-bearing checking		161		(88)		73		237		(233)		4		309			(38	)		271			563			(337	)		226
Savings and clubs		8		(14)		(6)		16		(10)		6		19			5			24			32			(28	)		4
Money market		76		(114)		(38)		290		(619)		(329)		212			396			608			510			(1,062	)		(552	)
Certificates of deposit		21		(92)		(71)		7		(340)		(333)		-			(165	)		(165	)		(65	)		(811	)		(876	)
Total deposits		266		(308)		(42)		550		(1,202)		(652)		540			198			738			1,040			(2,238	)		(1,198	)
Secured borrowings		65		-		65		-		-		-		36			(48	)		(12	)		121			-			121
Overnight borrowings		-		-		-		(43)		(32)		(75)		-			1			1			(185	)		(63	)		(248	)
FHLB advances		(26)		-		(26)		(90)		2		(88)		(26	)		-			(26	)		(260	)		18			(242	)
Total interest expense		305		(308)		(3)		417		(1,232)		(815)		550			151			701			716			(2,283	)		(1,567	)
Net interest income	$	4,214	$	(373)	$	3,841	$	5,298	$	146	$	5,444	$	9,496		$	501		$	9,997		$	12,209		$	378		$	12,587

Provision for loan losses

The provision for loan losses represents the necessary amount to charge against current earnings, the purpose of which is to increase the allowance for loan losses (the allowance) to a level that represents management’s best estimate of known and inherent losses in the Company’s loan portfolio. Loans determined to be uncollectible are charged off against the allowance. The required amount of the provision for loan losses, based upon the adequate level of the allowance, is subject to the ongoing analysis of the loan portfolio. The Company’s Special Assets Committee meets periodically to review problem loans. The committee is comprised of management, including credit administration officers, loan officers, loan workout officers and collection personnel. The committee reports quarterly to the Credit Administration Committee of the board of directors.

Management continuously reviews the risks inherent in the loan portfolio. Specific factors used to evaluate the adequacy of the loan loss provision during the formal process include:

•specific loans that could have loss potential;

•levels of and trends in delinquencies and non-accrual loans;

•levels of and trends in charge-offs and recoveries;

•trends in volume and terms of loans;

Table Ofof Contents

•changes in risk selection and underwriting standards;

•changes in lending policies and legal and regulatory requirements;

•experience, ability and depth of lending management;

•national and local economic trends and conditions; and

•changes in credit concentrations.

For the three months ended ~~March 31,~~September 30, 2022, ~~and 2021,~~ the ~~Company recorded a~~ provision for loan losses ofwas $0.5 million, ~~and $0.8~~a $0.1 million ~~respectively, a $0.3~~increase compared to $0.4 million ~~decrease.~~for the same period in 2021. The ~~decrease~~increase in the provision compared to the ~~quarter~~three months ended ~~March 31,~~September 30, 2021, was due to the higher provisioning required for loan growth in the third quarter of 2022 compared to the year earlier period.

For the nine months ended September 30, 2022, the provision for loan losses was $1.6 million relatively unchanged from the same period in 2021, despite loan growth in 2022 as the increased provisioning needed for higher organic loan growth was offset by a $0.4 million specific reserve incurred during the prior ~~year’s first quarter~~year that was not required in the current ~~quarter.~~ year.

This amount of provisioning was respective to the loan growth achieved during 2022 and reflected what management deemed necessary ~~given experienced loan growth,~~ to maintain the allowance for loan and lease losses at an adequate level.

The provision for loan losses derives from the reserve required from the allowance for loan losses calculation. The Company continued provisioning for the three and nine months ended ~~March 31,~~September 30, 2022 to maintain an allowance level that management deemed adequate.

For a discussion on the allowance for loan losses, see “Allowance for loan losses,” located in the comparison of financial condition section of management’s discussion and analysis contained herein.

Other income

For the ~~first~~third quarter of 2022, non-interest income amounted to ~~$4.5~~$3.9 million, a decrease of ~~$1.0~~$0.1 million, or ~~17%~~2%, compared to ~~$5.5~~$4.0 million recorded for the same 2021 period. The decrease was due to ~~$1.6~~$0.2 million less service charges on loans from less mortgage activity and less commercial loan late fees during the third quarter of 2022 compared to the third quarter of 2021. There was also a $0.1 million decrease in gains/losses on the write-down, sale or disposal of premises and equipment from various equipment that was disposed of during the third quarter of 2022. Partially offsetting these decreases was $0.2 million in additional deposit service charges from higher overdraft charges as the number of items presented increased.

Non-interest income totaled $12.7 million for the nine months ended September 30, 2022, a decrease of $1.4 million, or 10%, from the $14.1 million recorded for the nine months ended September 30, 2021. The decrease was primarily due to $2.3 million lower gains on loan sales and $0.5 million less loan service charges due to scaled back demand for mortgages. There was also a $0.2 million decrease in gains/losses on the write-down, sale or disposal of premises and equipment from ~~less mortgage activity~~premises and equipment that was disposed of during ~~the first quarter of 2022 compared to the first quarter of 2021.~~2022. Partially offsetting ~~this decrease~~these decreases was $0.7 million in additional deposit service charges, $0.2 million higher ~~interchange~~ fees ~~from increased debit card usage, increases in deposit service charges of $0.2 million and higher wealth management fees (fees~~ from trust fiduciary activities and ~~financial services) of~~a $0.2 ~~million.~~million increase in debit card interchange fees.

Operating expenses

For the quarter ended ~~March 31,~~September 30, 2022, total non-interest expenses were ~~$12.7~~$13.0 million, ~~an increase~~a decrease of ~~$1.2~~$2.2 million, or ~~10%~~14%, compared to ~~$11.5~~$15.2 million for the same 2021 quarter. Non-interest expenses would have remained flat if the Company had not incurred $2.2 million in merger-related expenses during the third quarter of 2021. Salary and employee benefits ~~rose $1.5~~declined $0.1 million, or ~~28%~~2%, to ~~$6.7~~$6.8 million for the ~~first~~third quarter of 2022 from ~~$5.2~~$6.9 million for the ~~first~~third quarter of 2021. The decrease was primarily due to less salaries expense from fewer full-time equivalent employees. Data processing and communications expenses decreased $0.1 million, or 11%, primarily due to the integration of systems after the merger with Landmark. These decreases were offset by increases in advertising and marketing expenses of $0.1 million from an increase in donations and $0.1 million in loan collection expenses during the third quarter of 2022.

For the nine months ended September 30, 2022, non-interest expenses increased $1.0 million, or 3%, compared to the nine months ended September 30, 2021, from $37.5 million to $38.5 million. Non-interest expenses would have increased $3.5 million more if not for $3.1 million in merger-related expenses and a $0.4 million FHLB prepayment penalty incurred by the Company during the nine months ended September 30, 2021. Salaries and employee benefit expenses grew $2.9 million, or 17%. The increase was primarily due to less deferred loan origination costs reducing salaries and employee ~~benefit expenses~~benefits expense from a lower volume of originations from mortgages and PPP loans. Additionally, salaries and employee benefits were higher from ~~17 more full-time equivalent employees.~~ new positions added and merit increases and higher group insurance from a larger amount of claims. Premises and equipment expenses increased ~~$0.3~~$0.5 million, or ~~17%~~10%, ~~primarily~~ due to ~~property~~higher expenses for lease payments, real estate taxes and other expenses related to premises and equipment acquired from the merger with Landmark. ~~Data processing~~PA shares tax expense was $0.3 million higher from growth in equity. Advertising and ~~communications~~marketing expenses ~~increased $0.1~~rose $0.2 million ~~due to~~from additional ~~systems and equipment added from the merger with Landmark. The FDIC assessment increased $0.1 million due to the larger average assets.~~advertising costs. Partially offsetting these increases, professional ~~fees decreased~~services were $0.2 million lower for the first nine months of 2022 compared to the same 2021 period due to ~~lower~~less legal expenses and other non-recurring professional fees incurred during the first quarter of 2022 and the write-off of $0.1 million of construction in process during the first quarter of 2021. Advertising and marketing expenses decreased $0.1 million due to a $0.1 million donation to Fidelity D & D Charitable Foundation during the first quarter of 2021. Non-interest expenses would have increased $0.9 million more if the Company had not incurred $0.5 million in merger-related expenses and a $0.4 million FHLB prepayment penalty during the first quarternine months of 2021.

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were ~~1.36%~~1.43% and ~~1.35%~~1.55% for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021. The expense ratio ~~increased~~decreased because of ~~increased non-interest expenses and~~ decreased non-interest ~~income.~~expenses. The efficiency ratio (non-GAAP) decreased from ~~59.11%~~62.98% at ~~March 31,~~September 30, 2021 to ~~56.21%~~56.01% at ~~March 31,~~September 30, 2022 due to revenue increasing faster than expenses. For more information on the calculation of the efficiency ratio, see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.

Provision for income taxes

The provision for income taxes increased ~~$0.1~~$0.9 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 compared to the same 2021 period due to higher pre-tax income. The Company's effective tax rate was ~~13.2%~~14.0% at ~~March 31,~~September 30, 2022 compared to ~~15.5%~~14.7% at ~~March 31,~~September 30, 2021. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The decrease in the effective tax rate was primarily due to higher tax-exempt interest income. Due to challenges relating to current market conditions, the Company may not have the ability to make a reliable estimate of all or part of its ordinary income which could cause volatility in the effective tax rate. If the federal corporate tax rate is increased, the Company’s net deferred tax liabilities and deferred tax assets will be re-valued upon adoption of the new tax rate. A federal tax rate increase will decrease net deferred tax assets with a corresponding decrease to provision for income taxes.

Table of Contents

Comparison of financial condition at

~~March 31,~~ September 30, 2022 and December 31, 2021

Overview

Consolidated assets increased ~~$1.7~~$16.7 million to $2.4 billion as of ~~March 31,~~September 30, 2022 relatively unchanged from December 31, 2021. The increase in assets occurred primarily in the loan portfolio ~~which~~partially offset by a decline in the investment portfolio. The reduction in the investment portfolio was ~~offset~~primarily caused by net unrealized losses inwhich were partially offset by the ~~investment portfolio and the~~

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related deferred tax ~~asset.~~asset which is a component of other assets on the consolidated balance sheets. Loan portfolio increases were funded by growth in deposits. ~~As explained in greater detail below, growth in deposits occurred because of business and seasonal tax activity, government relief due to the pandemic and increases in personal account balances.~~

Funds Deployed:

Investment securities

At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. Some of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Debt securities AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity. For the nine months ended September 30, 2022, AOCI was reduced by $82.5 million due to the change in fair value of the Company's investment securities.

Effective April 1, 2022, the Company transferred agency and municipal bonds with a book value of $245.5 million from AFS to HTM in order to apply the accounting for securities HTM to mitigate the effect AFS accounting has on the balance sheet. The bonds that were transferred had the highest price volatility and consisted of fixed-rate securities representing 70% of the agency portfolio, 70% of the taxable municipal portfolio each laddered out on the short to intermediate part of the curve and 35% of the tax-exempt municipal portfolio on the long end of the curve were identified as the best candidates given the Company’s ability to hold those bonds to maturity. The market value of the securities on the date of the transfer was $221.7 million, after netting unrealized losses totaling $18.9 million. The $18.9 million, net of deferred taxes, will be accreted against other comprehensive income over the life of the bonds.

As of ~~March 31,~~September 30, 2022, the carrying value of investment securities amounted to ~~$711.6~~$635.8 million, or ~~29%~~26% of total assets, compared to $739.0 million, or 31% of total assets, atas of December 31, 2021. On ~~March 31,~~September 30, 2022, ~~36%~~34% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations. The mortgage-backed securities portfolio includes only pass-through bonds issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (GNMA).

The Company’s municipal (obligations of states and political subdivisions) portfolio is comprised of tax-free municipal bonds with a book value of ~~$271.6~~$254.6 million and taxable municipal bonds with a book value of ~~$93.1~~$86.3 million. The overall credit ratings of these municipal bonds was as follows: 37% AAA, 62% AA, ~~1% A~~ and 1% ~~escrowed.~~A.

During the first ~~quarter~~nine months of 2022, the carrying value of total investments decreased ~~$27.4~~$103.2 million, or 4%14%. Purchases for the ~~quarter~~first nine months of 2022 totaled ~~$37.9~~$39.2 million, while principal reductions totaled ~~$10.1~~$32.7 million, ~~and~~ the decline in unrealized gain/loss was ~~$54.0 million.~~$81.6 million in the AFS portfolio and $23.9 million in unrealized losses were transferred to the HTM portfolio. The purchases were funded principally by cash flow generated from the portfolio and excess overnight liquidity. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile.

A comparison of investment securities at ~~March 31,~~September 30, 2022 and December 31, 2021 is as follows:



	March 31, 2022							December 31, 2021							September 30, 2022										December 31, 2021
(dollars in thousands)	Amount		%		Book yield		Reprice term	Amount		%		Book yield		Reprice term	Amount		%			Book yield			Reprice term		Amount		%			Book yield			Reprice term

MBS - GSE residential	$	258,728	36.3	%	1.8	%	6.4	$	257,267	34.8	%	1.6	%	5.1	$	217,475		34.2	%		1.8	%		6.5	$	257,267		34.8	%		1.6	%		5.1
Obligations of states & political subdivisions		338,623	47.6		2.3		14.7		364,710	49.4		2.3		7.5		305,937		48.1			2.9			15.2		364,710		49.4			2.3			7.5
Agency - GSE		114,232	16.1		1.4		7.0		117,003	15.8		1.4		5.2		112,375		17.7			2.3			6.7		117,003		15.8			1.4			5.2
Total	$	711,583	100.0	%	2.0	%	10.4	$	738,980	100.0	%	1.9	%	6.3	$	635,787		100.0	%		2.4	%		10.7	$	738,980		100.0	%		1.9	%		6.3

The investment securities portfolio contained no private label mortgage-backed securities, collateralized mortgage obligations, collateralized debt obligations, or trust preferred securities, and no off-balance sheet derivatives were in use. The portfolio had no adjustable-rate instruments as of ~~March 31,~~September 30, 2022 and December 31, 2021.

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Investment securities were comprised of AFS and HTM securities as of September 30, 2022 and AFS securities as of ~~March 31, 2022 and~~ December 31, 2021. The AFS securities were recorded with a net unrealized loss of ~~$53.8~~$81.4 million and a net unrealized gain of $0.2 million as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. Of the net ~~decline~~declineof $81.6 million in the unrealized gain ~~position of $54.0 million: $30.1~~position; $39.0 million was attributable to municipal securities; ~~$16.4~~$40.3 million was attributable to mortgage-backed securities and ~~$7.5~~$2.3 million was attributable to agency securities. During the second quarter of 2022, securities with net unrealized losses totaling $23.9 million were transferred to HTM of which subsequently $1.1 million was accreted against other comprehensive income. The

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direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve rise, especially at the intermediate and long end, the values of debt securities tend to decline. Whether or not the value of the Company’s investment portfolio will change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates decline, the market values of the Company’s debt securities portfolio could be subject to market value increases.

As of ~~March 31,~~September 30, 2022, the Company had ~~$425.1~~$426.8 million in public deposits, or 19% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on these public deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. As of ~~March 31,~~September 30, 2022, the balance of pledged securities required for public and trust deposits was ~~$402.8~~$468.4 million, or ~~57%~~74% of total securities.

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether impairment exists and whether the impairment is temporary or other-than-temporary. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security is other-than-temporarily impaired. If a decline in value is deemed to be other-than-temporary, the amortized cost of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized. During the quarter ended ~~March 31,~~September 30, 2022, the Company did not incur other-than-temporary impairment charges from its investment securities portfolio.

Restricted investments in bank stock

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaled $82 thousand as of ~~March 31,~~September 30, 2022 and December 31, 2021. The balance in FHLB stock was $3.6 million and $3.1 million as of September 30, 2022 and December 31, 2021, respectively. The dividends received from the FHLB totaled ~~$33~~$109 thousand and ~~$35~~$104 thousand for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, respectively. ~~The balance in FHLB stock was $3.1 million both as of March 31, 2022 and December 31, 2021, respectively.~~

Loans held-for-sale (HFS)

Upon origination, most residential mortgages and certain Small Business Administration (SBA) guaranteed loans may be classified as held-for-sale (HFS). In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market. In declining interest rate environments, the Company would be exposed to prepayment risk as rates on fixed-rate loans decrease, and customers look to refinance loans. Consideration is given to the Company’s current liquidity position and projected future liquidity needs. To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS. Occasionally, residential mortgage and/or ~~other nonmortgage~~business loans may be transferred from the loan portfolio to HFS. The carrying value of loans HFS is based on the lower of cost or estimated fair value. If the fair values of these loans decline below their original cost, the difference is written down and charged to current earnings. Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs.

As of ~~March 31,~~September 30, 2022 and December 31, 2021, loans HFS consisted of residential mortgages with carrying amounts of ~~$6.2~~$1.4 million and $31.7 million, respectively, which approximated their fair values. During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, residential mortgage loans with principal balances of ~~$29.9~~$68.0 million were sold into the secondary market and the Company recognized net gains of ~~$0.7~~$1.4 million, compared to ~~$80.7~~$140.7 million and ~~$2.3~~$3.6 million, respectively, during the ~~three~~nine months ended ~~March 31,~~September 30, 2021.

Management completed ~~a $12.8~~$18.1 million ~~transfer~~in transfers of mortgages HFS to the held-for-investment portfolio during the first ~~quarter~~nine months of 2022.

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster personal relationships. At ~~March 31,~~September 30, 2022 and December 31, 2021, the servicing portfolio balance of sold residential mortgage loans was ~~$449.9~~$465.5 million and $430.9 million, respectively, with mortgage servicing rights of ~~$1.8~~$1.7 million and $1.7 million for the same periods, respectively.

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Loans and leases

As of ~~March 31,~~September 30, 2022, the Company had gross loans and leases, including originated and acquired loans and leases, totaling $1.5 billion compared to $1.4 billion at December 31, 2021, an increase of ~~$39.8~~$90.2 million, or 3%6%.

Growth in the portfolio was primarily attributed to the ~~$16.7 million increase in the commercial and industrial portfolio, resulting from the origination of several large commercial loans during the quarter, along with the $18.8~~$61.1 million increase in the residential portfolio, ~~stemming from~~including $13 million in mortgage loans ~~HFS~~ originated during 2021 as available-for-sale but reclassified to the held-for-investment portfolio during the first quarter 2022. The Company elected to ~~remain invested at~~reclassify the mortgage loans, which meet FNMA underwriting guidelines and are considered high quality, to realize the better yields ~~that existed early~~than those alternately available during the first quarter of 2022. This growth was supplemented by a $28.8 million increase in ~~2022 along with management’s decision to retain a greater percentage~~the consumer portfolio during the first nine months of ~~mortgages held-for-investment that meet the FNMA underwriting guidelines.~~2022.

The composition of the loan portfolio at ~~March 31,~~September 30, 2022 and December 31, 2021 is summarized as follows:

	September 30, 2022						December 31, 2021
(dollars in thousands)	Amount			%			Amount			%
Commercial and industrial	$	221,911			14.6	%	$	236,304			16.5	%
Commercial real estate:
Non-owner occupied		315,323			20.7			312,848			21.8
Owner occupied		256,053			16.8			248,755			17.3
Construction		26,015			1.7			21,147			1.5
Consumer:
Home equity installment		56,814			3.7			47,571			3.3
Home equity line of credit		53,632			3.5			54,878			3.8
Auto		132,802			8.7			118,029			8.2
Direct finance leases		32,526			2.1			26,232			1.8
Other		7,733			0.5			8,013			0.6
Residential:
Real estate		384,493			25.2			325,861			22.8
Construction		37,433			2.5			34,919			2.4
Gross loans		1,524,735			100.0	%		1,434,557			100.0	%
Less:
Allowance for loan losses		(16,779	)					(15,624	)
Unearned lease revenue		(1,793	)					(1,429	)
Net loans	$	1,506,163					$	1,417,504

Loans held-for-sale	$	1,386					$	31,727

March 31, 2022
December 31, 2021
(dollars in thousands)
Amount
%
Amount
%
Commercial and industrial
$
252,963
17.2
%
$
236,304
16.5
%
Commercial real estate:
Non-owner occupied
310,663
21.1
312,848
21.8
Owner occupied
250,578
17.0
248,755
17.3
Construction
22,779
1.5
21,147
1.5
Consumer:
Home equity installment
47,852
3.2
47,571
3.3
Home equity line of credit
55,340
3.7
54,878
3.8
Auto
119,082
8.1
118,029
8.2
Direct finance leases
27,138
1.8
26,232
1.8
Other
8,307
0.6
8,013
0.6
Residential:
Real estate
343,360
23.3
325,861
22.8
Construction
36,247
2.5
34,919
2.4
Gross loans
1,474,309
100.0
%
1,434,557
100.0
%
Less:
Allowance for loan losses
(16,081)
(15,624)
Unearned lease revenue
(1,431)
(1,429)
Net loans
$
1,456,797
$
1,417,504
Loans held-for-sale
$
6,236
$
31,727

Commercial & industrial (C&I) and commercial real estate (CRE)

As of ~~March 31,~~September 30, 2022, the commercial loan portfolio increased by ~~$18.0~~$0.2 million ~~or 2%,~~ to ~~$837.0~~$819.3 million ~~over~~compared to the December 31, 2021 balance of ~~$819.0~~$819.1 million ~~primarily~~ due to ~~three large unrelated C&I loans that were originated during~~ the ~~quarter.~~ ~~Excluding~~$14.6 million increase in the ~~$18.0~~commercial real estate portfolio partially offset by the $14.4 million decrease in the commercial and industrial portfolio, which was attributed to a $38.1 million reduction in PPP loans (net of deferred fees). Excluding the reduction in PPP loans during the ~~three~~nine months ended ~~March 31,~~September 30, 2022, the commercial portfolio grew ~~$36.0~~$38.3 million with the growth stemming from the both the C&I ~~portfolio.~~and CRE portfolios.

Excluding PPP loans, C&I loans grew $23.7 million primarily due to four loans originated during the first nine months of 2022 to four unrelated borrowers consisting of one commercial fixed term note and three tax-free municipal loans. Other C&I loan originations in various industries were offset by scheduled and unscheduled paydowns in the portfolio.

CRE loans increased ~~$1.3~~$14.6 million with growth of $7.3 million in ~~owner-occupied~~owner occupied CRE primarily due to one fixed commercial loan, $4.8 million in commercial construction and ~~construction loans offsetting a reduction~~$2.5 million in non-owner occupied CRE loan balances. During the first nine months of 2022, the Company experienced growth in fixed commercial real estate loans and reductions in floating commercial real estate loans due to the current interest rate environment.

Paycheck Protection Program Loans

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP).

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans, and during the second and third quarter of 2020, the Company originated 1,551 loans totaling $159 million under the Paycheck Protection Program.

Under the PPP, the entire principal amount of the borrower’s loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount, so long as the employer maintains or quickly rehires employees and maintains salary levels and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

As part of the Economic Relief Act, which became law on December 27, 2020, an additional $284 billion of federal resources was allocated to a reauthorized and revised PPP. On January 19, 2021, the Company began processing and originating PPP loans for this

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second round, which subsequently ended on May 31, 2021, and during this round, the Company originated 1,022 loans totaling $77 million.

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Beginning in the fourth quarter of 2020 and continuing during ~~2021,~~2022, the Company submitted PPP forgiveness applications to the SBA, and through ~~March 31,~~September 30, 2022, the Company received forgiveness or paydowns of ~~$219.4~~$234.7 million, or ~~93%~~99%, of the original PPP loan balances of $236.3 million with ~~$16.3~~$31.6 million occurring during the ~~three~~nine months ended ~~March 31,~~September 30, 2022.

As a PPP lender, the Company received fee income of approximately $9.9 million with ~~$9.4~~$9.8 million recognized to date, including $0.7 million recognized during the first quarter of 2022, $0.5 million during the second quarter of 2022, and $26 thousand recognized during the third quarter of 2022. Unearned fees attributed to PPP loans, net of fees paid to referral sources as prescribed by the SBA under the PPP, were ~~$0.5 million~~$53 thousand as of ~~March 31,~~September 30, 2022.

The PPP loans originated by size were as follows as of ~~March 31,~~September 30, 2022:



(dollars in thousands)	Balance originated		Current balance		Total SBA fee		SBA fee recognized		Balance originated		Current balance		Total SBA fee		SBA fee recognized
$150,000 or less	$	76,594	$	5,713	$	4,866	$	4,550	$	76,594	$	358	$	4,866	$	4,846
Greater than $150,000 but less than $2,000,000		128,082		11,227		4,765		4,517		128,082		1,225		4,765		4,733
$2,000,000 or higher		31,656		-		316		316		31,656		-		316		316
Total PPP loans originated	$	236,332	$	16,940	$	9,947	$	9,383	$	236,332	$	1,583	$	9,947	$	9,895

The table above does not include the $20.3 million in PPP loans acquired because of the merger with Landmark during the third quarter of 2021. As of ~~March 31,~~September 30, 2022, the balance of outstanding acquired PPP loans was ~~$5.5~~$0.3 million.

Consumer

The consumer loan portfolio consisted of home equity installment, home equity line of credit, automobile, direct finance leases and other consumer loans.

As of ~~March 31,~~September 30, 2022, the consumer loan portfolio increased by ~~$3.0~~$28.8 million, or 1%11%, to ~~$257.7~~$283.5 million compared to the December 31, 2021 balance of $254.7 million, primarily due to ~~increases~~growth in the home equity installment, auto and direct finance lease portfolios. Auto loans grew $14.8 million from continued demand for higher priced automobiles and ~~leases.~~new dealer relationships. Direct finance leases increased $6.3 million primarily due to higher residual values and more automobile leases added than expired. Home equity installment loans also grew $9.2 million from the spring and fall home equity campaigns.

~~Residential~~

Residential

As of ~~March 31,~~September 30, 2022, the residential loan portfolio increased by ~~$18.8~~$61.1 million, or 5%17%, to ~~$379.6~~$421.9 million compared to the December 31, 2021 balance of $360.8 million. ~~For the three months ended March 31, 2022, growth~~The increase was due in ~~the portfolio was primarily attributed~~part to ~~the~~a strategic reclassification of $13 million in available-for-sale mortgages booked during 2021 to held-for-investment loans during the first quarter of 2022. The remainder of the increase was due to a shift from mortgage loans ~~held-for-sale originated during 2021 reclassified~~sold to loans held-for-investment due to increased jumbo loans and the ~~held-for-investment portfolio during~~pricing of loans in the ~~quarter along with management’s decision to retain a greater percentage of~~secondary market and more adjustable rate mortgages ~~held-for-investment that meet~~which are not being sold in the ~~FNMA underwriting guidelines.~~secondary market.

The residential loan portfolio consisted primarily of held-for-investment residential loans for primary residences. Management expects the sudden historic rise in interest rates ~~will have an~~to impact on demand for residential mortgages ~~throughout~~for the remainder of 2022.

Allowance for loan losses

Management evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (allowance) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. The provision for loan losses represents the amount necessary to maintain an appropriate allowance. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows:

~~identification of specific impaired loans by loan category;~~

●

identification of specific impaired loans by loan category;

●

calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

●

determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

●

application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation; and

●

application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio, regulations, and/or current economic conditions.

~~calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;~~

~~determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;~~

~~application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation; and~~

~~application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio, regulations, and/or current economic conditions.~~

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A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial loans. Commercial loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management determines an upgrade or downgrade may be warranted. The credit risk grades for the commercial loan portfolio are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what management believes to be best practices and within common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.

Acquired loans are initially recorded at their acquisition date fair values with no carryover of the existing related allowance for loan losses. Fair values are based on a discounted cash flow methodology that involves assumptions and judgements as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Upon acquisition, in accordance with GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30. These loans are deemed purchased credit impaired loans and the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount.

Acquired ASC 310-20 loans, which are loans that did not meet the criteria of ASC 310-30, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. These loans are initially recorded at fair value and include credit and interest rate marks associated with purchase accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans after acquisition.

Each quarter, management performs an assessment of the allowance for loan losses. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due. The assessment process also includes the review of all loans on non-accrual status as well as a review of certain loans to which the lenders or the Credit Administration function have assigned a criticized or classified risk rating.

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The following tables set forth the activity in the allowance for loan losses and certain key ratios for the period indicated:


	As of and for the			As of and for the						As of and for the			As of and for the			As of and for the
	three months ended			twelve months ended			three months ended			nine months ended			twelve months ended			nine months ended
(dollars in thousands)	March 31, 2022			December 31, 2021			March 31, 2021			September 30, 2022			December 31, 2021			September 30, 2021

Balance at beginning of period	$	15,624		$	14,202		$	14,202		$	15,624		$	14,202		$	14,202

Charge-offs:
Commercial and industrial		-			(130)			(7)			(323	)		(130	)		(120	)
Commercial real estate		(1)			(491)			(124)			(1	)		(491	)		(209	)
Consumer		(94)			(206)			(28)			(226	)		(206	)		(110	)
Residential		-			(162)			(43)			-			(162	)		(43	)
Total		(95)			(989)			(202)			(550	)		(989	)		(482	)

Recoveries:
Commercial and industrial		2			23			4			8			23			20
Commercial real estate		9			250			11			61			250			241
Consumer		14			138			24			59			138			70
Residential		2			-			-			2			-			-
Total		27			411			39			130			411			331
Net charge-offs		(68)			(578)			(163)			(420	)		(578	)		(151	)
Provision for loan losses		525			2,000			800			1,575			2,000			1,550
Balance at end of period	$	16,081		$	15,624		$	14,839		$	16,779		$	15,624		$	15,601

Allowance for loan losses to total loans		1.09	%		1.09	%		1.30	%		1.10	%		1.09	%		1.12	%
Net charge-offs to average total loans outstanding		0.02	%		0.04	%		0.06	%		0.04	%		0.04	%		0.02	%
Average total loans	$	1,467,362		$	1,299,960		$	1,162,112		$	1,487,247		$	1,299,960		$	1,248,495
Loans 30 - 89 days past due and accruing	$	1,512		$	1,982		$	912		$	852		$	1,982		$	1,086
Loans 90 days or more past due and accruing	$	174		$	64		$	59		$	50		$	64		$	112
Non-accrual loans	$	2,307		$	2,949		$	3,929		$	3,020		$	2,949		$	2,747
Allowance for loan losses to non-accrual loans		6.97	x		5.30	x		3.78	x		5.56	x		5.30	x		5.68	x
Allowance for loan losses to non-performing loans		6.48	x		5.19	x		3.72	x		5.47	x		5.19	x		5.46	x

The allowance increased ~~$0.5~~$1.2 million, or 3%7%, to ~~$16.1~~$16.8 million at ~~March 31,~~September 30, 2022 from $15.6 million at December 31, 2021 due to provisioning of ~~$0.5~~$1.6 million partially offset by ~~$68 thousand~~$0.4 million in net charge-offs. The allowance for loan and lease losses ~~remained unchanged~~increased as a percentage of total loans at 1.10% as of September 30, 2022 compared to 1.09% as of ~~March 31, 2022 compared to~~ December 31, 2021 ~~as the growth in the loan portfolio (3%) was the same as~~because the growth in the allowance ~~for loan losses (3%~~(7%) ~~during~~outpaced the ~~period.~~growth in the total loans (6%) through September 30, 2022.

Loans acquired from the Merchants and Landmark mergers (performing and non-performing) were initially recorded at their acquisition-date fair values. Since there is no initial credit valuation allowance recorded under this method, the Company ~~establishes~~established a post-acquisition allowance for loan losses to record losses which may subsequently arise on the acquired loans.

PPP loans made to eligible borrowers have a 100% SBA guarantee. Given this guarantee, no allowance for loan and lease losses was recorded for these loans.

Management believes that the current balance in the allowance for loan losses is sufficient to meet the identified potential credit quality issues that may arise and other issues unidentified but inherent to the portfolio. Potential problem loans are those where there is known information that leads management to believe repayment of principal and/or interest is in jeopardy and the loans are currently neither on non-accrual status nor past due 90 days or more.

During the first quarter of 2022, management increased the qualitative factors associated with its commercial, consumer, and residential portfolios related to the rise in rates that occurred during the quarter, and the adverse impact that these increased rates are anticipated to have on estimated credit losses.

‎

During the second quarter of 2022, management increased the qualitative factors associated with its commercial, consumer, and residential portfolios related to the rise in rates that occurred during the quarter, and the adverse impact that these increased rates are anticipated to have on estimated credit losses. These increases were partially offset by a reduction in the qualitative factors for the owner occupied CRE and residential RE portfolios related to the historically low delinquency observed in these portfolios.

During the third quarter of 2022, management decreases the qualitative factors associated with its commercial, consumer, and residential portfolios related to changes in the Company’s loan policy that were expected to reduce credit losses.

Table Ofof Contents

The allocation of net charge-offs among major categories of loans are as follows for the periods indicated:


	For the three		% of Total		For the three		% of Total
	months ended		Net		months ended		Net
(dollars in thousands)	March 31, 2022		Charge-offs		March 31, 2021		Charge-offs		For the nine months ended September 30, 2022			% of Total Net Charge-offs			For the nine months ended September 30, 2021			% of Total Net Charge-offs
Net charge-offs
Commercial and industrial	$	2	(3)	%	$	(3)	2	%	$	(315	)		75	%	$	(100	)		66	%
Commercial real estate		8	(12)			(113)	69			60			(14	)		33			(22	)
Consumer		(80)	118			(4)	3			(167	)		40			(40	)		27
Residential		2	(3)			(43)	26			2			(1	)		(43	)		29
Total net charge-offs	$	(68)	100	%	$	(163)	100	%	$	(420	)		100	%	$	(150	)		100	%

For the ~~three~~nine months ended ~~March 31,~~September 30, 2022, net charge-offs against the allowance totaled ~~$68~~$420 thousand compared with net charge-offs of ~~$163~~$150 thousand for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, representing a ~~$95~~$270 thousand ~~or 58%, decrease. This decrease~~increase, which was attributed to ~~general economic improvement~~a $193 thousand charge off in the C&I portfolio to a single borrower and ~~continued high levels~~increased losses in the consumer portfolio. Net charge offs increased as a percentage of ~~liquidity~~the total loan portfolio at 0.04% for the ~~Company’s customers.~~nine months ended September 30, 2022 compared with the nine months ended September 30, 2021.

For a discussion on the provision for loan losses, see the “Provision for loan losses,” located in the results of operations section of management’s discussion and analysis contained herein.

The allowance for loan losses can generally absorb losses throughout the loan portfolio. However, in some instances an allocation is made for specific loans or groups of loans. Allocation of the allowance for loan losses for different categories of loans is based on the methodology used by the Company, as previously explained. The changes in the allocations from period-to-period are based upon quarter-end reviews of the loan portfolio.

Allocation of the allowance among major categories of loans for the periods indicated, as well as the percentage of loans in each category to total loans, is summarized in the following table. This table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. When present, the portion of the allowance designated as unallocated is within the Company’s guidelines:



	March 31, 2022				December 31, 2021				March 31, 2021				September 30, 2022					December 31, 2021					September 30, 2021
			Category				Category				Category				Category					Category					Category
			% of				% of				% of				% of					% of					% of
(dollars in thousands)	Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans			Allowance		Loans			Allowance		Loans
Category
Commercial real estate	$	6,822	40	%	$	7,422	41	%	$	7,080	35	%	$	7,162		39	%	$	7,422		41	%	$	7,285		41	%
Commercial and industrial		2,780	17			2,204	16			2,342	26			2,674		15			2,204		16			2,441		19
Consumer		2,547	17			2,404	18			2,415	18			2,841		18			2,404		18			2,446		18
Residential real estate		3,851	26			3,508	25			2,915	21			4,022		28			3,508		25			3,013		22
Unallocated		81	-			86	-			87	-			80		-			86		-			416		-
Total	$	16,081	100	%	$	15,624	100	%	$	14,839	100	%	$	16,779		100	%	$	15,624		100	%	$	15,601		100	%

As of ~~March 31,~~September 30, 2022, the commercial loan portfolio, consisting of CRE and C&I loans, comprised ~~60%~~59% of the total allowance for loan losses compared with 62% on December 31, 2021. The commercial loan allowance allocation declined ~~but remained higher than the commercial loan allocation,~~ due to the payoff of a commercial real estate ~~loans~~loan to a single borrower with a large specific impairment during the first quarter of ~~2022.~~2022 and the relative decrease in this loan category, which decreased to 54% as of September 30, 2022 from 57% at December 31, 2021.

As of ~~March 31,~~September 30, 2022, the consumer loan portfolio comprised ~~16%~~17% of the total allowance for loan losses compared with 15% on December 31, 2021. The ~~one~~two percentage point increase in the consumer loan allowance allocation was the result of relative growth in the consumer portfolio, ~~during the quarter.~~which increased to 19% as of September 30, 2022 from 18% at December 31, 2021.

As of ~~March 31,~~September 30, 2022, the residential loan portfolio comprised 24% of the total allowance for loan losses compared with 22% on December 31, 2021. The two percentage point increase was the result of the relative increase in this loan category, which increased to 28% as of September 30, 2022 from 25% ~~as of~~at December 31, ~~2021 to 26% as of March 31, 2022.~~2021.

As of ~~March 31,~~September 30, 2022, the unallocated reserve, representing the portion of the allowance not specifically identified with a loan or groups of loans, was less than 1% of the total allowance for loan losses unchanged from December 31, 2021.

Non-performing assets

The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, troubled debt restructurings (TDRs), other real estate owned (ORE) and repossessed assets.

‎

Table Ofof Contents

The following table sets forth non-performing assets data as of the period indicated:

(dollars in thousands)	September 30, 2022			December 31, 2021			September 30, 2021

Loans past due 90 days or more and accruing	$	50		$	64		$	112
Non-accrual loans *		3,020			2,949			2,747
Total non-performing loans		3,070			3,013			2,859
Troubled debt restructurings		1,347			2,987			2,479
Other real estate owned and repossessed assets		103			434			803
Total non-performing assets	$	4,520		$	6,434		$	6,141

Total loans, including loans held-for-sale	$	1,524,328		$	1,464,855		$	1,435,997
Total assets	$	2,435,768		$	2,419,104		$	2,411,799
Non-accrual loans to total loans		0.20	%		0.20	%		0.19	%
Non-performing loans to total loans		0.20	%		0.21	%		0.20	%
Non-performing assets to total assets		0.19	%		0.27	%		0.25	%

(dollars in thousands)
March 31, 2022
December 31, 2021
March 31, 2021
Loans past due 90 days or more and accruing
$
174
$
64
$
59
Non-accrual loans *
2,307
2,949
3,929
Total non-performing loans
2,481
3,013
3,988
Troubled debt restructurings
1,371
2,987
2,489
Other real estate owned and repossessed assets
151
434
413
Total non-performing assets
$
4,003
$
6,434
$
6,890
Total loans, including loans held-for-sale
$
1,479,114
$
1,464,855
$
1,153,160
Total assets
$
2,420,774
$
2,419,104
$
1,913,092
Non-accrual loans to total loans
0.16%
0.20%
0.34%
Non-performing loans to total loans
0.17%
0.21%
0.35%
Non-performing assets to total assets
0.17%
0.27%
0.36%

* In the table above, the amount includes non-accrual TDRs of $0.4 million as of ~~March 31,~~September 30, 2022, $0.6 million as of December 31, 2021 and $0.7 million as of ~~March 31,~~September 30, 2021.

Management routinely reviews the loan portfolio to identify loans that are either delinquent or are otherwise deemed by management unable to repay in accordance with contractual terms. Generally, loans of all types are placed on non-accrual status if a loan of any type is past due 90 or more days or if collection of principal and interest is in doubt. Further, unsecured consumer loans are charged-off when the principal and/or interest is 90 days or more past due. Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income.

Non-performing assets represented ~~0.17%~~0.19% of total assets at ~~March 31,~~September 30, 2022 compared with 0.27% at December 31, ~~2021 with the~~2021. The improvement ~~resulting~~resulted from ~~the $2.4~~a $1.9 million, or ~~38%~~30%, decrease in non-performing assets. Non-performing assets ~~including a $0.6 million reduction in non-accrual loans,~~decreased due to a $1.6 million reduction in accruing troubled debt restructurings and a $0.3 million reduction in other real estate owned and repossessed ~~assets partially offset by the $0.1 million increase in loans past due 90 days and accruing.~~assets.

From December 31, 2021 to ~~March 31,~~September 30, 2022, non-accrual loans ~~declined $0.6~~increased $0.1 million, or ~~22%~~2%, from $2.9 million to ~~$2.3~~$3.0 million. The ~~$0.6~~$0.1 million ~~decline~~increase in non-accrual loans was primarily the result of ~~$0.5~~$1.7 million in additions and $0.1 million in advances partially offset by $0.9 million in payments, ~~and~~ $0.4 million in moves to ORE, ~~partially offset by~~ $0.3 million in ~~additions.~~ charge offs, and $0.1 million in moves to accrual.

At ~~March 31,~~September 30, 2022, there were a total of 3739 loans to 3329 unrelated borrowers with balances that ranged from less than $1 thousand to ~~$0.5~~$0.6 million. At December 31, 2021, there were a total of 31 loans to 28 unrelated borrowers with balances that ranged from less than $1 thousand to $0.7 million.

There were ~~one direct finance lease~~two full recourse auto loans totaling ~~$31 thousand and one commercial real estate loan totaling $143~~$50 thousand that ~~was~~were over 90 days past due as of ~~March 31,~~September 30, 2022 compared to two direct finance leases totaling $64 thousand that were over 90 days past due as of December 31, 2021. The delinquent ~~direct finance lease is~~auto loans are fully guaranteed under a formal recourse agreement with the originating auto dealer and ~~were~~we are in process of orderly ~~collection while the delinquent commercial real estate loan is well secured and in the process of~~ collection.

The Company seeks payments from all past due customers through an aggressive customer communication process. Unless well-secured and in the process of collection, past due loans will be placed on non-accrual at the 90-day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts.

‎

Table Ofof Contents

The composition of non-performing loans as of ~~March 31,~~September 30, 2022 is as follows:

			Past due
	Gross		90 days or		Non-		Total non-		% of
	loan		more and		accrual		performing		gross
(dollars in thousands)	balances		still accruing		loans		loans		loans
Commercial and industrial	$	221,911	$	-	$	628	$	628		0.28	%
Commercial real estate:
Non-owner occupied		315,323		-		732		732		0.23	%
Owner occupied		256,053		-		1,303		1,303		0.51	%
Construction		26,015		-		-		-		-
Consumer:
Home equity installment		56,814		-		-		-		-
Home equity line of credit		53,632		-		119		119		0.22	%
Auto loans		132,802		50		201		251		0.19	%
Direct finance leases *		30,733		-		-		-		-
Other		7,733		-		-		-		-
Residential:
Real estate		384,493		-		37		37		0.01	%
Construction		37,433		-		-		-		-
Loans held-for-sale		1,386		-		-		-		-
Total	$	1,524,328	$	50	$	3,020	$	3,070		0.20	%

Past due
Gross
90 days or
Non-
Total non-
% of
loan
more and
accrual
performing
gross
(dollars in thousands)
balances
still accruing
loans
loans
loans
Commercial and industrial
$
252,963
$
-
$
49
$
49
0.02%
Commercial real estate:
Non-owner occupied
310,663
-
478
478
0.15%
Owner occupied
250,578
143
1,300
1,443
0.58%
Construction
22,779
-
-
-
-
Consumer:
Home equity installment
47,852
-
-
-
-
Home equity line of credit
55,340
-
171
171
0.31%
Auto loans
119,082
-
172
172
0.14%
Direct finance leases *
25,707
31
-
31
0.12%
Other
8,307
-
-
-
-
Residential:
Real estate
343,360
-
137
137
0.04%
Construction
36,247
-
-
-
-
Loans held-for-sale
6,236
-
-
-
-
Total
$
1,479,114
$
174
$
2,307
$
2,481
0.17%

*Net of unearned lease revenue of ~~$1.4~~$1.8 million.

Payments received from non-accrual loans are recognized on a cost recovery method. Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. If the non-accrual loans that were outstanding as of ~~March 31,~~September 30, 2022 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of ~~$69~~$126 thousand.

The following tables set forth the activity in TDRs for the periods indicated:

As of and for the nine months ended September 30, 2022
	Accruing			Non-accruing
	Commercial			Commercial			Commercial
(dollars in thousands)	real estate			real estate			& industrial			Total
Troubled Debt Restructures:
Beginning balance	$	2,987		$	419		$	135		$	3,541
Additions		-			-			-			-
Pay downs / payoffs		(1,640	)		(65	)		(135	)		(1,840	)
Charge offs		-			-			-			-
Ending balance	$	1,347		$	354		$	-		$	1,701
Number of loans		6			1			-			7

As of and for the year ended December 31, 2021
	Accruing			Non-accruing
	Commercial			Commercial			Commercial
(dollars in thousands)	real estate			real estate			& industrial			Total
Troubled Debt Restructures:
Beginning balance	$	2,571		$	456		$	206		$	3,233
Additions		519			-			-			519
Pay downs / payoffs		(103	)		(37	)		(6	)		(146	)
Charge offs		-			-			(65	)		(65	)
Ending balance	$	2,987		$	419		$	135		$	3,541
Number of loans		8			1			2			11

As of and for the three months ended March 31, 2022
Accruing
Non-accruing
Commercial
Commercial
Commercial
(dollars in thousands)
real estate
real estate
& industrial
Total
Troubled Debt Restructures:
Beginning balance
$
2,987
$
419
$
135
$
3,541
Additions
-
-
-
-
Pay downs / payoffs
(1,616)
(61)
(135)
(1,812)
Charge offs
-
-
-
-
Ending balance
$
1,371
$
358
$
-
$
1,729
Number of loans
6
1
-
7

As of and for the year ended December 31, 2021
Accruing
Non-accruing
Commercial
Commercial
Commercial
(dollars in thousands)
real estate
real estate
& industrial
Total
Troubled Debt Restructures:
Beginning balance
$
2,571
$
456
$
206
$
3,233
Additions
519
-
-
519
Pay downs / payoffs
(103)
(37)
(6)
(146)
Charge offs
-
-
(65)
(65)
Ending balance
$
2,987
$
419
$
135
$
3,541
Number of loans
8
1
2
11

Table Ofof Contents

The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a TDR. TDRs arise when a borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards to maximize the Company’s recovery.

From December 31, 2021 to ~~March 31,~~September 30, 2022, TDRs declined $1.8 million, or ~~51%~~52%, primarily due to the payoff of two commercial real estate TDRs to a single borrower totaling $1.6 million and the payoff of two ~~commercial and industrial~~C&I TDRs to a single borrower totaling $0.1 million. At December 31, 2021, there were a total of 11 TDRs by 8 unrelated borrowers with balances that ranged from $50 thousand to $1.3 million, and at ~~March 31,~~September 30, 2022, there were a total of 7 TDRs by 6 unrelated borrowers with balances that ranged from $89 thousand to $0.5 million.

Loans modified in a TDR may or may not be placed on non-accrual status. At ~~March 31,~~September 30, 2022, there was one ~~TDRs~~TDR totaling $0.4 million that was on non-accrual status compared to three TDRs totaling $0.6 million at December 31, 2021.

Foreclosedassets held-for-sale

From December 31, 2021 to ~~March 31,~~September 30, 2022, foreclosed assets held-for-sale (ORE) declined from $434 thousand to ~~$151~~$103 thousand, a ~~$283~~$331 thousand decrease, which was primarily attributed to two ORE properties totaling $283 thousand that were sold during the first quarter. One property totaling $437 thousand was also added to ORE and sold during ~~the quarter.~~2022.

The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale:



	March 31, 2022			December 31, 2021			September 30, 2022						December 31, 2021
(dollars in thousands)	Amount		#	Amount		#	Amount			#			Amount			#

Balance at beginning of period	$	434	5	$	256	6	$	434			5		$	256			6

Additions		437	1		969	7		437			1			969			7
Pay downs		-			-			(6	)					-
Write downs		-			(16)			(17	)					(16	)
Sold		(720)	(3)		(775)	(8)		(745	)		(4	)		(775	)		(8	)
Balance at end of period	$	151	3	$	434	5	$	103			2		$	434			5

As of ~~March 31,~~September 30, 2022, ORE consisted of ~~three~~two properties securing loans to ~~three~~two unrelated borrowers totaling ~~$151~~$103 thousand. ~~Two properties~~One property ($~~150~~102 thousand) ~~to two unrelated borrowers were~~was added in 2021 and one property ($1 thousand) was added in 2017. Of the ~~three~~two properties, one property is under agreement of sale and ~~two properties are~~one property is listed for sale.

As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had no other repossessed assets held-for-sale.

Cash surrender value of bank owned life insurance

The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies. BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as components of non-interest income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company. This profitability is used to offset a portion of current and future employee benefit costs. As a result of the Landmark acquisition, the Company acquired $7.2 million in BOLI during the third quarter of 2021. The BOLI cash surrender value build-up can be liquidated if necessary, with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that enhances the Company’s capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value. The Company was notified of a pending death benefit claim on two owned policies and, upon completion of proper administration, expects to receive over $0.9 million in the upcoming months.

Premises and equipment

Net of depreciation, premises and equipment increased ~~$2.0~~$1.7 million during the first ~~quarter~~nine months of 2022. The Company purchased ~~$0.2~~$0.6 million in fixed assets and added ~~$3.1~~$4.0 million in construction in process during the first ~~quarter~~nine months of 2022. The increase in construction in process was primarily due to the purchase of the Scranton Electric Building for a new headquarters in Scranton, PA. These increases were partially offset by ~~$0.6~~$1.7 million in depreciation expense and ~~$0.6~~$1.2 million in transfers to other assets held-for-sale. The Company ~~expects~~is planning to ~~begin~~open a new branch and administrative office for Luzerne County in Wilkes-Barre in December. The Company has recently begun remodeling the Main Branch located in Dunmore, PA and estimated costs for the project are currently $3.9 million. The Company began corporate headquarters planning which may continue to increase construction in process and is evaluating its branch network looking for consolidation that makes sense for more efficient operations.

On December 23, 2020, the Commonwealth of Pennsylvania authorized the release of $2.0 million in Redevelopment Assistance Capital Program (RACP) funding for the Company’s headquarters project in Lackawanna County. On December 2, 2021, the Company announced it would be receiving an additional $2.0 million in RACP funding in support of the project. The $4.0 million in total RACP grant funds will be allocated to the renovation and rehabilitation of the historic building located in downtown Scranton which will be ~~use~~used for the new corporate headquarters. The Company currently expects net remaining costs for the corporate headquarters toto be $15.8 million ~~over~~over approximately two years beginning during the fourth quarter of 2022. In addition, the Company

~~Table Of Contents~~

intends to pursue a federal historic preservation tax credit which, if it qualifies, would provide a 20% tax credit on qualified improvements on the historic property.

~~The Company also plans to remodel the Main Branch located in Dunmore, PA which is expected to begin in August 2022 and estimated costs for the project are currently $3 million.~~

Table of Contents

Other assets

During the first ~~three~~nine months of 2022, the ~~$13.0~~$22.1 million increase in other assets was due mostly to a ~~$11.5~~$21.0 million increase in deferred tax assets primarily from net unrealized losses in the investment portfolio ~~$0.9~~and $0.7 million ~~of additional~~increase in prepaid ~~expenses and $0.6 million transferred to other assets held-for-sale.~~dealer reserve.

Funds Provided:

Deposits

The Company is a community based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 2221 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law. Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market and non-interest bearing checking (DDA). The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years. Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.

The following table represents the components of deposits as of the date indicated:



	March 31, 2022				December 31, 2021				September 30, 2022					December 31, 2021
(dollars in thousands)	Amount		%		Amount		%		Amount		%			Amount		%

Interest-bearing checking	$	744,858	33.7	%	$	730,595	33.7	%	$	731,701		32.4	%	$	730,595		33.7	%
Savings and clubs		249,757	11.3			234,747	10.8			245,202		10.9			234,747		10.8
Money market		485,469	22.0			475,447	21.9			538,480		23.9			475,447		21.9
Certificates of deposit		130,424	5.9			138,793	6.4			121,006		5.4			138,793		6.4
Total interest-bearing		1,610,508	72.9			1,579,582	72.8			1,636,389		72.6			1,579,582		72.8
Non-interest bearing		599,497	27.1			590,283	27.2			616,844		27.4			590,283		27.2
Total deposits	$	2,210,005	100.0	%	$	2,169,865	100.0	%	$	2,253,233		100.0	%	$	2,169,865		100.0	%

Total deposits increased ~~$40.1~~$83.4 million, or 2%4%, ~~remaining~~to $2.3 billion at ~~approximately~~September 30, 2022 from $2.2 billion at ~~March 31, 2022 and~~ December 31, 2021. During 2022, the Company accepted various wealth managed trust accounts into a bank pledged money market account which increased total deposits by $42.4 million at September 30, 2022. Money market accounts grew $63.0 million primarily due to the $42.4 million from trust accounts along with a $24.0 million transfer from an interest-bearing checking account. Non-interest bearing checking accounts increased $26.6 million primarily due to increases in business checking accounts. Savings and clubs ~~contributed the most to the deposit growth with an increase of $15.0~~also increased $10.5 million due to ~~growth in~~ personal ~~account balances.~~savings growth. Interest-bearing checking accounts ~~also~~ increased ~~$14.3~~$1.1 million during the first nine months of 2022 as seasonal activity in public accounts offset the aforementioned $24.0 million transfer to a money market account. During the fourth quarter of ~~2022. The increase in~~2022, one public customer started transitioning interest-bearing ~~checking accounts was primarily due~~deposits totaling $38.4 million at September 30, 2022 out of the bank and the Company expects most of these deposits to ~~seasonal tax cycles, business activity and shifts from non-interest bearing checking accounts. Money market accounts also increased $10.0 million, mostly due to higher balances~~be gone at the end of business accounts and shifts from other types of deposit accounts. The $9.2 million growth in non-interest bearing checking accounts was primarily due to seasonal public account increases and personal account growth.the year. The Company focuses on obtaining a full-banking relationship with existing checking account customers as well as forming new customer relationships. The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop creative programs for its ~~customers.~~customers to maintain and grow core deposits. For the remainder of 2022, the Company expects deposit ~~growth~~balances to ~~fund asset growth. Tax~~wane as clients transfer their deposits ~~are usually received during the first quarter~~to investments to earn higher interest and ~~retained for a short period of time in checking accounts with disbursements occurring shortly after they are received.~~pay down debts. Seasonal public deposit fluctuations are expected to remain volatile and at times may partially offset future deposit growth.

Partially offsetting these non-maturing deposit increases, CDs decreased ~~$8.4~~$17.8 million during the first ~~quarter~~nine months of 2022. CD balances continue to decline as rates ~~dropped~~lagged capital market rate increases and CDs with promotional rates reached maturity. The majority of maturing CDs were closed as customers could earn higher yields by investing the money elsewhere. The Company will continue to pursue strategies to grow and retain retail and business customers with an emphasis on deepening and broadening existing and creating new relationships.

The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program and Insured Cash Sweep (ICS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum insured amount of $250,000. The Company did not have any CDARs as of ~~March 31,~~September 30, 2022 and December 31, 2021. As of ~~March 31,~~September 30, 2022 and December 31, 2021, ICS reciprocal deposits represented ~~$25.6~~$26.7 million and $27.6 million, or 1% ~~and 1%,~~each, of total deposits which are included in interest-bearing checking accounts in the table above. The ~~$2.0~~$0.9 million decrease in ICS deposits is primarily due to ~~public funds~~business deposit transfers from ICS accounts to other interest-bearing checking accounts.

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As of ~~March 31,~~September 30, 2022, total uninsured deposits were estimated to be ~~$955.2 million.~~$1.1 billion. The estimate of uninsured deposits is based on

~~Table Of Contents~~

the same methodologies and assumptions used for regulatory reporting requirements. The Company aggregates deposit products by taxpayer identification number and classifies into ownership categories to ~~determine~~estimate amounts over the FDIC insurance limit.

The maturity distribution of certificates of deposit that meet or exceed the FDIC limit, by account, at ~~March 31,~~September 30, 2022 is as follows:



(dollars in thousands)
Three months or less	$	4,734	$	10,042
More than three months to six months		1,488		1,400
More than six months to twelve months		9,220		5,386
More than twelve months		5,439		4,416
Total	$	20,881	$	21,244

Approximately ~~59%~~27% of the CDs, with a weighted-average interest rate of ~~0.28%~~0.34%, are scheduled to mature in 2022 and an additional ~~28%~~52%, with a weighted-average interest rate of ~~0.33%~~0.36%, are scheduled to mature in 2023. Renewing CDs are currently expected to re-price to lower market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. The Company plans to address repricing CDs in the ordinary course of business on a relationship basis and is prepared to match rates when prudent to maintain relationships. Growth in CD accounts is challenged by the current and expected rate environment and clients’ preference for short-term ~~rates, as well as aggressive competitor~~ rates. The Company will develop CD promotional programs when the Company deems that it is ~~not currently offering any CD promotions but may resume promotions in the future.~~economically feasible to do so or when demand exists. The Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company.

Short-term borrowings

Borrowings are used as a complement to deposit generation as an alternative funding source whereby the Company will borrow under advances from the FHLB of Pittsburgh and other correspondent banks for asset growth and liquidity needs.

Short-term borrowings may include overnight balances with FHLB line of credit and/or correspondent bank’s federal funds lines which the Company may require to fund daily liquidity needs such as deposit outflow, loan demand and operations. ~~There were no~~If deposit balances decline, the Company may need to use short-term borrowings ~~as of March 31, 2022 and December 31, 2021 as~~to fund loan growth ~~in deposits funded asset growth. The Company does not expect to have short-term borrowings~~ for the ~~remainder~~fourth quarter of 2022. As of ~~March 31,~~September 30, 2022, the Company had the ability to borrow ~~$111.7~~$113.6 million from the Federal Reserve borrower-in-custody program, $145.9 million in overnight borrowings with the FHLB and $31.0 million from lines of credit with correspondent banks.

Secured borrowings

As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Company had 119 secured borrowing agreements with third parties with a fair value of ~~$10.6~~$7.6 million related to certain sold loan participations that did not qualify for sales treatment acquired from Landmark. Secured borrowings are expected to decrease infor the remainder of 2022 from scheduled amortization and, when possible, early pay-offs.

FHLB advances

The Company had no FHLB advances as of ~~March 31,~~September 30, 2022 and December 31, 2021. During the first quarter of 2021, the Company paid off $5 million in FHLB advances with a weighted average interest rate of 3.07%. During the third quarter of 2021, the Company acquired $4.5 million in FHLB advances from the Landmark merger that was subsequently paid off. As of ~~March 31,~~September 30, 2022, the Company had the ability to borrow an ~~additional $589.3~~additional $607.4 million from the ~~FHLB.~~FHLB, including any overnight borrowings. The Company does not expect to have any FHLB advances in 2022.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Management of interest rate risk and market risk analysis.

The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its exposures are critical factors in the regulatory evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy. Management believes the Company’s interest rate risk measurement framework is sound and provides an effective means to measure, monitor, analyze, identify and control interest rate risk in the balance sheet.

The Company is subject to the interest rate risks inherent in its lending, investing and financing activities. Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning assets and interest-bearing liabilities, except for those assets or liabilities with a short term remaining to maturity. Interest rate risk management is an integral part of the asset/liability management process. The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position. Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations. The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.

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Asset/Liability Management. One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO), which is comprised of senior management and members of the board of directors. ALCO meets quarterly to monitor the relationship of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk is a regular part of managing the Company. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of non-contractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the board of directors which includes limits on the impact to earnings from shifts in interest rates.

Interest Rate Risk Measurement. Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings at risk simulation and economic value at risk simulation. While each of the interest rate risk measurements has limitations, collectively, they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company and the distribution of risk along the yield curve, the level of risk through time and the amount of exposure to changes in certain interest rate relationships.

Static Gap. The ratio between assets and liabilities re-pricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.

To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals. A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) indicates the opposite effect. The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread. At ~~March 31,~~September 30, 2022, the Company maintained a one-year cumulative gap of ~~positive (asset~~negative (liability sensitive) ~~$9.7~~$86.4 million, or ~~0.4%~~-3.5%, of total assets. The effect of this ~~positive~~negative gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of ~~falling~~rising interest rates. Conversely, in ~~an increasing~~a declining interest rate environment, net interest income could be positively impacted because more ~~assets~~liabilities than ~~liabilities~~assets will re-price ~~upward~~downward during the one-year period.

Certain shortcomings are inherent in the method of analysis discussed above and presented in the next table. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table amounts. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

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The following table reflects the re-pricing of the balance sheet or “gap” position at ~~March 31,~~September 30, 2022:



			More than three		More than									More than three			More than
	Three months		months to		one year		More than				Three months			months to			one year			More than
(dollars in thousands)	or less		twelve months		to three years		three years		Total		or less			twelve months			to three years			three years			Total

Cash and cash equivalents	$	59,708	$	-	$	-	$	37,695	$	97,403	$	69,062		$	-		$	-		$	64,980		$	134,042
Investment securities ⁽¹⁾⁽²⁾		13,230		28,953		76,011		596,620		714,814		8,149			22,182			55,629			553,466			639,426
Loans and leases⁽²⁾		386,872		238,751		384,742		452,668		1,463,033		335,699			215,498			402,971			553,381			1,507,549
Fixed and other assets		-		53,065		-		92,459		145,524		-			53,711			-			101,040			154,751
Total assets	$	459,810	$	320,769	$	460,753	$	1,179,442	$	2,420,774	$	412,910		$	291,391		$	458,600		$	1,272,867		$	2,435,768
Total cumulative assets	$	459,810	$	780,579	$	1,241,332	$	2,420,774			$	412,910		$	704,301		$	1,162,901		$	2,435,768

Non-interest-bearing transaction deposits ⁽³⁾	$	-	$	60,010	$	164,742	$	374,745	$	599,497	$	-		$	61,746		$	169,509		$	385,589		$	616,844
Interest-bearing transaction deposits ⁽³⁾		609,412		-		348,270		522,402		1,480,084		637,258			-			351,250			526,875			1,515,383
Certificates of deposit		30,302		64,633		27,055		8,434		130,424		33,105			52,216			28,038			7,647			121,006
Secured borrowings		5,295		1,230		4,047		-		10,572		6,333			-			1,355			-			7,688
Short-term borrowings												10			-			-			-			10
Other liabilities		-		-		-		24,954		24,954		-			-			-			28,350			28,350
Total liabilities	$	645,009	$	125,873	$	544,114	$	930,535	$	2,245,531	$	676,706		$	113,962		$	550,152		$	948,461		$	2,289,281
Total cumulative liabilities	$	645,009	$	770,882	$	1,314,996	$	2,245,531			$	676,706		$	790,668		$	1,340,820		$	2,289,281

Interest sensitivity gap	$	(185,199)	$	194,896	$	(83,361)	$	248,907			$	(263,796	)	$	177,429		$	(91,552	)	$	324,406
Cumulative gap	$	(185,199)	$	9,697	$	(73,664)	$	175,243			$	(263,796	)	$	(86,367	)	$	(177,919	)	$	146,487

Cumulative gap to total assets		-7.7%		0.4%		-3.0%		7.2%				(10.8	)%		(3.5	)%		(7.3	)%		6.0	%

(1)	Includes restricted investments in bank stock and the net unrealized gains/losses on available-for-sale securities.

(2)

Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due. In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization. For amortizing loans and MBS – GSE residential, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products.

(3)

The Company’s demand and savings accounts were generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments. The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies.

~~(1) Includes restricted investments in bank stock and the net unrealized gains/losses on available-for-sale securities.~~

(2) Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due. In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization. For amortizing loans and MBS – GSE residential, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products.

(3) The Company’s demand and savings accounts were generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments. The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies.

Earnings at Risk and Economic Value at Risk Simulations. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet that extend beyond static re-pricing gap analysis. Although it will continue to measure its re-pricing gap position, the Company utilizes additional modeling for identifying and measuring the interest rate risk in the overall balance sheet. The ALCO is responsible for focusing on “earnings at risk” and “economic value at risk”, and how both relate to the risk-based capital position when analyzing the interest rate risk.

Earnings at Risk. An earnings at risk simulation measures the change in net interest income and net income should interest rates rise and fall. The simulation recognizes that not all assets and liabilities re-price one-for-one with market rates (e.g., savings rate). The ALCO looks at “earnings at risk” to determine income changes from a base case scenario under an increase and decrease of 200 basis points in interest rate simulation models.

Economic Value at Risk. An earnings at risk simulation measures the short-term risk in the balance sheet. Economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets and liabilities. The ALCO examines this ratio quarterly utilizing an increase and decrease of 200 basis points in interest rate simulation models. The ALCO recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.

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The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity). This analysis assumed that the adjusted interest-earning asset and interest-bearing liability levels at ~~March 31,~~September 30, 2022 remained constant. The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the ~~March 31,~~September 30, 2022 levels:



	% change				% change
	Rates +200		Rates -200		Rates +200			Rates -200
Earnings at risk:
Net interest income	(1.9)	%	(3.1)	%		(4.2	)%		(7.6	)%
Net income	(2.1)		(6.8)			(7.3	)		(15.2	)
Economic value at risk:
Economic value of equity	(7.6)		(23.1)			(10.1	)		(6.1	)
Economic value of equity as a percent of total assets	(1.2)		(3.7)			(1.4	)		(0.9	)

Economic value has the most meaning when viewed within the context of risk-based capital. Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%. At ~~March 31,~~September 30, 2022, the Company’s risk-based capital ratio was ~~14.18%~~14.34%.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning ~~April~~October 1, 2022, under alternate interest rate scenarios using the income simulation model described above:



	Net interest		$		%		Net interest		$			%
(dollars in thousands)	income		variance		variance		income		variance			variance
Simulated change in interest rates
+200 basis points	$	69,764	$	(1,339)	(1.9)	%	$	79,733	$	(3,472	)		(4.2	)%
+100 basis points		70,703		(400)	(0.6)			81,775		(1,430	)		(1.7	)%
Flat rate		71,103		-	-			83,205		-			-	%
-100 basis points		70,120		(983)	(1.4)			80,707		(2,498	)		(3.0	)%
-200 basis points		68,930		(2,173)	(3.1)			76,908		(6,297	)		(7.6	)%

Simulation models require assumptions about certain categories of assets and liabilities. The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date or earliest re-pricing opportunity. MBS – GSE residential securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments. For investment securities, the Company uses a third-party service to provide cash flow estimates in the various rate environments. Savings, money market and interest-bearing checking accounts do not have stated maturities or re-pricing terms and can be withdrawn or re-price at any time. This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff. Management projects the re-pricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity. The model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term at current product interest rates. As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant.

Liquidity

Liquidity management ensures that adequate funds will be available to meet customers’ needs for borrowings, deposit withdrawals and maturities, facility expansion and normal operating expenses. Sources of liquidity are cash and cash equivalents, asset maturities and pay-downs within one year, loans HFS, investments AFS, growth of core deposits, utilization of borrowing capacities from the FHLB, correspondent banks, ICS and CDARs, the Discount Window of the Federal Reserve Bank of Philadelphia (FRB), Atlantic Community Bankers Bank (ACBB) and proceeds from the issuance of capital stock. Though regularly scheduled investment and loan payments are dependable sources of daily liquidity, sales of both loans HFS and investments AFS, deposit activity and investment and loan prepayments are significantly influenced by general economic conditions including the interest rate environment. During low and declining interest rate environments, prepayments from interest-sensitive assets tend to accelerate and provide significant liquidity that can be used to invest in other interest-earning assets but at lower market rates. Conversely, in periods of high or rising interest rates, prepayments from interest-sensitive assets tend to decelerate causing prepayment cash flows from mortgage loans and mortgage-backed securities to decrease. Rising interest rates may also cause deposit inflow but priced at higher market interest rates or could also cause deposit outflow due to higher rates offered by the Company’s competition for similar products. The Company closely monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities.

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The Company’s contingency funding plan (CFP) sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal. The Company established guidelines for identifying, measuring, monitoring and managing the resolution of potentially serious liquidity crises. The CFP outlines required monitoring tools, acceptable alternative

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funding sources and required actions during various liquidity scenarios. Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity conditions. At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s Asset/Liability Committee. As of ~~March 31,~~September 30, 2022, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, the Company generated ~~$0.5~~$37.2 million of cash. During the period, the Company’s operations provided approximately ~~$18.2~~$40.3 million mostly from ~~$17.8~~$54.7 million of net cash inflow from the components of net interest income plus ~~$12.2~~$12.0 million in proceeds over originations of loans HFS partially offset by net non-interest expense/income related payments of ~~$11.8 million.~~$25.2 million and $1.6 million in quarterly estimated tax payments. Cash inflow from interest-earning assets, deposits and loan payments were used to purchase investment securities and replace maturing and cash runoff of securities, fund the loan portfolio, invest in bank premises and equipment and make net dividend payments. The Company received a large amount of public deposits over the past six years. The seasonal nature of deposits from municipalities and other public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of cash outflow from this customer base, including maintaining the requirements to pledge investment securities. Accordingly, the use of short-term overnight borrowings could be used to fulfill funding gap needs. The CFP is a tool to help the Company ensure that alternative funding sources are available to meet its liquidity needs.

During 2020, 2021 and the first ~~quarter~~nine months of 2022, the Company also experienced deposit inflow resulting from businesses and municipalities that received relief from the CARES Act, American Rescue Plan Act and other government stimulus. There is uncertainty about the length of time that these deposits will remain which could require the Company to maintain elevated cash balances. The Company will continue to monitor deposit fluctuation for significant changes.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy. These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments.

Lending commitments include commitments to originate loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

As of ~~March 31,~~September 30, 2022, the Company maintained ~~$97.4~~$134.0 million in cash and cash equivalents and ~~$717.8~~$414.8 million of investments AFS and loans HFS. Also as of ~~March 31,~~September 30, 2022, the Company had approximately ~~$589.3~~$607.4 million available to borrow from the FHLB, $31.0 million from correspondent banks, ~~$111.7~~$113.6 million from the FRB and ~~$363.1~~$362.2 million from the IntraFi Network One-Way Buy program. The combined total of ~~$1.9~~$1.7 billion represented ~~79%~~68% of total assets at ~~March 31, 2022.~~September 30, 2022. Management believes this level of liquidity to be strong and adequate to support current operations.

Capital

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, total shareholders' equity decreased ~~$36.5~~$65.2 million, or ~~17%~~31%, due principally to a ~~$42.7~~$82.5 million after tax reduction in the net unrealized gain position to a net unrealized loss position in the Company’s investment portfolio, ~~and $1.9~~$5.7 million of cash dividends declared on the Company’s common ~~stock.~~stock and $1.2 million in treasury stock purchases. These items were partially offset by ~~$7.5~~$22.9 million in net income added into retained earnings, $0.3 million from investments in the Company’s common stock via the Employee Stock Purchase Plan (ESPP) and ~~$0.3~~$1.0 million from stock-based compensation expense from the ESPP and restricted stock and SSARs. The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was ~~25.1%~~24.7% for the ~~three~~nine months ended ~~March 31,~~September 30, 2022. The balance of earnings is retained to further strengthen the Company’s capital position.

As of ~~March 31,~~September 30, 2022, the Company reported a net unrealized loss position of ~~$42.5~~$82.3 million, net of tax, from the securities ~~AFS~~ portfolio compared to a net unrealized gain of $0.2 million as of December 31, 2021. The $82.5 million reduction during the first ~~three~~nine months of 2022 was from the ~~$42.7~~$64.5 million reduction in net unrealized gains to net unrealized losses on AFS securities, net of tax, and $18.0 million in net unrealized losses on HTM securities transferred from AFS, net of tax. Lower unrealized gains and higher unrealized losses on all types of securities contributed to the net unrealized losses in investment portfolio. Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and not in the creditworthiness of the issuers. Generally, when U.S. Treasury rates rise, investment securities’ pricing declines and fair values of investment securities also decline. While volatility has existed in the yield curve within the past twelve months, a rising rate environment is expected and during the period of rising rates, the Company expects pricing in the bond portfolio to decline. There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of investment securities.

To help maintain a healthy capital position, the Company can issue stock to participants in the DRP and ESPP plans. The DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants. During the first ~~quarter~~nine months of 2022, the Company acquired shares in the open market to fulfill the needs of the DRP. Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet.

Table Ofof Contents

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. A capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements of 2.50%. As of ~~March 31,~~September 30, 2022 and December 31, 2021, the Company and the Bank exceeded all capital adequacy requirements to which it was subject.

The Company continues to closely monitor and evaluate alternatives to enhance its capital ratios as the regulatory and economic environments change. The following table depicts the capital amounts and ratios of the Company, on a consolidated basis, and the Bank as of ~~March 31,~~September 30, 2022 and December 31, 2021:

													For capital adequacy					To be well capitalized
						For capital							purposes with capital					under prompt corrective
	Actual					adequacy purposes							conservation buffer					action provisions
(dollars in thousands)	Amount		Ratio			Amount			Ratio				Amount		Ratio			Amount			Ratio
As of September 30, 2022

Total capital (to risk-weighted assets)
Consolidated	$	224,313		14.3	%	≥	$	125,097		8.0	%	≥	$	164,190		10.5	%			N/A		N/A
Bank	$	223,871		14.3	%	≥	$	125,026		8.0	%	≥	$	164,097		10.5	%	≥	$	156,282		10.0	%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	207,496		13.3	%	≥	$	70,367		4.5	%	≥	$	109,460		7.0	%			N/A		N/A
Bank	$	207,054		13.3	%	≥	$	70,327		4.5	%	≥	$	109,398		7.0	%	≥	$	101,584		6.5	%

Tier I capital (to risk-weighted assets)
Consolidated	$	207,496		13.3	%	≥	$	93,823		6.0	%	≥	$	132,916		8.5	%			N/A		N/A
Bank	$	207,054		13.3	%	≥	$	93,769		6.0	%	≥	$	132,840		8.5	%	≥	$	125,026		8.0	%

Tier I capital (to average assets)
Consolidated	$	207,496		8.5	%	≥	$	97,488		4.0	%	≥	$	97,488		4.0	%			N/A		N/A
Bank	$	207,054		8.5	%	≥	$	97,481		4.0	%	≥	$	97,481		4.0	%	≥	$	121,851		5.0	%

For capital adequacy
To be well capitalized
For capital
purposes with capital
under prompt corrective
Actual
adequacy purposes
conservation buffer
action provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of March 31, 2022:
Total capital (to risk-weighted assets)
Consolidated
$
212,410
14.2%
≥
$
119,818
8.0%
≥
$
157,261
10.5%
N/A
N/A
Bank
$
212,223
14.2%
≥
$
119,811
8.0%
≥
$
157,251
10.5%
≥
$
149,763
10.0%
Tier 1 common equity (to risk-weighted assets)
Consolidated
$
196,278
13.1%
≥
$
67,397
4.5%
≥
$
104,840
7.0%
N/A
N/A
Bank
$
196,090
13.1%
≥
$
67,393
4.5%
≥
$
104,834
7.0%
≥
$
97,346
6.5%
Tier I capital (to risk-weighted assets)
Consolidated
$
196,278
13.1%
≥
$
89,863
6.0%
≥
$
127,306
8.5%
N/A
N/A
Bank
$
196,090
13.1%
≥
$
89,858
6.0%
≥
$
127,299
8.5%
≥
$
119,811
8.0%
Tier I capital (to average assets)
Consolidated
$
196,278
8.1%
≥
$
96,497
4.0%
≥
$
96,497
4.0%
N/A
N/A
Bank
$
196,090
8.1%
≥
$
96,486
4.0%
≥
$
96,486
4.0%
≥
$
120,608
5.0%

‎

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													For capital adequacy					To be well capitalized
						For capital							purposes with capital					under prompt corrective
	Actual					adequacy purposes							conservation buffer					action provisions
(dollars in thousands)	Amount		Ratio			Amount			Ratio				Amount		Ratio			Amount			Ratio
As of December 31, 2021

Total capital (to risk-weighted assets)
Consolidated	$	205,667		14.5	%	≥	$	113,421		8.0	%	≥	$	148,866		10.5	%			N/A		N/A
Bank	$	205,726		14.5	%	≥	$	113,406		8.0	%	≥	$	148,845		10.5	%	≥	$	141,757		10.0	%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	189,980		13.4	%	≥	$	63,800		4.5	%	≥	$	99,244		7.0	%			N/A		N/A
Bank	$	190,039		13.4	%	≥	$	63,791		4.5	%	≥	$	99,230		7.0	%	≥	$	92,142		6.5	%

Tier I capital (to risk-weighted assets)
Consolidated	$	189,980		13.4	%	≥	$	85,066		6.0	%	≥	$	120,510		8.5	%			N/A		N/A
Bank	$	190,039		13.4	%	≥	$	85,054		6.0	%	≥	$	120,493		8.5	%	≥	$	113,406		8.0	%

Tier I capital (to average assets)
Consolidated	$	189,980		7.9	%	≥	$	95,688		4.0	%	≥	$	95,688		4.0	%			N/A		N/A
Bank	$	190,039		7.9	%	≥	$	95,680		4.0	%	≥	$	95,680		4.0	%	≥	$	119,600		5.0	%

As of December 31, 2021:
Total capital (to risk-weighted assets)
Consolidated
$
205,667
14.5%
≥
$
113,421
8.0%
≥
$
148,866
10.5%
N/A
N/A
Bank
$
205,726
14.5%
≥
$
113,406
8.0%
≥
$
148,845
10.5%
≥
$
141,757
10.0%
Tier 1 common equity (to risk-weighted assets)
Consolidated
$
189,980
13.4%
≥
$
63,800
4.5%
≥
$
99,244
7.0%
N/A
N/A
Bank
$
190,039
13.4%
≥
$
63,791
4.5%
≥
$
99,230
7.0%
≥
$
92,142
6.5%
Tier I capital (to risk-weighted assets)
Consolidated
$
189,980
13.4%
≥
$
85,066
6.0%
≥
$
120,510
8.5%
N/A
N/A
Bank
$
190,039
13.4%
≥
$
85,054
6.0%
≥
$
120,493
8.5%
≥
$
113,406
8.0%
Tier I capital (to average assets)
Consolidated
$
189,980
7.9%
≥
$
95,688
4.0%
≥
$
95,688
4.0%
N/A
N/A
Bank
$
190,039
7.9%
≥
$
95,680
4.0%
≥
$
95,680
4.0%
≥
$
119,600
5.0%

The Company advises readers to refer to the Supervision and Regulation section of Management’s Discussion and Analysis of Financial Condition and Results of Operation, of its 2021 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective. The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended ~~March 31,~~September 30, 2022.

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PART II - Other Information

Item 1. Legal Proceedings

The nature of the Company’s business generates a certain amount of litigation involving matters arising in the ordinary course of business. However, in the opinion of the Company after consultation with legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material adverse effect on the Company’s undivided profits or financial condition, operations or the results of such operations. No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank. In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal or regulatory actions against the Company or the Bank.

Item 1A. Risk Factors

Management of the Company does not believe there have been any material changes to the risk factors that were disclosed in the 2021 Form 10-K filed with the Securities and Exchange Commission on March 23, 2022.

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

~~None~~

	(a)		(b)		(c)		(d)
Period	Total number of shares (or units) purchased		Average price paid per share (or unit)		Total number of shares (or units) purchased as part of publicly announced plans or programs		Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
June 1, 2022 to June 30, 2022		10,294	$	37.60		10,294	$	4,612,907
July 1, 2022 to July 31, 2022		19,508		39.27		19,508		3,846,893
August 1, 2022 to August 31, 2022		2,037		39.00		2,037		3,767,450
Total		31,839	$	38.71		31,839	$	3,767,450

On May 18, 2022, the Company announced that the Board of Directors approved a plan to purchase, in open market and privately negotiated transactions, up to 3% of its outstanding common stock in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. The plan shall terminate on the earlier of the date an aggregate of $5,000,000 of stock have been purchased or August 9, 2023.

Item 3. Default Upon Senior Securities

~~None~~

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

~~None~~

‎None

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Item 6. Exhibits

The following exhibits are filed herewith or incorporated by reference as a part of this Form 10-Q:

3(i) Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Annex B of the Proxy Statement/Prospectus included in Registrant’s Amendment 4 to its Registration Statement No. 333-90273 on Form S-4, filed with the SEC on April 6, 2000.

3(ii) Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the SEC on April 16, 2020.

2.1 Agreement and Plan of Reorganization by and among Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank, MNB Corporation and Merchants Bank of Bangor dated as of December 9, 2019. Incorporated by reference to Annex A of the Registrant’s Registration Statement No. 333-236453 on Form S-4, filed with the Commission on February 14, 2020. (Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request.)

2.2 Agreement and Plan of Reorganization by and among Fidelity D & D Bancorp, Inc., NEPA Acquisition Subsidiary, LLC, The Fidelity Deposit and Discount Bank, Landmark Bancorp, Inc. and Landmark Community Bank dated as of February 25, 2021. Incorporated by reference to Annex A of the Registrant’s Registration No. 333-255479 on Form S-4, filed with the Commission on April 23, 2021. (Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request.)

*10.1 ~~Registrant’s~~Registrant’s 2012 Dividend Reinvestment and Stock Repurchase Plan. Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement No. 333-183216 on Form S-3 filed with the SEC on August 10, 2012 as amended February 3, 2014.

*10.2 ~~Registrant’s~~Registrant’s 2002 Employee Stock Purchase Plan. Incorporated by reference to Appendix A to Definitive proxy Statement filed with the SEC on March 28, 2002.

*10.3 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Daniel J. Santaniello, dated March 23, 2011. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*10.4 2012 Omnibus Stock Incentive Plan. Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

*10.5 2012 Director Stock Incentive Plan. Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

*10.6Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Salvatore R. DeFrancesco, Jr. dated as of March 17, 2016. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 18, 2016.

*10.7 Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Eugene J. Walsh dated as of March 29, 2017. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.8 Form of Supplemental Executive Retirement Plan – Applicable to Daniel J. Santaniello and Salvatore R. DeFrancesco, Jr. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.9 Form of Supplemental Executive Retirement Plan – Applicable to Eugene J. Walsh. Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.10 Form of Split Dollar Life Insurance Agreement – Applicable to Daniel J. Santaniello, Salvatore R. DeFrancesco, Jr. and Eugene J. Walsh. Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.11 Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Michael J. Pacyna dated as of March 20, 2019. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 21, 2019.

*10.12 Form of Supplemental Executive Retirement Plan for Michael J. Pacyna. Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 21, 2019.

*10.13 Form of Split Dollar Life Insurance Agreement for Michael J. Pacyna. Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the SEC on March 21, 2019.

*10.14 2022 Omnibus Stock Incentive Plan. Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 23, 2022.

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31.1 Rule 13a-14(a) Certification of Principal Executive Officer, filed herewith.

31.2 Rule 13a-14(a) Certification of Principal Financial Officer, filed herewith.

32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

101 Interactive data files: The following, from Fidelity D&D Bancorp, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~September 30, 2022, is formatted in Inline XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of ~~March 31,~~September 30, 2022 and December 31, 2021; Consolidated Statements of Income for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021; Consolidated Statements of Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021; Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021; Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021 and the Notes to the Consolidated Financial Statements. **

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

~~________________________________________________~~

* Management contract or compensatory plan or arrangement.

** Pursuant to Rule 406T of Regulation S-T, the interactive data files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

‎

Table Ofof Contents

Signatures

~~Signatures~~

FIDELITY D & D BANCORP, INC.

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


	Fidelity D & D Bancorp, Inc.

Date: ~~May 12,~~November 10, 2022	/s/Daniel J. Santaniello
	Daniel J. Santaniello, President and Chief Executive Officer

	Fidelity D & D Bancorp, Inc.

Date: ~~May 12,~~November 10, 2022	/s/Salvatore R. DeFrancesco, Jr.
	Salvatore R. DeFrancesco, Jr., Treasurer and Chief Financial Officer

STATE OF INCORPORATION:	IRS EMPLOYER IDENTIFICATION NO:
Pennsylvania	23-3017653


Title of each class	Trading Symbols(s)	Name of each exchange on which registered
Common stock, without par value	FDBC	The NASDAQ Stock Market, LLC


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

Consolidated Statements of Comprehensive Income	Three months ended						Nine months ended
(Unaudited)	September 30,						September 30,
(dollars in thousands)	*2022*			2021			*2022*			2021

Net income	$	7,689		$	4,859		$	22,875		$	16,222

Other comprehensive (loss) gain, before tax:
Unrealized holding loss on available-for-sale debt securities		(27,590	)		(6,488	)		(81,603	)		(11,071	)
Reclassification adjustment for net gains realized in income		(4	)		(40	)		(4	)		(40	)
Reclassification of unrealized loss on securities transferred from available-for-sale to held-to-maturity		-			-			(23,882	)		-
Amortization of unrealized loss on held-to-maturity securities		565			-			1,120			-
Net unrealized loss		(27,029	)		(6,528	)		(104,369	)		(11,111	)
Tax effect		5,676			1,371			21,917			2,333
Unrealized loss, net of tax		(21,353	)		(5,157	)		(82,452	)		(8,778	)
Other comprehensive loss, net of tax		(21,353	)		(5,157	)		(82,452	)		(8,778	)
Total comprehensive (loss) income, net of tax	$	(13,664	)	$	(298	)	$	(59,577	)	$	7,444



Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income	Three months ended
(Unaudited)	March 31,
(dollars in thousands)	2022		2021

Net income	$	7,522	$	5,667

Other comprehensive loss, before tax:
Unrealized holding loss on available-for-sale debt securities		(54,020)		(9,860)
Reclassification adjustment for net gains realized in income		-		-
Net unrealized loss		(54,020)		(9,860)
Tax effect		11,344		2,071
Unrealized loss, net of tax		(42,676)		(7,789)
Other comprehensive loss, net of tax		(42,676)		(7,789)
Total comprehensive loss, net of tax	$	(35,154)	$	(2,122)

See notes to unaudited consolidated financial statements


Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of ~~March 31,~~September 30, 2022 and December 31, 2021	3
	Consolidated Statements of Income for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021	6
	Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021	78
	Notes to Consolidated Financial Statements (Unaudited)	910
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	5758
Item 4.	Controls and Procedures	6364

Part II. Other Information
Item 1.	Legal Proceedings		65
Item 1.1A.	~~Legal Proceedings~~Risk Factors	6465
Item ~~1A.~~2.	~~Risk Factors~~	64
~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds	6465
Item 3.	Defaults upon Senior Securities	6465
Item 4.	Mine Safety Disclosures	6465
Item 5.	Other Information	6465
Item 6.	Exhibits	6566
Signatures		6768


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)	March 31, 2022		December 31, 2021		*September 30, 2022*			December 31, 2021
Assets:
Cash and due from banks	$	37,695	$	27,317	$	64,980		$	27,317
Interest-bearing deposits with financial institutions		59,708		69,560		69,062			69,560
Total cash and cash equivalents		97,403		96,877		134,042			96,877
Available-for-sale securities		711,583		738,980		413,413			738,980
Held-to-maturity securities (fair value of $182,240 in 2022; $0 in 2021)						222,374			-
Restricted investments in bank stock		3,231		3,206		3,639			3,206
Loans and leases, net (allowance for loan losses of
$16,081 in 2022; $15,624 in 2021)		1,456,797		1,417,504
Loans held-for-sale (fair value $6,315 in 2022, $32,013 in 2021)		6,236		31,727
Loans and leases, net (allowance for loan losses of $16,779 in 2022; $15,624 in 2021)						1,506,163			1,417,504
Loans held-for-sale (fair value $1,405 in 2022; $32,013 in 2021)						1,386			31,727
Foreclosed assets held-for-sale		151		434		103			434
Bank premises and equipment, net		31,336		29,310		30,971			29,310
Leased property under finance leases, net		1,292		1,307		1,149			1,307
Right-of-use assets		8,903		9,006		8,806			9,006
Cash surrender value of bank owned life insurance		53,065		52,745		53,711			52,745
Accrued interest receivable		7,424		7,526		7,780			7,526
Goodwill		19,628		19,628		19,628			19,628
Core deposit intangible, net		1,834		1,942		1,636			1,942
Other assets		21,891		8,912		30,967			8,912
Total assets	$	2,420,774	$	2,419,104	$	2,435,768		$	2,419,104
Liabilities:
Deposits:
Interest-bearing	$	1,610,508	$	1,579,582	$	1,636,389		$	1,579,582
Non-interest-bearing		599,497		590,283		616,844			590,283
Total deposits		2,210,005		2,169,865		2,253,233			2,169,865
Accrued interest payable and other liabilities		14,090		15,943		17,675			15,943
Finance lease obligation		1,309		1,320		1,169			1,320
Operating lease liabilities		9,555		9,627		9,506			9,627
Short-term borrowings						10			-
Secured borrowings		10,572		10,620		7,688			10,620
Total liabilities		2,245,531		2,207,375		2,289,281			2,207,375
Shareholders' equity:
Preferred stock authorized 5,000,000 shares with no par value; NaN issued		-		-
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 5,659,068 at March 31, 2022; and 5,645,687 at December 31, 2021)		114,666		114,108
Preferred stock authorized 5,000,000 shares with no par value; none issued						-			-
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 5,630,332 at September 30, 2022; and 5,645,687 at December 31, 2021)						115,337			114,108
Retained earnings		103,074		97,442		114,658			97,442
Accumulated other comprehensive (loss) income		(42,497)		179		(82,273	)		179
Treasury stock, at cost (31,945 shares at September 30, 2022 and no shares at December 31, 2021)						(1,235	)		-
Total shareholders' equity		175,243		211,729		146,487			211,729
Total liabilities and shareholders' equity	$	2,420,774	$	2,419,104	$	2,435,768		$	2,419,104

See notes to unaudited consolidated financial statements


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
(dollars in thousands except per share data)	March 31, 2022		March 31, 2021
Interest income:
Loans and leases:
Taxable	$	14,367	$	12,188
Nontaxable		409		320
Interest-bearing deposits with financial institutions		33		21
Restricted investments in bank stock		31		33
Investment securities:
U.S. government agency and corporations		1,508		700
States and political subdivisions (nontaxable)		1,381		854
States and political subdivisions (taxable)		449		224
Total interest income		18,178		14,340
Interest expense:
Deposits		822		864
Secured borrowings		65		-
FHLB advances		-		26
Total interest expense		887		890
Net interest income		17,291		13,450
Provision for loan losses		525		800
Net interest income after provision for loan losses		16,766		12,650
Other income:
Service charges on deposit accounts		799		566
Interchange fees		1,176		949
Service charges on loans		441		511
Fees from trust fiduciary activities		617		494
Fees from financial services		267		175
Fees and other revenue		380		178
Earnings on bank-owned life insurance		319		296
Gain (loss) on write-down, sale or disposal of:
Loans		712		2,347
Premises and equipment		(157)		-
Total other income		4,554		5,516
Other expenses:
Salaries and employee benefits		6,714		5,226
Premises and equipment		1,925		1,642
Data processing and communication		712		603
Advertising and marketing		781		901
Professional services		719		937
Merger-related expenses		-		523
Automated transaction processing		369		292
Office supplies and postage		179		113
PA shares tax		160		50
Loan collection		35		50
Other real estate owned		(25)		25
FDIC assessment		237		111
FHLB prepayment fee		-		369
Other		848		614
Total other expenses		12,654		11,456
Income before income taxes		8,666		6,710
Provision for income taxes		1,144		1,043
Net income	$	7,522	$	5,667
Per share data:
Net income - basic	$	1.33	$	1.14
Net income - diluted	$	1.32	$	1.13
Dividends	$	0.33	$	0.30

See notes to unaudited consolidated financial statements

For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)									Accumulated
									other
	Capital stock					Retained			comprehensive			Treasury
(dollars in thousands)	Shares			Amount		earnings			income (loss)			Stock			Total
Balance, December 31, 2020		4,977,750		$	77,676	$	80,042		$	8,952		$	-		$	166,670
Net income							16,222									16,222
Other comprehensive loss										(8,778	)					(8,778	)
Issuance of common stock through Employee Stock Purchase Plan		4,738			270											270
Issuance of common stock from vested restricted share grants through stock compensation plans		13,209			-											-
Issuance of common stock through exercise of SSARs		2,000														-
Stock-based compensation expense					860											860
Issuance of common stock for acquisition		647,990			35,056											35,056
Cash dividends declared							(4,731	)								(4,731	)
Balance, September 30, 2021		5,645,687		$	113,862	$	91,533		$	174		$	-		$	205,569

Balance, December 31, 2021		5,645,687		$	114,108	$	97,442		$	179		$	-		$	211,729
Net income							22,875									22,875
Other comprehensive loss										(82,452	)					(82,452	)
Issuance of common stock through Employee Stock Purchase Plan		4,891			252											252
Forfeited restricted dividend reinvestment shares		(106	)										-			-
Issuance of common stock from vested restricted share grants through stock compensation plans		11,699			-											-
Stock-based compensation expense					977											977
Common stock repurchased		(31,839	)										(1,235	)		(1,235	)
Cash dividends declared							(5,659	)								(5,659	)
Balance, September 30, 2022		5,630,332		$	115,337	$	114,658		$	(82,273	)	$	(1,235	)	$	146,487


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 2022 and 2021
(Unaudited)							Accumulated
							other
	Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income (loss)		Total
Balance, December 31, 2020		4,977,750	$	77,676	$	80,042	$	8,952	$	166,670
Net income						5,667				5,667
Other comprehensive loss								(7,789)		(7,789)
Issuance of common stock through Employee Stock Purchase Plan		4,738		270						270
Issuance of common stock from vested restricted share grants through stock compensation plans		11,059		-						-
Issuance of common stock through exercise of SSARs		2,000		-						-
Stock-based compensation expense				276						276
Cash dividends declared						(1,512)				(1,512)
Balance, March 31, 2021		4,995,547	$	78,222	$	84,197	$	1,163	$	163,582

Balance, December 31, 2021		5,645,687	$	114,108	$	97,442	$	179	$	211,729
Net income						7,522				7,522
Other comprehensive loss								(42,676)		(42,676)
Issuance of common stock through Employee Stock Purchase Plan		4,891		252						252
Issuance of common stock from vested restricted share grants through stock compensation plans		8,490		-						-
Stock-based compensation expense				306						306
Cash dividends declared						(1,890)				(1,890)
Balance, March 31, 2022		5,659,068	$	114,666	$	103,074	$	(42,497)	$	175,243

See notes to unaudited consolidated financial statements

For the Three Months Ended September 30, 2022 and 2021
(Unaudited)									Accumulated
									other
	Capital stock					Retained			comprehensive			Treasury
(dollars in thousands)	Shares			Amount		earnings			income (loss)			Stock			Total
Balance, June 30, 2021		4,995,713		$	78,473	$	88,381		$	5,331		$	-		$	172,185
Net income							4,859									4,859
Other comprehensive loss										(5,157	)					(5,157	)
Issuance of common stock from vested restricted share grants through stock compensation plans		1,984			-											-
Stock-based compensation expense					333											333
Issuance of common stock for acquisition		647,990			35,056											35,056
Cash dividends declared							(1,707	)								(1,707	)
Balance, September 30, 2021		5,645,687		$	113,862	$	91,533		$	174		$	-		$	205,569

Balance, June 30, 2022		5,651,777		$	115,079	$	108,848		$	(60,920	)	$	(388	)	$	162,619
Net income							7,689									7,689
Other comprehensive loss										(21,353	)					(21,353	)
Forfeited restricted dividend reinvestment shares		(58	)										-			-
Issuance of common stock from vested restricted share grants through stock compensation plans		158			-											-
Stock-based compensation expense					258											258
Common stock repurchased		(21,545	)										(847	)		(847	)
Cash dividends declared							(1,879	)								(1,879	)
Balance, September 30, 2022		5,630,332		$	115,337	$	114,658		$	(82,273	)	$	(1,235	)	$	146,487



Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Three months ended March 31,
(dollars in thousands)	2022		2021

Cash flows from operating activities:
Net income	$	7,522	$	5,667
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		1,402		1,394
Provision for loan losses		525		800
Deferred income tax expense (benefit)		439		(544)
Stock-based compensation expense		306		266
Excess tax benefit from exercise of SSARs		-		26
Proceeds from sale of loans held-for-sale		30,239		82,284
Originations of loans held-for-sale		(18,048)		(60,426)
Earnings from bank-owned life insurance		(319)		(296)
Net gain from sales of loans		(712)		(2,347)
Net gain from sales of investment securities		-		-
Net (gain) loss from sale and write-down of foreclosed assets held-for-sale		(44)		(15)
Net loss from write-down and disposal of bank premises and equipment		157		-
Operating lease payments		31		7
Change in:
Accrued interest receivable		101		(11)
Other assets		(1,501)		(1,605)
Accrued interest payable and other liabilities		(1,853)		492
Net cash provided by operating activities		18,245		25,692

Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		-		-
Proceeds from maturities, calls and principal pay-downs		10,057		14,276
Purchases		(37,930)		(69,290)
Increase in restricted investments in bank stock		(24)		(118)
Net increase in loans and leases		(27,254)		(25,056)
Principal portion of lease payments received under direct finance leases		1,494		1,123
Purchases of bank premises and equipment		(3,242)		(286)
Proceeds from sale of foreclosed assets held-for-sale		764		107
Net cash used in investing activities		(56,135)		(79,244)

Cash flows from financing activities:
Net increase in deposits		40,149		213,425
Net decrease in other borrowings		(36)		-
Repayment of FHLB advances		-		(5,000)
Repayment of finance lease obligation		(59)		(24)
Proceeds from employee stock purchase plan participants		252		270
Dividends paid		(1,890)		(1,512)
Net cash provided by financing activities		38,416		207,159
Net increase in cash and cash equivalents		526		153,607
Cash and cash equivalents, beginning		96,877		69,346

Cash and cash equivalents, ending	$	97,403	$	222,953

See notes to unaudited consolidated financial statements


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
(Unaudited)	Three months ended March 31,
(dollars in thousands)	2022		2021
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	928	$	1,046
Income tax		-		-
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized gains on available-for-sale securities		(54,020)		(9,860)
Transfers from loans to foreclosed assets held-for-sale		437		249
Transfers from/(to) loans to/(from) loans held-for-sale, net		(12,798)		1,491
Transfers from premises and equipment to other assets held-for-sale		633		-
Security settlement pending		-		7,894
Right-of-use asset		50		-
Lease liability		50		-



See notes to unaudited consolidated financial statements

*As of and for the nine months ended September 30, 2022*
	Unrealized gains
	(losses) on			Securities
	available-for-sale			transferred to
(dollars in thousands)	debt securities			held-to-maturity			Total
Beginning balance	$	179		$	-		$	179

Other comprehensive loss before reclassifications, net of tax		(64,466	)		(17,983	)		(82,449	)
Amounts reclassified from accumulated other comprehensive income, net of tax		(3	)		-			(3	)
Net current-period other comprehensive loss		(64,469	)		(17,983	)		(82,452	)
Ending balance	$	(64,290	)	$	(17,983	)	$	(82,273	)

Details about accumulated other
comprehensive income components	Amount reclassified from accumulated												Affected line item in the statement
(dollars in thousands)	other comprehensive income												where net income is presented
	For the three months						For the nine months
	ended September 30,						ended September 30,
	2022			2021			2022			2021

Unrealized gains (losses) on AFS debt securities	$	4		$	40		$	4		$	40		Gain (loss) on sale of investment securities
Income tax effect		(1	)		(9	)		(1	)		(9	)	Provision for income taxes
Total reclassifications for the period	$	3		$	31		$	3		$	31		Net income



~~As of and for the three months ended March 31, 2022~~
	~~Unrealized gains~~
	~~(losses) on~~
	~~available-for-sale~~
~~(dollars in thousands)~~	~~debt securities~~
~~Beginning balance~~	$	~~179~~

~~Other comprehensive loss before reclassifications, net of tax~~		~~(42,676)~~
~~Amounts reclassified from accumulated other comprehensive income, net of tax~~		-
~~Net current-period other comprehensive loss~~		~~(42,676)~~
~~Ending balance~~	$	~~(42,497)~~

			*Gross*		*Gross*
	*Amortized*		*unrealized*		*unrealized*			*Fair*
(dollars in thousands)	*cost*		*gains*		*losses*			*value*
September 30, 2022
Held-to-maturity securities:
Agency - GSE	$	80,039	$	-	$	(9,574	)	$	70,465
Obligations of states and political subdivisions		142,335		-		(30,560	)		111,775

Total held-to-maturity securities	$	222,374	$	-	$	(40,134	)	$	182,240

Available-for-sale debt securities:
Agency - GSE	$	37,050	$	-	$	(4,714	)	$	32,336
Obligations of states and political subdivisions		198,534		324		(35,256	)		163,602
MBS - GSE residential		259,209		-		(41,734	)		217,475

Total available-for-sale debt securities	$	494,793	$	324	$	(81,704	)	$	413,413



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
March 31, 2022
Available-for-sale debt securities:
Agency - GSE	$	124,134	$	59	$	(9,961)	$	114,232
Obligations of states and political subdivisions		364,689		1,432		(27,498)		338,623
MBS - GSE residential		276,553		116		(17,941)		258,728

Total available-for-sale debt securities	$	765,376	$	1,607	$	(55,400)	$	711,583



	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		losses		value		losses		value		losses

March 31, 2022
Agency - GSE	$	64,808	$	(5,309)	$	43,387	$	(4,652)	$	108,195	$	(9,961)
Obligations of states and political subdivisions		257,752		(23,838)		29,713		(3,660)		287,465		(27,498)
MBS - GSE residential		219,792		(14,985)		28,377		(2,956)		248,169		(17,941)
Total	$	542,352	$	(44,132)	$	101,477	$	(11,268)	$	643,829	$	(55,400)
Number of securities		341				54				395

December 31, 2021
Agency - GSE	$	84,308	$	(1,460)	$	26,516	$	(1,140)	$	110,824	$	(2,600)
Obligations of states and political subdivisions		193,124		(2,662)		12,796		(399)		205,920		(3,061)
MBS - GSE residential		137,495		(2,351)		9,469		(327)		146,964		(2,678)
Total	$	414,927	$	(6,473)	$	48,781	$	(1,866)	$	463,708	$	(8,339)
Number of securities		187				26				213



														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
March 31, 2022	past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing

Commercial and industrial	$	773	$	-	$	49	$	822	$	252,141	$	252,963		$	-
Commercial real estate:
Non-owner occupied		-		-		478		478		310,185		310,663			-
Owner occupied		-		82		1,443		1,525		249,053		250,578			143
Construction		-		-		-		-		22,779		22,779			-
Consumer:
Home equity installment		58		-		-		58		47,794		47,852			-
Home equity line of credit		-		-		171		171		55,169		55,340			-
Auto loans		339		85		172		596		118,486		119,082			-
Direct finance leases		149		-		31		180		25,527		25,707	⁽²⁾		31
Other		26		-		-		26		8,281		8,307			-
Residential:
Real estate		-		-		137		137		343,223		343,360			-
Construction		-		-		-		-		36,247		36,247			-
Total	$	1,345	$	167	$	2,481	$	3,993	$	1,468,885	$	1,472,878		$	174



			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
March 31, 2022
Commercial and industrial	$	49	$	49	$	-	$	49	$	49
Commercial real estate:
Non-owner occupied		866		73		793		866		1
Owner occupied		2,904		1,361		922		2,283		551
Consumer:
Home equity installment		33		-		-		-		-
Home equity line of credit		210		20		151		171		4
Auto loans		232		20		152		172		5
Residential:
Real estate		184		-		137		137		-
Total	$	4,478	$	1,523	$	2,155	$	3,678	$	610



	March 31, 2022
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	250,718	$	329	$	1,916	$	-	$	252,963
Commercial real estate - non-owner occupied		290,314		16,257		4,092		-		310,663
Commercial real estate - owner occupied		234,123		6,579		9,876		-		250,578
Commercial real estate - construction		22,779		-		-		-		22,779
Total commercial	$	797,934	$	23,165	$	15,884	$	-	$	836,983



	March 31, 2022				March 31, 2021
			Weighted-				Weighted-
	Shares		average grant		Shares		average grant
	granted		date fair value		granted		date fair value

Director plan	18,000	⁽²⁾	$	49.85	12,500	⁽²⁾	$	52.00
Omnibus plan	16,520	⁽³⁾		49.85	13,552	⁽³⁾		52.00
Omnibus plan	-				50	⁽¹⁾		58.17
Omnibus plan	-				36	⁽³⁾		58.17
Total	34,520		$	49.85	26,138		$	52.02



	2012 Stock incentive plans
	Director	Omnibus	Total		Weighted- average grant date fair value
Non-vested balance at December 31, 2021	14,920	28,123	43,043		53.20
Granted	18,000	16,520	34,520		49.85
Forfeited	-	(47)	(47)		52.00
Vested	(6,164)	(2,326)	(8,490)		53.81
Non-vested balance at March 31, 2022	26,756	42,270	69,026	$	51.45



	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)
Outstanding December 31, 2021	94,332		9.66	5.5
Granted	-
Exercised	-
Forfeited	-
Outstanding March 31, 2022	94,332	$	9.66	5.3


As of December 31, 2021:

Total capital (to risk-weighted assets)
Consolidated	$	205,667	14.5%	≥	$	113,421	8.0%	≥	$	148,866	10.5%			N/A	N/A
Bank	$	205,726	14.5%	≥	$	113,406	8.0%	≥	$	148,845	10.5%	≥	$	141,757	10.0%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	189,980	13.4%	≥	$	63,800	4.5%	≥	$	99,244	7.0%			N/A	N/A
Bank	$	190,039	13.4%	≥	$	63,791	4.5%	≥	$	99,230	7.0%	≥	$	92,142	6.5%

Tier I capital (to risk-weighted assets)
Consolidated	$	189,980	13.4%	≥	$	85,066	6.0%	≥	$	120,510	8.5%			N/A	N/A
Bank	$	190,039	13.4%	≥	$	85,054	6.0%	≥	$	120,493	8.5%	≥	$	113,406	8.0%

Tier I capital (to average assets)
Consolidated	$	189,980	7.9%	≥	$	95,688	4.0%	≥	$	95,688	4.0%			N/A	N/A
Bank	$	190,039	7.9%	≥	$	95,680	4.0%	≥	$	95,680	4.0%	≥	$	119,600	5.0%