PENNS WOODS BANCORP INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)


RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income is determined by calculating the difference between the
yields earned on interest-earning assets and the rates paid on interest-bearing
liabilities. To compare the tax-exempt asset yields to taxable yields, amounts
are adjusted to taxable equivalents based on the marginal corporate federal tax
rate of 21%.  The tax equivalent adjustments to net interest income for 2021,
2020, and 2019 were $449,000, $476,000, and $489,000, respectively.

2021 vs. 2020

Reported net interest income increased $1,495,000 to $49,718,000 for the year
ended December 31, 2021 compared to the year ended December 31, 2020, as the
growth in the earning asset portfolio and decline in rate paid on
interest-bearing liabilities more than offset a decrease in the yield on earning
assets to 3.35% from 3.80%.  Total interest income decreased $4,224,000 or
$4,251,000 on a tax equivalent basis, primarily from a decrease in the tax
equivalent yield on the loan portfolio decreasing 28 basis points ("bp"). Tax
equivalent interest income on the investment portfolio decreased $541,000 as the
yield on the investment portfolio decreased 54 bp. The decrease in the yield on
the earning asset portfolio was driven by the impact of the continued low
interest rate environment resulting from the COVID-19 pandemic.

Interest expense decreased $5,719,000 to $8,696,000 for the year ended
December 31, 2021 compared to 2020. The decrease in interest expense was driven
by a 51 bp decrease in the average rate paid on interest-bearing deposits led by
a 61 bp decrease in the average rate paid on time deposits. The decrease in the
average rate paid on interest-bearing deposits was offset by an increase in the
balance of the average interest-bearing deposit portfolio of $51,034,000 while
the average balance of the time deposit portfolio decreased $94,554,300.
Interest expense on total borrowings decreased $699,000 as the balance of
average total borrowings decreased $32,644,000 due to FHLB long-term borrowings
totaling $30,000,000 maturing during the year ended December 31, 2021. The
decrease in the overall rate paid on interest-bearing liabilities is the result
of the continued low interest rate environment.

2020 vs. 2019

Reported net interest income decreased $2,592,000 to $48,223,000 for the year
ended December 31, 2020 compared to the year ended December 31, 2019, as the
growth in the earning asset portfolio was offset by a decrease in the yield on
earning assets to 3.80% from 4.33%.  Total interest income decreased $4,136,000
primarily from a decrease in the tax equivalent yield on the loan portfolio
decreasing 16 basis points ("bp") coupled with a decrease in the average balance
of the loan portfolio of $26,382,000. Tax equivalent interest income on the
investment portfolio decreased $688,000 as the yield on the investment portfolio
decreased 65 bp. The decrease in the yield on the earning asset portfolio was
driven by the impact of the continued low interest rate environment resulting
from the COVID-19 pandemic.

Interest expense decreased $1,544,000 to $14,415,000 for the year ended
December 31, 2020 compared to 2019. The decrease in interest expense was driven
by a 14 bp decrease in the average rate paid on interest-bearing deposits led by
a 29 bp decrease in the average rate paid on money market deposits. The decrease
in the average rate paid on interest-bearing deposits was offset by an increase
in the balance of the average interest-bearing deposit portfolio of $45,673,000.
Interest expense on total borrowings decreased $666,000 as the balance of
average total borrowings decreased $15,442,000 due to the growth in the deposit
portfolio. The decrease in the overall rate paid on interest-bearing liabilities
is the result of the continued low interest rate environment.




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Table of contents BALANCES AND AVERAGE INTEREST RATES

The following tables set forth certain information relating to the Corporation's
average balance sheet and reflect the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid.  Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.

                                                                         2021                                                              2020                                                              2019
                                              Average Balance                                                   Average Balance                                                   Average Balance
(Dollars In Thousands)                              (1)              Interest            Average Rate                 (1)              Interest            Average Rate                 (1)              Interest            Average Rate
Assets:
Tax-exempt loans (3)                          $     46,312          $  1,308                      2.82  %       $     45,650          $  1,441                      3.16  %       $     66,435          $  2,038                      3.07  %
All other loans (4)                              1,299,321            52,199                      4.02  %          1,304,209            56,079                      4.30  %          1,309,806            58,774                      4.49  %
Total loans (2)                                  1,345,633            53,507                      3.98  %          1,349,859            57,520                      4.26  %          1,376,241            60,812                      4.42  %

Fed funds sold                                      28,395               202                      0.71  %                  -                 -                         -  %                  -                 -                         -  %

Taxable securities                                 148,066             4,083                      2.80  %            142,714             4,630                      3.30  %            134,935             5,306                      3.99  %
Tax-exempt securities (3)                           36,993               829                      2.27  %             28,973               823                      2.89  %             25,702               835                      3.29  %
Total securities                                   185,059             4,912                      2.69  %            171,687             5,453                      3.23  %            160,637             6,141                      3.88  %

Interest-bearing deposits                          201,273               242                      0.12  %            140,022               141                      0.10  %             21,161               310                      2.00  %

Total interest-earning assets                    1,760,360           
58,863                      3.35  %          1,661,568            63,114                      3.80  %          1,558,039            67,263                      4.33  %

Other assets                                       129,582                                                           118,536                                                           111,839

Total assets                                  $  1,889,942                                                      $  1,780,104                                                      $  1,669,878

Liabilities and shareholders' equity:
Savings                                       $    225,637               116                      0.05  %       $    193,568               256                      0.13  %       $    169,832               216                      0.13  %
Super Now deposits                                 307,446               900                      0.29  %            254,177             1,755                      0.69  %            231,816             1,758                      0.76  %
Money market deposits                              305,883               972                      0.32  %            245,633             1,529                      0.62  %            239,317             2,184                      0.91  %
Time deposits                                      244,341             3,557                      1.46  %            338,895             7,025                      2.07  %            345,635             7,285                      2.11  %
Total interest-bearing deposits                  1,083,307             5,545                      0.51  %          1,032,273            10,565                      1.02  %            986,600            11,443                      1.16  %

Short-term borrowings                                7,178                 9                      0.13  %             12,660                43                      0.34  %             34,897               793                      2.27  %
Long-term borrowings                               135,474             3,142                      2.32  %            162,636             3,807                      2.34  %            155,841             3,723                      2.25  %
Total borrowings                                   142,652             3,151                      2.21  %            175,296             3,850                      2.20  %            190,738             4,516                      2.25  %

Total interest-bearing liabilities               1,225,959             8,696                      0.71  %          1,207,569            14,415                      1.19  %          1,177,338            15,959                      1.34  %

Demand deposits                                    478,984                                                           394,210                                                           321,443
Other liabilities                                   23,568                                                            20,858                                                            22,379
Shareholders' equity                               161,431                                                           157,467                                                           148,718

Total liabilities and shareholders'
equity                                        $  1,889,942                                                      $  1,780,104                                                      $  1,669,878
Interest rate spread                                                                              2.64  %                                                           2.61  %                                                           2.99  %
Net interest income/margin                                          $
50,167                      2.85  %                             $ 48,699                      2.94  %                             $ 51,304                      3.31  %



1.Information on this table has been calculated using average daily balance
sheets to obtain average balances.
2.Non-accrual loans have been included with loans for the purpose of analyzing
net interest earnings.
3.Income and rates on a fully taxable equivalent basis include an adjustment for
the difference between annual income from tax-exempt obligations and the taxable
equivalent of such income at the standard tax rate of 21%.
4.Fees on loans are included with interest on loans as follows: 2021 - $852,000;
2020 - $695,000; 2019 - $775,000.


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Contents

            Reconciliation of Taxable Equivalent Net Interest Income
(In Thousands)                                          2021          2020          2019
Total interest income                                $ 58,414      $ 62,638      $ 66,774
Total interest expense                                  8,696        14,415        15,959
Net interest income                                    49,718        48,223        50,815
Tax equivalent adjustment                                 449           476           489

Net interest income (fully taxable equivalent) $50,167 $48,699

     $ 51,304



Rate/Volume Analysis

The table below sets forth certain information regarding changes in our interest
income and interest expense for the periods indicated. For interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in average volume multiplied by
old rate) and (ii) changes in rates (changes in rate multiplied by old average
volume). Increases and decreases due to both interest rate and volume, which
cannot be separated, have been allocated proportionally to the change due to
volume and the change due to interest rate.  Income and interest rates are on a
taxable equivalent basis.

                                                                                              Year Ended December 31,
                                                                      2021 vs. 2020                                             2020 vs. 2019
                                                                Increase (Decrease) Due To                                Increase (Decrease) Due To
(In Thousands)                                           Volume                Rate             Net               Volume              Rate               Net
Interest income:
Loans, tax-exempt                                  $        2               $  (135)         $  (133)         $   (600)            $      3          $   (597)
Loans                                                    (211)               (3,669)          (3,880)             (248)              (2,447)           (2,695)
Fed funds sold                                            202                     -              202                 -                    -                 -
Taxable investment securities                              32                  (579)            (547)               62                 (738)             (676)
Tax-exempt investment securities                          104                   (98)               6                46                  (58)              (12)
Interest-bearing deposits                                  30                    71              101             1,259               (1,428)             (169)
Total interest-earning assets                             159                (4,410)          (4,251)              519               (4,668)           (4,149)

Interest expense:
Savings deposits                                            3                  (143)            (140)               40                    -                40
Super Now deposits                                         41                  (896)            (855)               80                  (83)               (3)
Money market deposits                                      58                  (615)            (557)                3                 (658)             (655)
Time deposits                                          (1,687)               (1,781)          (3,468)             (132)                (128)             (260)
Short-term borrowings                                     (14)                  (20)             (34)             (321)                (429)             (750)
Long-term borrowings                                     (633)                  (32)            (665)               44                   40                84
Total interest-bearing liabilities                     (2,232)               (3,487)          (5,719)             (286)              (1,258)           

(1,544)

Change in net interest income                      $    2,391               $  (923)         $ 1,468          $    805             $ (3,410)         $ (2,605)



PROVISION FOR LOAN LOSSES

2021 vs. 2020

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


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Contents

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

Although management believes that it uses the best information available to make
such determinations and that the allowance for loan losses is adequate at
December 31, 2021, future adjustments could be necessary if circumstances or
economic conditions differ substantially from the assumptions used in making the
initial determinations.  A downturn in the local economy or employment and
delays in receiving financial information from borrowers could result in
increased levels of nonperforming assets and charge-offs, increased loan loss
provisions and reductions in interest income.  Additionally, as an integral part
of the examination process, bank regulatory agencies periodically review the
Banks' loan loss allowance. The banking regulators could require additions to
the loan loss allowance based on their judgment of information available to them
at the time of their examination.

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

The allowance for loan losses increased from $13,803,000 at December 31, 2020 to
$14,176,000 at December 31, 2021.  At December 31, 2021, the allowance for loan
losses was 1.02% of total loans compared to 1.03% of total loans at December 31,
2020.

The provision for loan losses totaled $640,000 for the year ended December 31,
2021 compared to $2,625,000 for the year ended December 31, 2020.  The decrease
in the provision was appropriate when considering the economic impact of the
COVID-19 pandemic, reduction in non-performing loans, and level of net
charge-offs during 2021.  Net charge-offs of $267,000 represented 0.02% of
average loans for the year ended December 31, 2021 compared to net charge-offs
of $716,000 or 0.05% of average loans for the year ended December 31, 2020. 

the

impact of the COVID-19 pandemic coupled with supply chain disruptions led to an
increase in the provision related to the commercial real estate mortgage segment
of the loan portfolio. A decrease occurred in the automobile segment of the loan
portfolio which coupled with a lower level of unemployment led to a decreased
allowance for loan losses for this segment. Nonperforming loans decreased
$4,084,000 as the economic environment improved as COVID-19 restrictions
lessened. The majority of the nonperforming loans are centered on several loans
that are either in a secured position and have sureties with a strong underlying
financial position and/or a specific allowance within the allowance for loan
losses.  Internal loan review and analysis, level of net charge-offs, decreased
level of nonperforming loans noted previously, and the economic impact of the
COVID-19 pandemic, dictated an decrease in the provision for loan losses.
Utilizing both internal and external resources, as noted, senior management has
concluded that the allowance for loan losses remains at a level adequate to
provide for probable losses inherent in the loan portfolio.

2020 vs. 2019

The allowance for loan losses increased from $11,894,000 at December 31, 2019 to
$13,803,000 at December 31, 2020.  At December 31, 2020, the allowance for loan
losses was 1.03% of total loans compared to 0.88% of total loans at December 31,
2019. This increase is due in large part to the economic uncertainty caused by
the COVID-19 pandemic.

The provision for loan losses totaled $2,625,000 for the year ended December 31,
2020 compared to $2,735,000 for the year ended December 31, 2019.  The decrease
in the provision was appropriate when considering the economic uncertainty
caused by the COVID-19 pandemic and level of net charge-offs during 2020.  Net
charge-offs of $716,000 represented 0.05% of average loans for the year ended
December 31, 2020 compared to net charge-offs of $4,678,000 or 0.34% of average
loans for the year ended December 31, 2019.  The decrease in the loan portfolio
was driven by the residential real estate segment that declined $33,535,000 as
consumers refinanced their mortgage as they took advantage of historically low
mortgage rates on the secondary market. Growth occurred in the automobile
segment of the portfolio which due to the economic uncertainty and level of
unemployment due to the COVID-19 pandemic required an increased allowance for
loan losses. Nonperforming loans decreased $2,087,000 as a nonperforming loan
was paid-off during the fourth quarter of 2020. The majority of the
nonperforming loans are centered on several loans that are either in a secured
position and have sureties with a strong underlying financial position and/or a
specific allowance within the allowance for loan losses.  Internal loan review
and analysis, level of net charge-offs, decreased level of nonperforming loans
noted previously, and the economic uncertainty caused by the COVID-19 pandemic,
dictated an decrease in the provision for loan losses.  Utilizing both internal
and external resources, as noted, senior management has concluded that the
allowance for loan losses remains at a level adequate to provide for probable
losses inherent in the loan portfolio.
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  T    a    b    l    e     of Conte    n    t    s
NON-INTEREST INCOME

2021 vs. 2020

Total non-interest income decreased $499,000 from the year ended December 31,
2020 to December 31, 2021. Excluding net security gains, non-interest income
increased $450,000 year over year. Bank owned life insurance increased primarily
due to gains recognized on the receipt of death benefits. Debit card income
increased $231,000 primarily due to an increase in debit card usage resulting
from a lessening of COVID-19 restrictions and as consumers return to historical
purchasing levels. Gain on sale of loans decreased as an increased proportion of
secondary market loan originations were conducted in a broker capacity which
resulted in other income increasing significantly.

                                                             2021                                    2020                                  Change
(In Thousands)                                   Amount              % Total             Amount              % Total             Amount               %
Service charges                                $  1,703                 14.59  %       $  1,690                 13.89  %       $    13                 0.77  %
Net securities gains, available for sale            699                  5.99             1,592                 13.08             (893)              

(56.09)

Net equity securities (losses) gains                (37)                (0.32)               27                  0.22              (64)             

(237.04)

Net securities losses, trading                       (3)                (0.03)              (11)                (0.09)               8               (72.73)
Bank owned life insurance                           916                  7.85               653                  5.37              263                40.28
Gain on sale of loans                             2,474                 21.20             4,148                 34.09           (1,674)              (40.36)
Insurance commissions                               553                  4.74               416                  3.42              137                32.93
Brokerage commissions                               851                  7.29               970                  7.97             (119)              (12.27)
Loan broker income                                2,164                 18.55               673                  5.53            1,491               221.55
Debit card income                                 1,511                 12.95             1,280                 10.52              231                18.05
Other                                               838                  7.19               730                  6.00              108                14.79
Total non-interest income                      $ 11,669                100.00  %       $ 12,168                100.00  %       $  (499)               (4.10) %



2020 vs. 2019

Total non-interest income increased $1,716,000 from the year ended December 31,
2019 to December 31, 2020. Excluding net security gains, non-interest income
increased $856,000 year over year. Service charges decreased primarily due to
overdraft income declining as a result of the government actions taken to
contain the spread of COVID-19 and economic stimulus provided by the government.
Insurance commissions along with brokerage commissions decreased primarily from
the impact of the uncertainty surrounding the economy. Debit card income
decreased $98,000 primarily due to a decline in debit card usage resulting from
the stay at home government actions taken to contain the spread of COVID-19.
Gain on sale of loans increased significantly as the low interest rate
environment caused an increase in the number of homeowners who refinanced their
mortgage to take advantage of historically low interest rates.
                                                               2020                                    2019                                 Change
(In Thousands)                                     Amount              % Total             Amount              % Total             Amount              %
Service charges                                  $  1,690                 13.89  %       $  2,411                 23.07  %       $  (721)            (29.90) %
Net securities gains, available for sale            1,592                 13.08               640                  6.12              952             148.75
Net equity securities gains                            27                  0.22                89                  0.85              (62)             69.66
Net securities (losses) gains, trading                (11)                (0.09)               19                  0.18              (30)            157.89
Bank owned life insurance                             653                  5.37               574                  5.49               79              13.76
Gain on sale of loans                               4,148                 34.09             1,754                 16.78            2,394             136.49
Insurance commissions                                 416                  3.42               433                  4.14              (17)             (3.93)
Brokerage commissions                                 970                  7.97             1,358                 12.99             (388)            (28.57)
Loan broker income                                    673                  5.53             1,058                 10.12             (385)            (36.39)
Debit card income                                   1,280                 10.52             1,378                 13.18              (98)             (7.11)
Other                                                 730                  6.00               738                  7.08               (8)             (1.08)
Total non-interest income                        $ 12,168                100.00  %       $ 10,452                100.00  %       $ 1,716              16.42  %



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  T    a    b    l    e     of Conte    n    t    s
NON-INTEREST EXPENSE

2021 vs. 2020

Total non-interest expenses increased $1,837,000 from the year ended
December 31, 2020 to December 31, 2021. The increase in salaries and employee
benefits was attributable to routine wage and benefit increases in addition to a
return to full staffing levels as branch lobbies were temporarily closed during
a period of 2020 due to the COVID-19 pandemic. Occupancy expense increased
primarily due to increased depreciation and maintenance costs as certain
projects were delayed due to the COVID-19 pandemic in 2020. Marketing expenses
increased as advertising returned to normal levels after being reduced during
2020 due to the pandemic. Other expenses decreased as general office supply and
miscellaneous expenses decreased year over year.

                                                               2021                                    2020                                 Change
(In Thousands)                                     Amount              % Total             Amount              % Total             Amount              %
Salaries and employee benefits                   $ 23,014                 56.26  %       $ 21,632                 55.37  %       $ 1,382               6.39  %
Occupancy                                           3,209                  7.85             2,650                  6.78              559              21.09
Furniture and equipment                             3,522                  8.61             3,411                  8.73              111               3.25
Software amortization                                 868                  2.12               978                  2.50             (110)            (11.25)
Pennsylvania shares tax                             1,350                  3.30             1,289                  3.30               61               4.73
Professional fees                                   2,432                  5.95             2,362                  6.05               70               2.96
Federal Deposit Insurance Corporation
deposit insurance                                     963                  2.35               939                  2.40               24               2.56

Marketing                                             545                  1.33               261                  0.67              284             108.81
Intangible amortization                               191                  0.47               227                  0.58              (36)            (15.86)
Other                                               4,811                 11.76             5,319                 13.62             (508)             (9.55)
Total non-interest expense                       $ 40,905                100.00  %       $ 39,068                100.00  %       $ 1,837               4.70  %



2020 vs. 2019

Total non-interest expenses decreased $640,000 from the year ended December 31,
2019 to December 31, 2020. The decrease in salaries and employee benefits was
attributable to staff layoffs resulting from branch lobbies being temporarily
closed during a period of 2020 due to the COVID-19 pandemic. Furniture and
equipment expense and software amortization increased due to continued
enhancement of systems, in particular those related to electronic banking
channels. Marketing expenses decreased as advertising was reduced during 2020
due to the pandemic. The increase in deposit insurance reflects the increase in
deposit balances and the FDIC assessment credit that was recorded during 2019.
                                                               2020                                    2019                                 Change
(In Thousands)                                     Amount              % Total             Amount              % Total            Amount              %
Salaries and employee benefits                   $ 21,632                 55.37  %       $ 21,829                 54.97  %       $ (197)             (0.90) %
Occupancy                                           2,650                  6.78             2,712                  6.83             (62)             (2.29)
Furniture and equipment                             3,411                  8.73             3,248                  8.18             163               5.02
Software amortization                                 978                  2.50               871                  2.19             107              12.28
Pennsylvania shares tax                             1,289                  3.30             1,148                  2.89             141              12.28
Professional fees                                   2,362                  6.05             2,474                  6.23            (112)             (4.53)
Federal Deposit Insurance Corporation
deposit insurance                                     939                  2.40               578                  1.46             361              

62.46

Write down of assets held for sale                      -                     -               475                  1.20            (475)             

n / A

Loss on sale of premises and equipment                  -                     -               474                  1.19            (474)             n/a
Marketing                                             261                  0.67               425                  1.07            (164)            (38.59)
Intangible amortization                               227                  0.58               264                  0.66             (37)            (14.02)
Other                                               5,319                 13.62             5,210                 13.13             109               2.09
Total non-interest expense                       $ 39,068                100.00  %       $ 39,708                100.00  %       $ (640)             (1.61) %



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  T    a    b    l    e     of Conte    n    t    s
INCOME TAXES

2021 vs. 2020

The provision for income taxes for the year December 31, 2021 resulted in an effective tax rate of 19.12% compared to 18.58% for 2020.

2020 vs. 2019

The provision for income taxes for the year December 31, 2019 resulted in an effective tax rate of 18.58% compared to 16.67% for 2018.

                              FINANCIAL CONDITION

INVESTMENTS

2021

The fair value of the investment portfolio increased $4,109,000 from
December 31, 2020 to December 31, 2021. The increase in value is the result of
growth in the municipal segment of the portfolio as the investment portfolio
continues to be actively managed in order to reduce interest rate and market
risk. This strategy is being deployed through selective purchasing of bonds that
mature within ten years. The unrealized losses within the debt securities
portfolio are the result of market activity, not credit issues/ratings, as
approximately 85% of the debt securities portfolio on an amortized cost basis is
currently rated A or higher by either S&P or Moody's.

2020

The fair value of the investment portfolio increased $13,658,000 from
December 31, 2019 to December 31, 2020. The increase in value is the result of
growth in the municipal segment of the portfolio as the investment portfolio
continues to be actively managed in order to reduce interest rate and market
risk. This strategy is being deployed through selective purchasing of bonds that
mature within ten years. The unrealized losses within the debt securities
portfolio are the result of market activity, not credit issues/ratings, as
approximately 83% of the debt securities portfolio on an amortized cost basis is
currently rated A or higher by either S&P or Moody's.

The book values ​​of marketable securities are summarized as follows for the years ended December 31, 20212020 and 2019:

                                                                2021                                        2020                                        2019
(In Thousands)                                    Balance             % Portfolio             Balance             % Portfolio             Balance  
          % Portfolio
Available for sale (AFS):

Mortgage-backed securities                      $   1,747                     1.04  %       $   2,141                     1.31  %       $   4,966                     3.31  %

State and political securities
(tax-exempt)                                       38,563                    23.00  %          34,736                    21.23  %          22,575                    15.07  %
State and political securities (taxable)           78,095                    46.57  %          73,277                    44.79  %          59,711                    39.83  %
Other bonds, notes and debentures                  48,005                    28.63  %          52,107                    31.85  %          61,367                    40.93  %
Total debt securities                             166,410                    99.23  %         162,261                    99.19  %         148,619                    99.12  %

Equity securities:
Other investment equity securities                  1,251                     0.75  %           1,288                     0.79  %           1,261                     0.84  %
Trading securities                                     37                     0.02  %              40                     0.02  %              51                     0.03  %
Total equity securities                             1,288                     0.77  %           1,328                     0.81  %           1,312                     0.88  %

Total                                           $ 167,698                   100.00  %       $ 163,589                   100.00  %       $ 149,931                   100.00  %





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  T    a    b    l    e     of Conte    n    t    s
The following table shows the maturities and repricing of investment securities,
at amortized cost and the weighted average yields (for tax-exempt obligations on
a fully taxable basis assuming a 21% tax rate) at December 31, 2021:

                                                                      Over One Year
                                                 Over Year or         Through Five           Over Five Years                               Amortized Cost
(In Thousands)                                       Less                 Years             Through Ten Years        Over Ten Years            Total
Mortgage-backed securities:
AFS Amount                                       $       -          $         -             $         -             $       1,752          $    1,752
Yield                                                    -  %                 -     %                 -     %                2.58  %             2.58   %

State and political securities
(tax-exempt):
AFS Amount                                           7,564               16,937                  12,747                       498              37,746
Yield                                                 1.28  %              1.16     %              2.61     %                3.65  %             1.71   %
State and political securities
(taxable):
AFS Amount                                           2,667               37,406                  35,268                       765              76,106
Yield                                                 1.19  %              1.82     %              2.89     %                1.32  %             2.29   %
Other bonds, notes, and debentures:
AFS Amount                                           2,281               35,337                  10,184                         -              47,802
Yield                                                 0.87  %              2.47     %              3.18     %                   -  %             2.56   %
Total Amount                                     $  12,512          $    89,680             $    58,199             $       3,015             163,406
Total Yield                                           1.18  %              1.95     %              2.88     %                2.44  %             2.25   %
Equity Securities
Investment Equity Amount                                                                                                                        1,300
Trading Amount                                                                                                                                     50
Total Investment Portfolio Value                                                                                                           $  164,756
Total Investment Portfolio Yield                                                                                                                 2.23   %



All yields represent weighted average yields expressed on a tax equivalent
basis.  They are calculated on the basis of the cost, adjusted for amortization
of premium and accretion of discount, and effective yields weighted for the
scheduled maturity of each security.  The taxable equivalent adjustment
represents the difference between annual income from tax-exempt obligations and
the taxable equivalent of such income at the standard 21% tax rate (derived by
dividing tax-exempt interest by 79%).

The distribution of credit ratings based on amortized cost and estimated fair value of the debt securities portfolio at December 31, 2021 follows:

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

Mortgage-backed securities              $         1,752          $   1,747          $            -          $         -          $        -               $         -          $       -          $         -          $         1,752          $   1,747

State and political securities                  111,412            114,096                   1,259                1,377                   -                         -              1,181                1,185                  113,852            116,658
Other debt securities                            26,204             26,184                   5,529                5,603                   -                         -             16,069               16,218                   47,802             48,005
Total debt securities                   $       139,368          $ 142,027          $        6,788          $     6,980          $        -               $         -          $  17,250          $    17,403          $       163,406          $ 166,410



LOAN PORTFOLIO

2021

Gross loans of $1,392,147,000 at December 31, 2021 represented an increase of
$47,820,000 from December 31, 2020. The commercial real estate segment of the
loan portfolio had the largest increase from the previous year as emphasis has
been placed on this segment of the portfolio coupled with our entrance into the
Altoona market during 2020. Indirect auto lending declined within the portfolio
as supply chain issues limited dealer activity. Indirect auto lending and home
equity lines are part of the overall strategy to maintain the duration of the
earning asset portfolio in preparation for a rising interest rate environment.



                                       24

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Table of Contents 2020

Gross loans of $1,344,327,000 at December 31, 2020 represented a decrease of
$11,217,000 from December 31, 2019. The residential real estate segment of the
loan portfolio had the largest decrease from the previous year as the
historically low interest rate environment caused homeowners to refinance their
mortgage in the secondary market. Indirect auto lending continued to grow within
the portfolio as the product continued to expand in northeast and central
Pennsylvania. Indirect auto lending and home equity lines are part of the
overall strategy to shorten the duration of the earning asset portfolio in
preparation for a rising interest rate environment. Commercial real estate
mortgages increased $9,927,000 but remained at approximately 28% of the total
loan portfolio.

The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loan at December 31, 2021, 2020, 2019,
2018, and 2017:
                                                   2021                                        2020                                       2019                                        2018                                        2017
(In Thousands)                         Amount               % Total                Amount               % Total               Amount               % Total                Amount               % Total                Amount               % Total
Commercial, financial, and
agricultural                       $   163,285                  11.73  %       $   164,743                 12.25  %       $   156,213                  11.52  %       $   188,561                  13.62  %       $   178,885                 14.35  %
Real estate mortgage:
Residential                            595,847                  42.80              589,721                 43.87              623,256                  45.98              622,379                  44.94              597,077                 47.90
Commercial                             446,734                  32.09              373,188                 27.76              363,261                  26.80              371,695                  26.84              332,019                 26.63
Construction                            37,295                   2.68               39,309                  2.92               38,067                   2.81               43,523                   3.14               31,683                  2.54
Consumer Automobile                    139,408                  10.01              156,403                 11.64              150,517                  11.10              133,183                   9.63               79,714                  6.40
Other consumer installment
loans                                    9,277                   0.67               19,940                  1.48               23,043                   1.70               24,552                   1.77               26,964                  2.16
Net deferred loan fees and
discounts                                  301                   0.02                1,023                  0.08                1,187                   0.09                  864                   0.06                  272                  0.02
Gross loans                        $ 1,392,147                 100.00  %       $ 1,344,327                100.00  %       $ 1,355,544                
100.00  %       $ 1,384,757                 100.00  %       $ 1,246,614                100.00  %



The amounts of domestic loans at December 31, 2021 are presented below by
category and maturity:

                                              Commercial,                                  Real Estate
                                            financial, and                                                                              Consumer           Other consumer
(In Thousands)                               agricultural             Residential          Commercial           Construction           automobile            installment              Total
Loans with variable interest rates:
1 year or less                            $            219          $      1,114          $      218          $         610          $         -          $          559          $     2,720
1 through 5 years                                    8,515                 4,182               9,636                    338                    -                       -               22,671
5 through 15 years                                  37,135                65,626             134,918                  8,368                    -                      38              246,085
After 15 years                                      47,801               476,898             261,248                 16,918                    -                   2,769              805,634
Total floating interest rate loans                  93,670               547,820             406,020                 26,234                    -                   3,366            1,077,110
Loans with fixed interest rates:
1 year or less                                       1,609                   623               1,289                    164                1,200                     352                5,237
1 through 5 years                                   34,576                 3,536               6,366                  1,848               85,288                   3,483              135,097
5 through 15 years                                  31,925                13,029              28,184                  4,236               52,920                   2,076              132,370
After 15 years                                       1,505                30,839               4,875                  4,813                    -                       -               42,032
Total fixed interest rate loans                     69,615                48,027              40,714                 11,061              139,408                   5,911              314,736
Total                                     $        163,285          $    595,847          $  446,734          $      37,295          $   139,408          $        9,277            1,391,846
Net deferred loan fees and                                                                                                                                                                301
discounts                                                                                                                                                                         $ 1,392,147



·     The loan maturity information is based upon original loan terms and is not
adjusted for "rollovers."  In the ordinary course of business, loans maturing
within one year may be renewed, in whole or in part, at interest rates
prevailing at the date of renewal.
·          Scheduled repayments are reported in maturity categories in which the
payment is due.

                                       25

————————————————– ——————————

T able of C on ten ts Banks do not provide loans that provide for negative amortization, and no loans contain conversion clauses. The Banks had no outstanding foreign loans at December 31, 2021.

The following table shows the amount of cumulative and non-cumulative TDRs at
December 31, 20212020 and 2019:

                                                          2021                                                   2020                                                    2019
(In Thousands)                       Accrual           Nonaccrual           Total           Accrual           Nonaccrual            Total           Accrual           Nonaccrual            Total
Commercial, financial, and
agricultural                        $   314          $       574          $   888          $   988          $       862          $  1,850          $     -          $     2,190          $  2,190
Real estate mortgage:
Residential                           3,999                  178            4,177            3,889                   90             3,979            4,089                  144             4,233
Commercial                            1,836                2,509            4,345            2,107                4,423             6,530            2,127                4,732             6,859
Construction                              -                    -                -                -                    -                 -                -                    -                 -
Other consumer installment
loans                                     -                    -                -                -                    -                 -                -                    -                 -
                                    $ 6,149          $     3,261          $ 9,410          $ 6,984          $     5,375          $ 12,359          $ 6,216          $     7,066          $ 13,282



ALLOWANCE FOR LOAN LOSSES

2021

The allowance for loan losses represents the amount which management estimates
is adequate to provide for probable losses inherent in its loan portfolio as of
the consolidated balance sheet date.  All loan losses are charged to the
allowance and all recoveries are credited to it per the allowance method of
providing for loan losses.  The allowance for loan losses is established through
a provision for loan losses charged to operations.  The provision for loan
losses is based upon management's quarterly review of the loan portfolio.  The
purpose of the review is to assess loan quality, identify impaired loans,
analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and
recoveries, and assess general economic conditions in the markets served. An
external independent loan review is also performed semi-annually for the Banks.
Management remains committed to an aggressive program of problem loan
identification and resolution.

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

The allowance for loan losses increased from $13,803,000 at December 31, 2020 to
$14,176,000 at December 31, 2021.  At December 31, 2021 and 2020, the allowance
for loan losses to total loans was 1.02% and 1.03%, respectively.  Net loan
charge-offs of $267,000 or 0.02% of average loans for the year ended December
31, 2021 countered the impact of the provision for loan losses of $640,000. The
allowance for loan losses remained stable as the gross loan portfolio increased
3.56% and the portfolio continued to be impacted by the economic uncertainty
that has resulted from the COVID-19 pandemic. The COVID-19 pandemic has resulted
in various businesses operating at less than 100% capacity and supply chain
issues. Management concluded that the allowance for loan losses is adequate to
provide for probable losses inherent in its loan portfolio as of the balance
sheet date as noted in the provision for loan losses discussion.

Based on management's loan-by-loan review, the past performance of the
borrowers, and current economic conditions, including recent business closures
and bankruptcy levels, management does not anticipate any current losses related
to nonaccrual, nonperforming, or classified loans above those that have already
been considered in its overall judgment of the adequacy of the allowance for
loan losses.

2020

The allowance for loan losses increased from $11,894,000 at December 31, 2019 to
$13,803,000 at December 31, 2020.  At December 31, 2020 and 2019, the allowance
for loan losses to total loans was 1.03% and 0.88%, respectively.  Net loan
charge-offs of $716,000 or 0.05% of average loans for the year ended December
31, 2020 countered the impact of the provision for loan losses of
$2,625,000. Driving the increase in the allowance for loan losses was the
economic uncertainty that has resulted from the COVID-19 pandemic. The COVID-19
pandemic has resulted in various businesses operating at less than 100%
capacity, an increase in the unemployment rate, and an increase in the number of
loans that have been granted payment
                                       26
--------------------------------------------------------------------------------
  T    a    b    l    e     of Conte    n    t    s
deferrals. In response to the uncertainty in both the business and consumer
sectors caused by the COVID-19 pandemic and as well as the level of precision in
estimating the effects of a pandemic, a higher than normal unallocated reserve
is considered necessary. Management concluded that the allowance for loan losses
is adequate to provide for probable losses inherent in its loan portfolio as of
the balance sheet date as noted in the provision for loan losses discussion.

                                                                                             Allocation of the Allowance For Loan Losses

                                        December 31, 2021                        December 31, 2020                        December 31, 2019                        December 31, 2018                        December 31, 2017
(In Thousands)                     Amount              % Total              Amount              % Total              Amount              % Total       
      Amount              % Total              Amount              % Total
Balance at end of period
applicable to:
Commercial, financial,
and agricultural                $   1,946                 11.73  %       $   1,936                 12.26  %       $   1,779                 11.53  %       $   1,680                 13.63  %       $   1,177                 14.35 

%

Real estate mortgage:
Residential                         4,701                 42.81              4,460                 43.90              4,306                 46.02              5,616                 44.97              5,679                 47.91
Commercial                          5,336                 32.10              3,635                 27.78              3,210                 26.82              4,047                 26.86              4,277                 26.64
Construction                          179                  2.68                134                  2.93                118                  2.81                143                  3.14                155                  2.54
Consumer automobiles                1,411                 10.02              1,906                 11.65              1,780                 11.11              1,328                  9.62                804                  6.40
Other consumer
installment loans                     111                  0.66                261                  1.48                278                  1.71                259                  1.78                271                  2.16
Unallocated                           492                     -              1,471                     -                423                     -                764                     -                495                     -
                                $  14,176                100.00  %       $  13,803                100.00  %       $  11,894                100.00  %       $  13,837                100.00  %       $  12,858                100.00  %


An additional allowance for loan losses and net recoveries (write-offs) is shown in the tables below.

                                             Amount of                                                                                                             Ratio of Net
                                           Allowance for                               Allowance for                                                               (Charge-Offs)
                                            Loan Losses                               Loan Losses to          Net (Charge-Offs)                                Recoveries to Average
(In Thousands)                               Allocated           Total loans         Total Loans Ratio           Recoveries              Average Loans                 Loans
December 31, 2021
Commercial, financial, and
agricultural                              $         1,946       $   163,285                    1.19  %       $            (10)         $      175,631                       (0.01) %
Real estate mortgage:
Residential                                         4,701           595,847                    0.79  %                   (107)                584,849                       (0.02) %
Commercial                                          5,336           446,734                    1.19  %                     95                 381,306                        0.02  %
Construction                                          179            37,295                    0.48  %                     10                  41,564                        0.02  %
Consumer automobiles                                1,411           139,408                    1.01  %                   (143)                152,496                       (0.09) %
Other consumer installment loans                      111             9,277                    1.20  %                   (112)                  9,787                       (1.14) %
Unallocated                                           492
                                          $        14,176       $ 1,391,846                    1.02  %       $           (267)         $    1,345,633                       (0.02) %

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



                                       27

————————————————– ——————————

  T    a    b    l    e     of Conte    n    t    s
                                                                                                                                                                    Ratio of Net
                                              Amount of                                 Allowance for                                                               (Charge-Offs)
                                              Allowance                                Loan Losses to          Net (Charge-Offs)                                Recoveries to Average
(In Thousands)                                Allocated           Total loans         Total Loans Ratio           Recoveries              Average Loans                 Loans
December 31, 2020
Commercial, financial, and
agricultural                               $         1,936       $   164,743                    1.18  %       $            (28)         $      164,876                       (0.02) %
Real estate mortgage:
Residential                                          4,460           589,721                    0.76  %                   (205)                606,069                       (0.03) %
Commercial                                           3,635           373,188                    0.97  %                    (64)                359,788                       (0.02) %
Construction                                           134            39,309                    0.34  %                     11                  41,423                        0.03  %
Consumer automobiles                                 1,906           156,403                    1.22  %                   (321)                156,063                       (0.21) %
Other consumer installment loans                       261            19,940                    1.31  %                   (109)                 21,640                       (0.50) %
Unallocated                                          1,471
                                           $        13,803       $ 1,343,304                    1.03  %       $           (716)         $    1,349,859                       (0.05) %
Total non-accrual loans outstanding        $         9,122
Non-accrual loans to total loans
outstanding                                        0.68  %
Allowance for loan losses to
non-accrual loans                                151.32  %


                                                                                                                                                                    Ratio of Net
                                              Amount of                                 Allowance for                                                               (Charge-Offs)
                                              Allowance                                Loan Losses to          Net (Charge-Offs)                                Recoveries to Average
(In Thousands)                                Allocated           Total loans         Total Loans Ratio           Recoveries              Average Loans                 Loans
December 31, 2019
Commercial, financial, and
agricultural                               $         1,779       $   156,213                    1.14  %       $         (2,813)         $      181,164                       (1.55) %
Real estate mortgage:
Residential                                          4,306           623,256                    0.69  %                   (341)                620,941                       (0.05) %
Commercial                                           3,210           363,261                    0.88  %                   (149)                365,445                       (0.04) %
Construction                                           118            38,067                    0.31  %                     10                  39,809                        0.03  %
Consumer automobiles                                 1,780           150,517                    1.18  %                   (250)                144,573                       (0.17) %
Other consumer installment loans                       278            23,043                    1.21  %                 (1,135)                 24,309                       (4.67) %
Unallocated                                            423
                                           $        11,894       $ 1,354,357                    0.88  %       $         (4,678)         $    1,376,241                       (0.34) %
Total non-accrual loans outstanding        $        10,374
Non-accrual loans to total loans
outstanding                                        0.77  %
Allowance for loan losses to
non-accrual loans                                114.65  %



Over the last three years, various quantitative and qualitative factors indicate
changes in our provision for loan losses. The provision for commercial and
agricultural loans decreased during 2021 due to levels and trends of nonaccrual
loans in our portfolio and a decline in net charge-offs. The provision for
residential real estate loans remained flat as the porfolio size increased
slightly and the level of net charge-offs declined modestly. The provision for
this loan type is adjusted by national indices as well as our historical losses.
The provision for commercial and construction real estate loans increased as the
economic environment has continued to remain soft as the impact of the COVID-19
pandemic and associated supply chain issues is felt within the markets we serve.
The provision for consumer automobiles decreased due to reduction in indirect
loan volume and a decrease in portfolio size. The provision for other consumer
installment loans has decreased as the portfolio declined to $9,277,000 at
December 31, 2021 from $19,940,000 at December 31, 2020. The COVID-19 pandemic
and associated supply chain issues has resulted in various businesses operating
at less than 100% capacity. This has caused an increase in the risk profile of
the commercial segment of the loan portfolio resulting in a provision shift from
unallocated to the commercial real estate mortgage segment of the loan
portfolio. Average loan amounts are calculated off of end of month balances.
                                       28

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Contents

The provision for commercial and agricultural loans decreased during 2020 due to
levels and trends of nonaccrual loans in our portfolio and a decline in
charge-offs. The change in the provision for residential real estate loans vary
based on our observations of industry trends during 2020 in national and market
area foreclosure rates and the impact of the COVID-19 pandemic. The provision
for this loan type is adjusted by national indices as well as our historical
losses. The provision for commercial and construction real estate loans
increased as the economic environment has softened as the impact of the COVID-19
pandemic is felt within the markets we serve. The provision for consumer
automobiles decreased slightly due to the leveling off of indirect loan volume.
The provision for other consumer installment loans has decreased as the level of
charge-offs has declined. The COVID-19 pandemic has resulted in various
businesses operating at less than 100% capacity, an increase in the unemployment
rate, and an increase in the number of loans that have been granted payment
deferrals. In response to the uncertainty in both the business and consumer
sectors caused by the COVID-19 pandemic and as well as the level of precision in
estimating the effects of a pandemic, a higher than normal unallocated reserve
is considered necessary.

NON-PERFORMING LOANS

The decrease in nonperforming loans during 2021 is primarily due to improved
loan portfolio performance despite the continued impact of the COVID-19
pandemic. The majority of the nonperforming loans are centered on several loans
that are either in a secured position and have sureties with a strong underlying
financial position and/or a specific allowance within the allowance for loan
losses.

The following table presents information concerning nonperforming loans.  The
accrual of interest will be discontinued when the principal or interest of a
loan is in default for 90 days or more, or as soon as payment is questionable,
unless the loan is well secured and in the process of collection. Consumer loans
and residential real estate loans secured by 1 to 4 family dwellings are not
ordinarily subject to those guidelines.  The reversal of previously accrued but
uncollected interest applicable to any loan placed in a nonaccrual status and
the treatment of subsequent payments of either principal or interest is handled
in accordance with GAAP.  These principles do not require a write-off of
previously accrued interest if principal and interest are ultimately protected
by sound collateral values.  A nonperforming loan may be restored to accruing
status when:

1. Principal and interest are no longer due and unpaid; 2. It becomes well secured and being collected; and 3. The outlook for future contractual payments is no longer uncertain.

                               Total Nonperforming Loans
(In Thousands)       90 Days Past Due      Nonaccrual        Total
2021                $      861            $     5,389      $ 6,250
2020                     1,212                  9,122       10,334
2019                     2,047                 10,374       12,421
2018                     1,274                 15,298       16,572
2017                       509                  6,759        7,268



The level of non-accruing loans continues to fluctuate annually and is
attributed to the various economic factors experienced both regionally and
nationally.  Overall, the portfolio is well secured with a majority of the
balance making regular payments or scheduled to be satisfied in the near
future.  Presently, there are no significant loans where serious doubts exist as
to the ability of the borrower to comply with the current loan payment terms
which are not included in the nonperforming categories as indicated above.

Management's judgment in determining the amount of the additions to the
allowance charged to operating expense considers the following factors with no
single factor being determinative:
1.        Economic conditions and the impact on the loan portfolio;
2.        Analysis of past loan charge-offs experienced by category and
comparison to outstanding loans;
3.        Effect of problem loans on overall portfolio quality; and
4.        Reports of examination of the loan portfolio by the Department and the
FDIC.







                                       29

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  T    a    b    l    e     of Conte    n    t    s
DEPOSITS

2021 vs. 2020

Total average deposits increased $135,808,000 or 9.52% from 2020 to 2021.
Noninterest-bearing deposits average balance increased $84,774,000 as customers
received funding from various government programs that were designed to combat
the effects of the COVID-19 pandemic while seeking safety in bank deposits.

2020 vs. 2019

Total average deposits increased $118,440,000 or 9.05% from 2020 to 2021.
Noninterest-bearing deposits average balance increased $72,767,000 as customers
received funding from various government programs that were designed to combat
the effects of the COVID-19 pandemic.

The average amount and average rate paid on deposits are summarized below for the years ended December 31, 20212020 and 2019:

                                      2021                         2020                         2019
                               Average                      Average                      Average
(In Thousands)                 Amount          Rate         Amount          Rate         Amount          Rate
Noninterest-bearing         $   478,984       0.00  %    $   394,210       0.00  %    $   321,443       0.00  %
Savings                         225,637       0.05           193,568       0.13           169,832       0.13
Super Now                       307,446       0.29           254,177       0.69           231,816       0.76
Money Market                    305,883       0.32           245,633       0.62           239,317       0.91
Time                            244,341       1.46           338,895       2.07           345,635       2.11
Total average deposits      $ 1,562,291       0.36  %    $ 1,426,483       0.74  %    $ 1,308,043       0.88  %


The following table shows the expected maturities of term deposits that exceed the FDIC insurance limit at December 31, 2021.

(In Thousands)                                  2021
Due within 3 months or less                  $  8,060

More than 3 months and less than 6 months 26,128 More than 6 months and less than 12 months 6,938 More than 12 months

                            13,217

Total                                        $ 54,343



From December 31, 2021 and 2020, the Company had $656,484,000 and $433,759,000respectively, in uninsured deposits.

SHAREHOLDERS' EQUITY

2021

Shareholders' equity increased $8,128,000 to $172,274,000 at December 31, 2021
compared to December 31, 2020.  Accumulated other comprehensive loss of
$1,112,000 at December 31, 2021 increased from a loss of $882,000 at December
31, 2020 as a result of a decrease of $2,341,000 in the net unrealized gain on
available for sale securities and a change in the defined benefit plan of
$2,111,000. The current level of shareholders' equity equates to a book value
per share of $24.37 at December 31, 2021 compared to $23.27 at December 31,
2020, and an equity to asset ratio of 8.88% at December 31, 2021 and 8.95% at
December 31, 2020. Dividends declared for the twelve months ended December 31,
2021 and 2020 were $1.28 per share.




                                       30

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Table of Contents 2020

Shareholders' equity increased $9,182,000 to $164,142,000 at December 31, 2020
compared to December 31, 2019. The change in accumulated other comprehensive
loss from $2,777,000 at December 31, 2019 to $882,000 at December 31, 2020 is a
result of an increase in unrealized gains on available for sale securities (from
an unrealized gain of $2,455,000 at December 31, 2019 to an unrealized gain of
$4,714,000 at December 31, 2020). The amount of accumulated other comprehensive
loss at December 31, 2020 was also impacted by the change in net excess of the
projected benefit obligation over the fair value of the plan assets of the
defined benefit pension plan, resulting in an increase in the net loss of
$364,000. The current level of shareholders' equity equates to a book value per
share of $23.27 at December 31, 2020 compared to $22.01 at December 31, 2019,
and an equity to asset ratio of 8.95% at December 31, 2020 compared to 9.31% at
December 31, 2019. Dividends declared for the twelve months ended December 31,
2020 and 2019 were $1.28 per share and $1.26 per share, respectively.

Bank regulators have risk based capital guidelines.  Under these guidelines the
Corporation and each Bank are required to maintain minimum ratios of core
capital and total qualifying capital as a percentage of risk weighted assets and
certain off-balance sheet items. At December 31, 2021, both the Corporation's
and each Bank's required ratios were well above the minimum ratios (and
including the current capital conservation buffer where applicable) as follows:

                                                                                Jersey Shore                                         Minimum
                                                        Corporation              State Bank              Luzerne Bank               Standards
Common equity tier 1 capital to risk-weighted
assets                                                        10.791  %              10.337  %                  11.164  %                7.000  %
Tier 1 capital to risk-weighted assets                        10.791  %              10.337  %                  11.164  %                8.500  %
Total capital to risk-weighted assets                         11.776  %              11.309  %                  12.182  %               10.500  %
Tier 1 capital to average assets                               8.397  %               8.326  %                   7.537  %                4.000  %



For a more comprehensive discussion of these requirements, see "Regulation and
Supervision" in Item 1 of the Annual Report on Form 10-K.  Management believes
that the Corporation and the Banks will continue to exceed regulatory capital
requirements.

RETURN ON EQUITY AND ASSETS

The ratio of net income to average total assets and average shareholders’ equity, as well as certain other equity ratios are presented as follows:

                                                                  2021                    2020                    2019
Percentage of net income to:
Average total assets                                                  0.85  %                 0.85  %                 0.94  %
Average shareholders' equity                                          9.93  %                 9.66  %                10.54  %
Percentage of dividends declared to net income                       56.39  %                59.32  %                56.27  %
Percentage of average shareholders' equity to average total
assets                                                                8.54  %                 8.85  %                 8.91  %


LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK

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

The following liquidity measures are monitored for compliance and were within the limits cited in December 31, 2021.

1.  Net Loans to Total Assets, 85% maximum
2.  Net Loans to Total Deposits, 100% maximum
3.  Cumulative 90 day Maturity GAP %, +/- 20% maximum
4.  Cumulative 1 Year Maturity GAP %, +/- 25% maximum

Fundamental objectives of the Corporation's asset/liability management process
are to maintain adequate liquidity while minimizing interest rate risk. The
maintenance of adequate liquidity provides the Corporation with the ability to
meet its financial obligations to depositors, loan customers, and shareholders.
Additionally, it provides funds for normal operating expenditures and business
opportunities as they arise.  The objective of interest rate sensitivity
management is to increase net
                                       31

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T able of contents interest income by managing interest rate sensitive assets and liabilities so that they can be revalued in response to changes in market interest rates.

The Corporation, like other financial institutions, must have sufficient funds
available to meet its liquidity needs for deposit withdrawals, loan commitments,
and expenses.  In order to control cash flow, the Corporation estimates future
flows of cash from deposits and loan payments.  The primary sources of funds are
deposits, principal and interest payments on loans and mortgage-backed
securities, as well as FHLB borrowings.  Funds generated are used principally to
fund loans and purchase investment securities. Management believes the
Corporation has adequate resources to meet its normal funding requirements.

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

Management monitors and determines the desirable level of liquidity.
Consideration is given to loan demand, investment opportunities, deposit pricing
and growth potential, as well as the current cost of borrowing funds.  The
Corporation has a current borrowing capacity at the FHLB of $599,303,000 with
$118,000,000 utilized, leaving $428,698,000 available.  In addition to this
credit arrangement, the Corporation has additional lines of credit with
correspondent banks of $100,000,000. The Corporation's management believes that
it has sufficient liquidity to satisfy estimated short-term and long-term
funding needs.

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

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

A market value at risk calculation is utilized to monitor the effects of
interest rate changes on the Corporation's balance sheet and more specifically
shareholders' equity.  The Corporation does not manage the balance sheet
structure in order to maintain compliance with this calculation.  The
calculation serves as a guideline with greater emphasis placed on interest rate
sensitivity.  Changes to calculation results from period to period are reviewed
as changes in results could be a signal of future events.

INTEREST RATE SENSITIVITY

In this analysis, the Company examines the outcome of various changes in market interest rates in increments of 100 basis points and their effect on net interest income. It is assumed that the change is instantaneous and that all rates move in parallel. Assumptions are also made regarding prepayment terms for mortgages and mortgage-backed securities.






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T able of C on ten ts The following is a rate shock forecast for the twelve month period ending
December 31, 2022 assuming a static balance sheet at December 31, 2021.

                                                                                  Parallel Rate Shock in Basis Points
(In Thousands)                             (200)             (100)            Static              100               200               300               400
Net interest income                     $ 48,631          $ 50,893          $ 53,281          $ 56,442          $ 59,830          $ 63,195          $ 66,664
Change from static                        (4,650)           (2,388)                -             3,161             6,549             9,914            13,383
Percent change from static                 -8.73  %          -4.48  %              -              5.93  %          12.29  %          18.61  %          25.12  %



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

INFLATION

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

CRITICAL ACCOUNTING METHODS

The Corporation's accounting policies are integral to understanding the results
reported.  The accounting policies are described in detail in Note 1 of the
"Notes to Consolidated Financial Statements" included in Item 8 of this Annual
Report on Form 10-K. Our most complex accounting policies require management's
judgment to ascertain the valuation of assets, liabilities, commitments, and
contingencies.  We have established detailed policies and control procedures
that are intended to ensure valuation methods are well controlled and applied
consistently from period to period.  In addition, the policies and procedures
are intended to ensure that the process for changing methodologies occurs in an
appropriate manner.  The following is a brief description of our current
accounting policies involving significant management valuation judgments.

Other than temporary impairment of Debt securities

Debt securities are evaluated periodically to determine whether a decline in
their value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reason underlying the
decline, to determine whether the loss in value is other than temporary. The
term "other than temporary" is not intended to indicate that the decline is
permanent.  It indicates that the prospects for a near term recovery of value
are not necessarily favorable, or that there is a lack of evidence to support
fair values equal to, or greater than, the carrying value of the investment.
Once a decline in value is determined to be other than temporary, the value of
the security is reduced and a corresponding charge to earnings is recognized.
For a full discussion of the Corporation's methodology of assessing impairment,
refer to Note 4 of the "Notes to Consolidated Financial Statements" included in
Item 8 of this Annual Report on Form 10-K.

Allowance for loan losses

Arriving at an appropriate level of allowance for loan losses involves a high
degree of judgment.  The Corporation's allowance for loan losses provides for
probable losses based upon evaluations of known and inherent risks in the loan
portfolio.

Management uses historical information to assess the adequacy of the allowance
for loan losses as well as the prevailing business environment; as it is
affected by changing economic conditions and various external factors, which may
impact the portfolio in ways currently unforeseen.  The allowance is increased
by provisions for loan losses and by recoveries of loans previously charged-off
and reduced by loans charged-off.  For a full discussion of the Corporation's
methodology of assessing the adequacy of the reserve for allowance for loan
losses, refer to Note 1 of the "Notes to Consolidated Financial Statements"
included in Item 8 of this Annual Report on Form 10-K.


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Contents

Good will and other intangible assets

As discussed in Note 8 of the "Notes to Consolidated Financial Statements," the
Corporation must assess goodwill and other intangible assets each year for
impairment.  This assessment involves estimating cash flows for future periods.
If the future cash flows were less than the recorded goodwill and other
intangible assets balances, we would be required to take a charge against
earnings to write down the assets to the lower value.

Deferred tax assets

Management uses an estimate of future earnings to support their position that
the benefit of their deferred tax assets will be realized.  If future income
should prove non-existent or less than the amount of the deferred tax assets
within the tax years to which they may be applied, the asset may not be realized
and the Corporation's net income will be reduced.  The Corporation's deferred
tax assets are described further in Note 12 of the "Notes to Consolidated
Financial Statements" included in Item 8 of this Annual Report on Form 10-K.

Retirement benefits

Pension costs and liabilities are dependent on assumptions used in calculating
such amounts.  These assumptions include discount rates, benefits earned,
interest costs, expected return on plan assets, mortality rates, and other
factors.  In accordance with GAAP, actual results that differ from the
assumptions are accumulated and amortized over future periods and, therefore,
generally affect recognized expense and the recorded obligation of future
periods.  While management believes that the assumptions used are appropriate,
differences in actual experience or changes in assumptions may affect the
Corporation's pension obligations and future expense.  Our pension benefits are
described further in Note 13 of the "Notes to Consolidated Financial Statements"
included in Item 8 of this Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS

The Company has various financial obligations, including contractual obligations that may require future cash payments. The following table shows, at December 31, 2021, significant fixed and determinable contractual obligations to third parties by date of payment. A more in-depth discussion of the nature of each obligation is included in the “Notes to Consolidated Financial Statements” included in Item 8 of this Annual Report on Form 10-K.

                                                                                                   Payments Due In
                                                                                                         Three to Five
(In Thousands)                                    One Year or Less          One to Three Years               Years              Over Five Years             Total
Deposits without a stated maturity              $       1,415,948          $                -          $            -          $             -          $ 1,415,948
Time deposits                                             136,281                      57,127                  10,605                    1,354              205,367
Repurchase agreements                                       5,747                           -                       -                        -                5,747
Short-term borrowings                                           -                           -                       -                        -                    -
Long-term borrowings                                       23,160                      65,380                  30,872                    6,551              125,963
Operating leases                                              291                         519                     517                    2,568                3,895



The Corporation's operating lease obligations represent short and long-term
lease and rental payments for branch facilities and equipment.  The Bank leases
certain facilities under operating leases which expire on various dates through
2049.  Renewal options are available on the majority of these leases.

DISCLAIMER FOR THE PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact.  The
Corporation cautions readers that the following important factors, among others
in addition to the factors discussed in Item 1 - "Business" and in Item 1A -
"Risk Factors", may have affected and could in the future affect the
Corporation's actual results and could cause the Corporation's actual results
for subsequent periods to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Corporation herein:
(i) the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Corporation must comply, and the
associated costs of compliance with such laws and regulations either currently
or in the future as applicable; (ii) the effect of changes in accounting
policies and practices, as
                                       34
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  T    a    b    l    e     of Conte    n    t    s
may be adopted by the regulatory agencies as well as by the Financial Accounting
Standards Board; (iii) the effect on the Corporation's competitive position
within its market area of the increasing consolidation within the banking and
financial services industries, including the increased competition from larger
regional and out-of-state banking organizations as well as non-bank providers of
various financial services; (iv) the effect of changes in interest rates;
(v) the effect of changes in the business cycle and downturns in the local,
regional or national economies; and (vi) the effects of health emergencies,
including the spread of infectious diseases or pandemics.

SECTION 7A QUANTITATIVE AND QUALITATIVE INFORMATION ON MARKET RISK

Market risk for the Corporation is comprised primarily from interest rate risk
exposure and liquidity risk.  Interest rate risk and liquidity risk management
is performed at the Banks' level as well as the Corporation level.  The
Corporation's interest rate sensitivity is monitored by management through
selected interest rate risk measures produced internally. Additional information
and details are provided in the Interest Sensitivity section of Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Generally, management believes that the Company is well positioned to react quickly when the outlook for market interest rates changes.





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