NORWOOD FINANCIAL CORP Management’s Discussion and Analysis of Financial Conditions and Results of Operations. (Form 10-K)

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introduction

This MD&A and related financial data are presented to facilitate the understanding and evaluation of the financial condition and results of operations of the Company and the Bank, as
December 31, 2021 and 2020, and

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for the years ended December 31, 2021 and 2020. This section should be read in conjunction with the consolidated financial statements and related footnotes.

Critical accounting policies

Note 2 to the Company's consolidated financial statements (incorporated by
reference in Item 8 of the Form 10-K) lists significant accounting policies used
in the development and presentation of its financial statements. This discussion
and analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of
the Company and its results of operations.

Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, the
valuation of deferred tax assets, the determination of other-than-temporary
impairment on securities, the determination of goodwill impairment and the fair
value of financial instruments. Please refer to the discussion of the allowance
for loan losses calculation under "Allowance for Loan Losses and Non-performing
Assets" in the "Financial Condition" section.

The deferred income taxes reflect temporary differences in the recognition of
the revenue and expenses for tax reporting and financial statement purposes,
principally because certain items are recognized in different periods for
financial reporting and tax return purposes. Although realization is not
assured, the Company believes it is more likely than not that all deferred tax
assets will be realized.

In estimating other-than-temporary impairment losses on securities, the Company
considers 1) the length of time and extent to which the fair value has been less
than cost and 2) the financial condition of the issuer. The Company does not
have the intent to sell these securities and it is more likely than not that it
will not sell the securities before recovery of their cost basis. The Company
believes that any unrealized losses at December 31, 2021 and 2020 represent
temporary impairment of the securities.

The fair value of financial instruments is based on quoted market prices, when available. In cases where a quoted price is not available, fair values ​​are based on observable market-based parameters, as well as unobservable parameters. Any such assessment is applied consistently over time.

In connection with the acquisition of Delaware in 2016, we recorded goodwill in
the amount of $1.6 million, representing the excess of amounts paid over the
fair value of the net assets of the institution acquired at the date of
acquisition. In connection with the acquisition of UpState.in July 2020, we
recorded goodwill in the amount of $17.9 million, representing the excess of
amounts paid over the fair value of the net assets of the institution acquired
at the date of acquisition. Goodwill is tested annually and deemed impaired when
the carrying value of goodwill exceeds its implied fair value.

FINANCIAL CONDITION

Total assets

Total assets as of December 31, 2021 were $2.069 billion compared to
$1.852 billion as of year-end 2020, an increase of $216.6 million. The increase
in assets was primarily attributable to the $221.4 million increase in total
deposits.

Loans Receivable

As of December 31, 2021, loans receivable totaled $1.355 billion compared to
$1.411 billion as of year-end 2020, a decrease of $55.8 million due primarily to
a $78.8 million decrease in PPP loans resulting from loan forgiveness.
Commercial real estate loans grew $49.6 million, while residential mortgage
loans increased $9.9 million during the year.

The Bank's loan products include loans for personal and business use. Personal
lending includes mortgage lending to finance principal residences and, to a
lesser extent, second home dwellings. The Bank's loan products include
fixed-rate mortgage products with terms up to 30 years which may be sold in the
secondary market through the Federal National Mortgage Association ("Fannie
Mae") or the FHLB, or held in the Bank's portfolio to the extent consistent with
our asset/liability management strategies. Fixed-rate home equity loans are
originated on terms up to 180 months. Home equity lines of credit tied to the
prime rate are also offered. The Bank also offers indirect dealer financing of
automobiles (new and used), boats, and recreational vehicles through a limited
network of dealers in Northeast Pennsylvania and the Southern Tier of New York.
At December 31, 2021, there were $141.7 million of indirect loans in the
portfolio. In connection with the acquisition of UpState in 2020, the Company
acquired approximately $413.5 million in loans, including $37.3 million in
residential real estate loans, $289.0 million in commercial real estate loans,
$92.0 million in commercial, financial and agricultural loans, and $2.3 million
in consumer loans. As of December 31, 2021, the approximate outstanding balance
of these acquired loans was $287.1 million. In connection with the acquisition
of Delaware, the Company acquired approximately $116.7 million in loans,
including $68.7 million in residential real estate loans, $22.5 million in
commercial real estate loans, $13.6 million in commercial,

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financial and agricultural loans, $6.5 million in consumer loans and $5.4 in
construction loans. As of December 31, 2021, the approximate outstanding balance
of these acquired loans was $37.6 million.

Commercial loans and commercial mortgages are provided to local small and
mid-sized businesses at a variety of terms and rate structures. Commercial
lending activities include lines of credit, revolving credit, term loans,
mortgages, various forms of secured lending and a limited amount of letter of
credit facilities. The rate structure may be fixed, immediately repricing tied
to the prime rate or adjustable at set intervals. Also included in commercial
loans are municipal finance lending in which the Bank has been active in recent
years. Municipal lending includes both general obligations of local taxing
authorities and revenue obligations of specific revenue producing projects such
as sewer authorities and educational units. At December 31, 2021, the Bank had
approximately $135.7 million in loans on commercial rentals, as well as
$116.3 million of loans outstanding on residential rentals, which are its
largest lending concentrations.

As a qualified Small Business Administration ("SBA") lender, the Bank originated
$156.3 million of PPP loans in total, including loans originated by USNY Bank
prior to the acquisition date.

The Bank's construction lending has primarily involved lending for commercial
construction projects and for single-family residences. All loans for the
construction of speculative sale homes have a loan-to-value ratio of not more
than 80%. For both commercial and single-family projects, loan proceeds are
disbursed during the construction phase according to a draw schedule based on
the stage of completion. Construction projects are inspected by contracted
inspectors or bank personnel. Construction loans are underwritten on the basis
of the estimated value of the property as completed. For commercial projects,
the Bank typically also provides the permanent financing after the construction
period, as a commercial mortgage.

The Bank also, from time to time, originates loans secured by undeveloped land.
Land loans granted to individuals have a term of up to five years. Land loans
granted to developers may have an interest only period during development. The
substantial majority of land loans have a loan-to-value ratio not exceeding 75%.
The Bank has limited its exposure to land loans but may expand its lending on
raw land, as market conditions allow, to qualified borrowers experienced in the
development and sale of raw land.

Loans involving construction financing and loans on raw land have a higher level
of risk than loans for the purchase of existing homes since collateral values,
land values, development costs and construction costs can only be estimated at
the time the loan is approved. The Bank has sought to minimize its risk in
construction lending and in lending for the purchase of raw land by offering
such financing primarily to builders and developers to whom the Bank has loaned
funds in the past and to persons who have previous experience in such projects.
The Bank also limits construction lending and loans on raw land to its market
area, with which management is familiar.

Adjustable-rate loans decrease the risks associated with changes in interest
rates by periodically repricing, but involve other risks because as interest
rates increase, the underlying payments by the borrower increase, thus
increasing the potential for payment default. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate may also be
limited by the maximum periodic interest rate adjustment permitted in certain
adjustable-rate mortgage loan documents, and, therefore is potentially limited
in effectiveness during periods of rapidly rising interest rates. These risks
have not had an adverse effect on the Bank.

The Bank's adjustable-rate loan portfolio includes approximately $14.8 million
in loan participations indexed to the London Interbank Offered Rate ("LIBOR")
which is expected to be phased out by June 30, 2023. The Bank anticipates that
the terms of LIBOR-based loans, which have not matured prior to the phase-out of
LIBOR will be negotiated to incorporate a to-be-determined substitute reference
rate. The Bank must rely on the lead bank to renegotiate the terms of loans in
which the Bank has a participation. There can be no assurance that the lead bank
will be able to successfully renegotiate the loans in which the Bank has
participations or that the substitute reference rate will perform as
satisfactorily as LIBOR.

Consumer lending, including indirect financing, provides benefits to the Bank's
asset/liability management program by reducing the Bank's exposure to interest
rate changes, due to their generally shorter terms. Such loans may entail
additional credit risks compared to owner-occupied residential mortgage lending
especially when unsecured or secured by collateral such as automobiles that
depreciate rapidly.

Commercial lending including real-estate related loans entail significant
additional risks when compared with residential real estate and consumer
lending. For example, commercial loans typically involve larger loan balances to
single borrowers or groups of related borrowers. The payment experience on such
loans typically is dependent on the successful operation of the project and
these risks can be significantly impacted by the cash flow of the borrowers and
market conditions for commercial office, retail, and warehouse space. In periods
of decreasing cash flows, the commercial borrower may permit a lapse in general
maintenance of the property causing the value of the underlying collateral to
deteriorate. The liquidation of commercial property is often more costly and may
involve more time to sell than residential real estate. The Bank offsets such
factors with requiring more owner equity, a lower loan to value ratio and

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by obtaining personal guarantees from principals. In addition, the majority of the Bank’s commercial real estate portfolio consists of owner-occupied properties.

Commercial loans and leases are considered to have a higher degree of credit
risk than secured real estate lending. The repayment of unsecured commercial
business loans is wholly dependent on the success of the borrower's business,
while secured commercial business loans may be secured by collateral that may
not be readily marketable in the event of default. Municipal financing includes
lending to local taxing authorities and revenue-producing projects. Such loans
may constitute the general obligation of the taxing authority or may rely on a
specific revenue source which is responsible for the repayment of the debt.
General obligations are considered to carry a lower level of risk than other
loan types since they are backed by the full faith and credit of the taxing
authority. Revenue obligations are backed solely by revenues generated by the
project financed and repayment may be affected by the success of the project.

Due to the type and nature of the collateral, consumer lending generally
involves more credit risk when compared with residential real estate lending.
Consumer lending collections are typically dependent on the borrower's
continuing financial stability, and thus, are more likely to be adversely
affected by job loss, divorce, illness and personal bankruptcy. In most cases,
any repossessed collateral for a defaulted consumer loan will not provide an
adequate source of repayment of the outstanding loan balance. The remaining
deficiency is usually turned over to a collection agency.

There are additional risks associated with indirect lending since we must rely
on the dealer to provide accurate information to us and accurate disclosures to
the borrowers. These loans are principally done on a non-recourse basis. We seek
to mitigate these risks by only dealing with dealers with whom we have a
long-standing relationship.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank
Act") prohibits lenders from making residential mortgages unless the lender
makes a reasonable and good faith determination that the borrower has a
reasonable ability to repay the mortgage loan according to its terms. A borrower
may recover statutory damages equal to all finance charges and fees paid within
three years of a violation of the ability-to-repay rule and may raise a
violation as a defense to foreclosure at any time. As authorized by the
Dodd-Frank Act, the Consumer Financial Protection Bureau ("CFPB") has adopted
regulations defining "qualified mortgages" that are presumed to comply with the
Dodd-Frank Act's ability-to-repay rules. Under the CFPB regulations, qualified
mortgages must satisfy the following criteria: (i) no negative amortization,
interest-only payments, balloon payments, or term greater than 30 years; (ii) no
points or fees in excess of 3% of the loan amount for loans over $100,000; (iii)
borrower's income and assets are verified and documented; and (iv) the
borrower's debt-to-income ratio generally may not exceed 43%. Qualified
mortgages are conclusively presumed to comply with the ability-to-pay rule
unless the mortgage is a "higher cost" mortgage, in which case the presumption
is rebuttable. Under the EGRRCPA, enacted in 2018, residential mortgages
originated for portfolio by insured depository institutions, like the Bank, with
less than $10 billion in total consolidated assets will be treated as qualified
mortgages; provided that the mortgage terms do not include interest-only
payments or negative amortization, total points and fees do not exceed 3% of the
loan amount, prepayment penalties are not in excess of those permitted for
qualified mortgages under Regulation Z and the lender has considered and
documented the debt, income and financial resources of the borrower.

The Bank has established various lending limits for its officers and also
maintains an Officer Loan Committee to approve higher loan amounts. The Officer
Loan Committee is comprised of the President and Chief Executive Officer, Chief
Lending Officer and other Bank officers. The Officer Loan Committee has the
authority to approve all loans up to set limits based on the type of loan and
the collateral. Requests in excess of these limits must be submitted to the
Directors' Loan Committee or Board of Directors for approval. Additionally, the
President and Chief Executive Officer, and the Chief Lending Officer and other
officers have the authority to approve secured and unsecured loans up to amounts
approved by the Board of Directors and maintained in the Bank's Loan Policy.
Notwithstanding individual lending authority, certain loan policy exceptions
must be submitted to the Officer Loan Committee for approval.

Risk insurance cover is required on all properties securing loans made by the Bank. Flood insurance is also required, if applicable.

Loan applicants are notified of the credit decision by letter. If the loan is
approved, the loan commitment specifies the terms and conditions of the proposed
loan including the amount, interest rate, amortization term, a brief description
of the required collateral, and the required insurance coverage. The borrower
must provide proof of fire, flood (if applicable) and casualty insurance on the
property serving as collateral and title insurance, and these applicable
insurances must be maintained during the full term of the loan.

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The following table sets forth maturities and interest rate sensitivity for
selected categories of loans as of December 31, 2021. Scheduled repayments are
reported in the maturity category in which payment is due. Demand loans, loans
having no stated schedule of repayments and no stated maturity and overdrafts
are reported as due in one year or less.

                                                         After Five
                            One Year     After One to      Years          After
                                                         Through 15
                             or Less      Five Years       years         15 years       Total
                                                       (dollars in thousands)

Real Estate:
Residential                 $  49,550   $      119,830   $   75,898   $   27,762   $   273,040
Commercial                     55,376          192,647      327,434       53,267       628,724
Agricultural                    1,003            1,420       16,475       43,027        61,925
Construction                    2,483              807        8,036       10,664        21,990
Commercial loans               81,996           77,427       25,943          665       186,031
Other agricultural loans       10,390           10,700       13,848        2,992        37,930
Consumer loans                 59,202           79,960        7,183           55       146,400
Total                       $ 260,000   $      482,791   $  474,817   $  138,432   $ 1,356,040

Loans with fixed rates      $  46,765   $      192,717   $  345,033   $  199,759   $   784,274
Loans with floating rates     136,262          362,582       69,722        3,200       571,766
Total                       $ 183,027   $      555,299   $  414,755   $  202,959   $ 1,356,040

provision for loan losses

The allowance for loan losses totaled $16,442,000 as of December 31, 2021 and
represented 1.21% of total loans receivable compared to $13,150,000 and 0.93% of
total loans as of year-end 2020. Net charge-offs for 2021 totaled $908,000 and
represented 0.07% of average loans compared to $809,000 and 0.07% of average
loans in 2020.

Management assesses the adequacy of the allowance for loan losses on a quarterly
basis. The process includes a review of the risks inherent in the loan
portfolio. It also includes an analysis of impaired loans and a historical
review of losses. Other factors considered in the analysis include:
concentrations of credit in specific industries in the commercial portfolio, the
local and regional economic conditions, trends in delinquencies, internal risk
rating classifications, total loan growth in the portfolio and fluctuations in
large balance credits. During 2020, the Company added qualitative factors for
COVID-19 related industries and for loans which have received deferral of
payment due to COVID-19 factors. For loans acquired, including those that are
not deemed impaired at acquisition, credit discounts representing the principal
losses expected over the life of the loan are a component of the initial fair
value. Subsequent to the purchase date, the methods utilized to estimate the
required allowance for credit losses for these loans is similar to originated
loans; however, the Company records a provision for loan losses only when the
required allowance exceeds any remaining credit discounts.

The Company has limited exposure to higher-risk loans. The Company does not
originate option ARM products, interest only loans, sub-prime loans or loans
with initial teaser rates in its residential real estate portfolio. The Company
has $10.8 million of junior lien home equity loans. For 2021, there were $13,000
of charge-offs for this portfolio, with recoveries of $13,000 in 2021.

As of December 31, 2021, the Company considered its concentration of credit risk
profile to be acceptable. The highest concentrations are in commercial rentals
and the residential rentals categories.



During 2020, the Company recognized an increase in its adversely classified
loans due primarily to loan balances acquired from UpState. The loans were
accounted for in accordance with ASC 310-30, and were appropriately recorded at
fair value after recording a specific loan fair value adjustment of $6,937,000.
The Company assesses a loss factor against the classified loans, which is based
on prior experience. Classified loans that are considered impaired are measured
on a loan-by-loan basis. The Company values such loans by either the present
value of expected cash flows, the loan's obtainable market price or the fair
value of collateral if the loan is collateral dependent.

At December 31, 2021, the recorded investment in impaired loans, not requiring
an allowance for loan losses, was $157,000 (net of charge-offs against the
allowance for loan losses of $0). The recorded investment in impaired loans,
requiring an allowance for loan losses, was $1,517,000, (net of charge-offs
against the allowance for loan losses of $0) . At December 31, 2020, the
recorded

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investment in impaired loans not requiring an allowance for loan losses, was
$2,662,000 (net of charge-offs of $652,000). The recorded investment in impaired
loans, requiring an allowance for loan losses, was $0.

Following its analysis, after applying these factors, management considers the provision to be December 31, 2021, adequate. However, there can be no assurance that the allowance for loan losses will be sufficient to cover material losses that may occur in the future.

The following table presents information regarding the Bank’s loan loss allowance as at December 31, 2021 and 2020:

                                                          As of December 31,
                                                        2021            2020
                                                        (dollars in thousands)

Total loans receivable, net of deferred charges $1,354,931 $1,410,732

Allowance balance at beginning of period            $     13,150    $      

8,509

Net (charge-offs) recoveries:
Real Estate-Residential                                       57            (35)
Real Estate-Commercial                                     (433)           (413)
Real Estate-Agricultural                                       -               -
Real Estate-Construction                                       -               -
Commercial loans                                           (124)              37
Other agricultural loans                                    (27)            (11)
Consumer                                                   (381)           (387)

Total                                                      (908)           (809)

Provision Expense                                          4,200           5,450
Allowance balance at end of period                  $     16,442    $     13,150

Average loans receivable:
Real Estate-Residential                             $    264,305    $    241,961
Real Estate-Commercial                                   595,854         511,592
Real Estate-Agricultural                                  64,295          26,935
Real Estate-Construction                                  21,793          18,268
Commercial loans                                         247,953         206,164
Other agricultural loans                                  40,215          16,645
Consumer                                                 152,478         156,208

Total average loans outstanding                     $  1,386,893    $  

1,177,773

Net (charge-offs) recoveries as a percent of
average loans outstanding
Real Estate-Residential                                     0.02 %        (0.01) %
Real Estate-Commercial                                    (0.07)          (0.08)
Real Estate-Agricultural                                       -               -
Real Estate-Construction                                       -               -
Commercial loans                                          (0.05)            0.02
Other agricultural loans                                  (0.07)          (0.07)
Consumer                                                  (0.25)          (0.25)

Total net charge-offs                                     (0.07) %        (0.07) %

Credit Quality Ratios:
As a percent of year-end loans, net of unearned
income:
Allowance for loan losses                                  1.21%           0.93%
Nonaccrual loans                                           0.05%           0.24%
Nonperforming loans                                        0.05%           0.24%
Allowance for loan losses to nonaccrual loans           2557.08%         

387.79%

Provision for loan losses to non-performing loans 2240.05% 387.79%


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The following table sets forth the allocation of the Bank's allowance for loan
losses by loan category and the percent of loans in each category to total loans
at the date indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which credit losses may occur. The
total allowance is available to absorb losses from any type of loan.

                                        As of December 31,
                                   2021                  2020
                                        % of                  % of
                                       Loans                 Loans
                                      to Total              to Total
                             Amount    Loans       Amount    Loans
                                      (dollars in thousands)
Real estate - residential   $  2,175      20.1 %  $  1,960      18.6 %
Real estate - commercial      10,878      46.4       8,004      41.0
Real estate - agricultural         -       4.6           -       4.7
Real estate - construction       133       1.6         150       1.5
Commercial                     1,490      13.7       1,360      20.1
Other agricultural loans           -       2.8           -       2.9
Consumer                       1,766      10.8       1,676      11.2
Total                       $ 16,442       100 %  $ 13,150       100 %


As a result of the acquisition of UpState, the Company added $107.3 million of
agricultural loans to the loan portfolio. These loans are included in the
outstanding balance information, but do not require an allocation of the
allowance for loan losses since they were recorded at fair value in accordance
with ASC 310-20 and ASC 310-30.

Additional information about the allowance for loan losses at December 31, 2021
is presented under "Item 1. Business" of this Annual Report on Form 10-K, as
well as in Note 2 and Note 4 to the audited consolidated financial statements.

Non-performing assets

Non-performing assets consist of non-performing loans and real estate owned as a
result of foreclosure, which is held for sale. Loans are placed on non-accrual
status when management believes that a borrower's financial condition is such
that collection of interest is doubtful. Commercial and real estate related
loans are generally placed on non-accrual when interest is 90 days delinquent.
When loans are placed on non-accrual, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is charged
against the allowance for loan losses.

As of December 31, 2021, non-performing loans totaled $734,000 and represented
0.05% of total loans compared to $3,391,000 or 0.24% as of December 31, 2020.
The decrease in the level of non-performing loans reflects upgrades to accrual
status on several loans acquired from UpState, as well as payments received on
other non-performing credits. Additionally, one loan with a carrying value of
$1,487,000 as of December 31, 2020 was transferred to Foreclosed Real Estate
Owned during 2021.

Foreclosed real estate owned totaled $1,742,000 as of December 31, 2021 and
$965,000 as of December 31, 2020. During 2021, property with a carrying value of
$255,000 was disposed of through a sale. The Company did not recorded a gain
from the sale of the property. Additionally, one loan with a carrying value of
$1,032,000 was transferred to Foreclosed Real Estate Owned during 2021.

Securities

The securities portfolio consists of U.S. Treasury securities, U.S. Government
agencies, mortgage-backed securities issued by government sponsored entities and
municipal obligations. The Company classifies its investments into two
categories: held to maturity (HTM) and available for sale (AFS). The Company
does not have trading securities. Securities classified as HTM are those in
which the Company has the ability and the intent to hold the security until
contractual maturity. As of December 31, 2021, there were no securities carried
in the HTM portfolio. Securities classified as AFS are eligible to be sold due
to liquidity needs or interest rate risk management. These securities are
adjusted to and carried at their fair value with any unrealized gains or losses
recorded net of deferred income taxes, as an adjustment to capital and reported
in the equity section of the Consolidated Balance Sheet as other comprehensive
income. As of December 31, 2021, $406.8 million of securities were so classified
and carried at their fair value, with unrealized losses, net of tax, of
$1,453,000 included in accumulated other comprehensive income as a component of
stockholders' equity. The Company considers its investment portfolio a source of
earnings and liquidity. Investment securities may also be pledged to secure
public deposits and customer repurchase agreements.

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As of December 31, 2021, the average life of the portfolio was 5.6 years. The
Company has maintained a relatively short average life in the portfolio in order
to generate cash flow to support loan growth and maintain liquidity levels.
Purchases for the year totaled $268.2 million, while maturities and principal
reductions totaled $68.2 million and proceeds from sales were $11.4 million. The
purchases were funded principally by cash flow generated from the portfolio and
excess overnight liquidity.

The following table sets forth certain information regarding securities not
carried at fair value through earnings, weighted average yields, and maturities
of the Company's securities portfolio as of December 31, 2021 and 2020. Yields
on tax-exempt securities are stated on a fully taxable equivalent basis using a
Federal tax rate of 21%. Actual maturities may differ from contractual
maturities as certain instruments have call features which allow prepayment of
obligations. Maturity on the mortgage-backed securities is based upon
contractual terms, the average life may differ as a result of changes in cash
flow.

                                                            After One                  After Five                                     Total Investment
                            One Year or Less            Through Five Years          Through Ten Years         After Ten Years            Securities
                         Carrying        Average      Carrying        Average      Carrying     Average     Carrying    Average      Carrying    Average
                          Value           Yield         Value          Yield         Value       Yield        Value      Yield        Value       Yield
                                                                             (dollars in thousands)
U.S. Treasury
securities              $        -             - %   $     1,060         1.01 %   $    18,291      1.19 %   $       -         - %   $   19,351      1.18 %
U.S. Government
agencies                         -             -               -            -          16,011      1.51                                 16,011      1.51
State and political
subdivision                    583          1.93          10,427         3.14          20,601      2.25       114,256      2.33        145,867      2.38
Corporate obligations            -             -               -            -               -         -             -         -              -         -
Mortgage-backed
securities-government
sponsored entities               -             -           2,665         2.40           4,110      1.96       218,778      1.39        225,553      1.41

Total Investment
Securities              $      583          1.93 %   $    14,152         2.84 %   $    59,013      1.70 %   $ 333,034      1.71 %   $  406,782      1.75 %


The portfolio had no adjustable-rate instruments as of December 31, 2021 and
2020. The portfolio contained no private label mortgage-backed securities,
collateralized debt obligations (CDOs), or trust preferred securities, and no
off-balance sheet derivatives were in use. As of December 31, 2021, the
portfolio did not contain any step-up bonds. The mortgage-backed securities
portfolio includes pass-through bonds and collateralized mortgage obligations
(CMO's) issued by Fannie Mae, Freddie Mac and the Government National Mortgage
Association (GNMA).

The Company evaluates the securities in its portfolio for
other-than-temporary-impairment (OTTI) as fair value declines below cost. In
estimating OTTI, management considers (1) the length of time and the extent of
the decline in fair value and (2) the financial condition and near-term
prospects of the issuer. As of December 31, 2021, the Company held 140
investment securities in a loss position, which had a combined unrealized loss
of $4.8 million. Management believes that these losses are principally due to
changes in interest rates and represent temporary impairment as the Company does
not have the intent to sell these securities and it is more likely than not that
it will not have to sell the securities before recovery of their cost basis. No
impairment charges were recognized in 2021 or 2020.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company uses fair value measurements to record fair value adjustments to
certain financial instruments and determine fair value disclosures (see Note 16
of Notes to the Consolidated Financial Statements).

Approximately $406.8 million, which represents 19.7% of total assets at
December 31, 2021, consisted of financial instruments recorded at fair value on
a recurring basis. This amount consists entirely of the Company's available for
sale securities portfolio and interest rate derivatives. The Company uses
valuation methodologies involving market-based or market-derived information,
collectively Level 1 and 2 measurements, to measure fair value. There were no
transfers into or out of Level 3 for any instruments for the years ended
December 31, 2021 and 2020.

The Company utilizes a third party provider to perform valuations of the
investments. Methods used to perform the valuations include: pricing models that
vary based on asset class, available trade and bid information, actual
transacted prices, and proprietary models for valuations of state and municipal
obligations. In addition, the Company has a sample of fixed-income securities
valued by another independent source. The Company does not adjust values
received from its providers, unless it is evident that fair value measurement is
not consistent with the Company's policies.

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The Company also utilizes a third party provider to provide the fair value of
certain loan servicing rights. Fair value for the purpose of this measurement is
defined as the amount at which the asset could be exchanged in a current
transaction between willing parties, other than in a forced liquidation. The
fair value of mortgage servicing rights as of December 31, 2021 and 2020 was
$500,000 and $476,000, respectively.

DEPOSITS

The Bank provides a full range of deposit products to its retail and business
customers. These include interest-bearing and noninterest bearing transaction
accounts, statement savings and money market accounts. Certificate of deposit
terms range up to five years for retail instruments. As of December 31, 2021,
the Bank has $992,000 of brokered deposits obtained through internet listing
services, and no broker deposits which were secured through Cede & Co. All of
these brokered deposits were acquired from UpState. The Bank has no current
brokered deposits through its participation in the Certificate of Deposit
Account Registry Service ("CDARS"). The Bank participates in the Jumbo CD
($100,000 and over) markets with local municipalities and school districts which
are typically priced on a competitive bid basis. Other services the Bank offers
its customers include cash management, direct deposit, Remote Deposit Capture,
mobile deposit capture, PopMoney® mobile payments and Automated Clearing House
(ACH) activity. The Bank operates thirty-one automated teller machines and is
affiliated with the MoneyPass® ATM network. Internet banking including bill-pay
is offered through the website at www.waynebank.com. Other services, such as
eStatements and mobile banking are available online.

The following table sets forth information regarding deposit categories of the
Company.

                                         Years Ended December 31,
                                     2021                      2020
                                   Average                   Average
                              Balance    Rate Paid      Balance    Rate Paid
                                          (dollars in thousands)
Noninterest-bearing demand  $   423,404          - %  $   297,175          - %
Interest-bearing demand         180,080       0.11        123,172       0.13
Money Market                    295,626       0.23        185,214       0.28
Savings                         265,981       0.06        200,042       0.06
Time                            517,087       0.71        457,844       1.27

Total                       $ 1,682,178               $ 1,263,447


As of December 31, 2021 and 2020, the total of uninsured deposits of the Company
was $235,515,000 and $177,596,000, respectively. Total uninsured deposits is
calculated based on regulatory reporting requirements and reflects the portion
of any deposit of a customer at an insured depository institution that exceeds
the applicable FDIC insurance coverage for that depositor at that institution
and amounts in any other uninsured investment or deposit accounts that are
classified as deposits and not subject to any federal or state deposit insurance
regime.

From December 31, 2021the sum of we term deposits exceeding the
Federal Deposit Insurance Corporation insurance limits were $257,238,000.

The following table shows the amount of uninsured term deposits based on the time remaining to maturity at December 31, 2021:

      Amount
  (in thousands)


Three months or less            $  65,401
Over 3 through 6 months            55,639
Over 6 months through 12 months   109,607
Over 12 months                     26,591
                                $ 257,238


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Total deposits as of December 31, 2021, were $1.757 billion, an increase of
$221.4 million from December 31, 2020. Deposit growth included $145.4 million in
non-maturity interest-bearing deposits, and $81.1 million in non-interest
bearing demand deposits. The large increases recorded in 2021 reflect the cash
inflow from economic stimulus related to the Covid-19 pandemic. Time deposits
decreased $5.1 million.

Time deposits over $250,000, which consist principally of school district funds,
other public funds and short-term deposits from large commercial customers with
maturities generally less than one year, totaled $257.2 million as of
December 31, 2021, compared to $205.4 million at year-end 2020. These deposits
are subject to competitive bid and the Company bases its bid on current interest
rates, loan demand, investment portfolio structure and the relative cost of
other funding sources.

As of December 31, 2021, non-interest bearing demand deposits totaled
$440.7 million compared to $359.6 million at year-end 2020. Cash management
accounts in the form of securities sold under agreements to repurchase included
in short-term borrowings, totaled $60.8 million at year end 2021 compared to
$63.3 million as of December 31, 2020. These balances represent commercial and
municipal customers' funds invested in overnight securities. The Company
considers these accounts as a source of core funding.

RESULTS OF OPERATIONS

Summary

Net income for the Company for the year ended December 31, 2021 was $24,915,000,
which was $9,835,000 higher than the $15,080,000 earned in 2020. Earnings per
share on a fully diluted basis were $3.04 for 2021 compared to $2.09 in 2020.
The return on average assets for the year was 1.24% with a return on average
equity of 12.35%, compared to 0.97% and 9.06%, respectively, in 2020. Net
interest income increased $14,837,000, which offset a $4,138,000 increase in
other expenses. The variances reflect the full-year effect of the results of the
acquisition of UpState.

Net interest income (fully taxable equivalent, or fte) totaled $66,100,000,
which was an increase of $14,741,000 from the 2020 total. Average loans
outstanding increased $209.1 million in 2021, which resulted in an increase in
interest income (fte) of $11.1 million. Total average securities increased
$120.0 million in 2021 as proceeds from deposit growth and overnight liquidity
were used to fund new purchases, resulting in a $1.2 million increase in
interest income (fte) on securities. Average interest-bearing deposits increased
$292.5 million, but decreasing interest rates on certificates of deposit
resulted in a $1.9 reduction in interest expense. The cost of borrowed funds
decreased $369,000 compared to the prior year due primarily to a lower cost of
borrowings. The resulting net interest spread (fte) increased three basis points
to 3.39% in 2021 as a 29 basis point reduction in the yield earned was offset by
a 32 basis point decrease in the cost of funds. All variances include the
full-year impact from the acquisition of UpState.

Loans receivable decreased $55.8 million from the prior year-end, due primarily
to a $78.8 million decrease in PPP loans resulting from loan forgiveness. Loan
growth included a $49.6 million increase in commercial real estate loans. Retail
loans decreased $5.2 million in 2021 due to a $4.4 million decrease in real
estate loans secured by farmland and a $4.7 million decrease in indirect auto
and marine financing. Residential mortgage loans and construction loans
increased $10.9 million, net. Total non-performing loans decreased from
$3,391,000, or 0.24% of total loans at the end of 2020, to $734,000, or 0.05% of
total loans on December 31, 2021. Net charge-offs totaled $908,000 in 2021,
which was an increase from the $809,000 recorded in 2020. Based on management's
analysis, the Company determined that it would be appropriate to allocate
$4,200,000 to the allowance for loan losses in 2021, which resulted in an
increase in the ratio of the allowance for loan losses to total loans
outstanding of 1.21% at December 31, 2021 compared to 0.93% at December 31,
2020. The allowance for loan losses represented 2,240% of total non-performing
loans on December 31, 2021 compared to 388% as of December 31, 2020.

Total other income for the year ended December 31, 2021 totaled $8,325,000
compared to $7,780,000 in the prior year, an increase of $545,000. Gains on the
sale of loans and investment securities decreased $329,000 in the aggregate,
while service charges and fees increased $578,000. All other items of other
income increased $296,000, net. The increase reflects the full-year of benefits
derived from the acquisition of UpState.

Other expenses were $38,578,000 in 2021 compared to $34,440,000 for the similar
period in 2020, an increase of $4,138,000. Salaries and benefits costs increased
$3,487,000 in 2021, while occupancy and equipment costs rose $674,000. All other
operating expenses decreased $23,000, net. The increases reflect the full-year
cost of operating four new community offices acquired from UpState. Income tax
expense for the year totaled $5,945,000, which was an increase of $2,659,000
from the prior year. The effective tax rate in 2021 was 19.3% compared to 17.9%
in 2020.

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The following table shows the change in net income (in thousands):

Net income 2020                            $  15,080
Net interest income                           14,837
Provision for loan losses                      1,250

Net capital gains on disposals of loans and securities (329) Other income

                                     874
Salaries and employee benefits               (3,487)
Occupancy, furniture and equipment             (674)
Professional fees                              (520)
Merger related expenses                        2,049
Other expenses                               (1,506)
Income tax expense                           (2,659)
Net income 2021                            $  24,915


NET INTEREST INCOME

Net interest income is the most significant source of revenue for the Company
and represented 88.7% of total revenue for the year ended December 31, 2021. Net
interest income (fte) totaled $66,100,000 for the year ended December 31, 2021
compared to $51,359,000 for 2020, an increase of $14,741,000. The resulting fte
net interest spread and net interest margin were 3.39% and 3.50%, respectively,
in 2021 compared to 3.36% and 3.55%, respectively, in 2020.

Interest income (fte) for the year ended December 31, 2021 totaled $71,857,000
compared to $59,338,000 in 2020. The fte yield on average earning assets was
3.81%, decreasing 29 basis points from the 4.10% reported last year. The
tax-equivalent yield on total loans increased 10 basis points to 4.73% in 2021,
while average loans outstanding increased $209.1 million, resulting in an
increase in interest income (fte) from loans of $11.1 million. The yield on
securities decreased 48 basis points in 2021 due primarily to lower yields on
new purchases. Average securities outstanding increased $120.0 million as cash
flow from deposit growth was utilized to fund new purchases, and interest income
(fte) from the portfolio increased $1.2 million.

Interest expense was $5,757,000 in 2021 which resulted in an average cost of
interest-bearing liabilities of 0.42% compared to total interest expense of
$7,979,000 in 2020 with an average cost of 0.74%. Total interest-bearing
deposits cost was 0.38% in 2021, which was a decrease of 30 basis points over
the prior year. The decrease in cost was due primarily to time certificates of
deposit that repriced to current market rates upon maturity, resulting in a
decrease in the interest rate paid from 1.27% in 2020 to 0.71% in 2021.
Borrowing costs also decreased in 2021, reflecting the lower interest rate
environment.

PROVISION FOR LOAN LOSSES

The provision for loan losses was $4,200,000 in 2021 compared to $5,450,000 in
2020. The decreased provision for loan losses recorded in 2021 reflects the
improvement in the economic factor and other qualitative factors that are
utilized to establish a subjective assessment of the adequacy of the allowance
for loan losses. Qualitative factors specific to the pandemic that were
developed in 2020 required a $2.3 million allocation to the required allowance
for loan losses at December 31, 2021. Additionally, the qualitative factor
related to large balance loans added $1.4 million to the allowance in 2021 due
to growth in this category of loans and an increase in the factor.

Management assesses the adequacy of the allowance for loan losses on a quarterly
basis. The process includes a review of the risks inherent in the loan
portfolio. It also includes an analysis of impaired loans and a historical
review of losses. Other factors considered in the analysis include:
concentrations of credit in specific industries in the commercial portfolio, the
local and regional economic conditions, trends in delinquencies, internal risk
rating classifications, total loan growth in the portfolio and fluctuations in
large balance credits. For loans acquired, including those that are not deemed
impaired at acquisition, credit discounts representing the principal losses
expected over the life of the loan are a component of the initial fair value.
Subsequent to the purchase date, the methods utilized to estimate the required
allowance for credit losses for these loans is similar to originated loans;
however, the Company records a provision for loan losses only when the required
allowance exceeds any remaining credit discounts.

OTHER INCOME

Total other income was $8,325,000 for the year ended December 31, 2021 compared
to $7,780,000 in 2020, an increase of $545,000. Service charges and fees
increased $572,000 in 2021, while gains on the sale of loans and investment
securities decreased $329,000 in the aggregate. All other items of other income
increased $302,000, net.

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Other income (in thousands of dollars)

For the year ended the 31st of December

                                                         2021     2020
Service charges on deposit accounts                     $   398  $   377
ATM Fees                                                    443      457
Overdraft Fees                                            1,029      985
Safe deposit box rental                                     100      102
Loan related service fees                                 1,368    1,416
Debit card                                                2,228    1,656
Fiduciary activities                                        748      682
Commissions on mutual funds & annuities                     127      122

Earnings and income from life insurance policies held by banks 941 845 Other income

                                                674      540
                                                          8,056    7,182
Net realized gains on sales of securities                    92       71
Gains on sales of loans                                     177      527
Total                                                   $ 8,325  $ 7,780


OTHER EXPENSES

Other expenses totaled $38,578,000 for the year ended December 31, 2021 compared
to $34,440,000 in the prior year. The $4,138,000 increase in other expenses
reflects the additional costs related to the operations of the four new
community offices acquired from UpState. Salaries and employee benefits costs
increased $3,487,000 in 2021, while occupancy and equipment costs increased
$674,000. All other operating expenses decreased $23,000, net. The Company's
efficiency ratio, which measures total other expenses as a percentage of net
interest income (fte) plus other income, was 51.8% in 2021 compared to 58.2% in
2020.

Other expenses (in thousands of dollars)

For the year ended the 31st of December

                                                             2021      2020
Salaries                                                   $ 12,944  $ 10,903
Employee benefits                                             7,664     6,218
Occupancy                                                     3,533     3,128
Furniture and equipment                                       1,289     1,020
Data processing and related operations                        2,415     

2,457

Federal Deposit Insurance Corporation insurance assessment      681       399
Advertising                                                     473       385
Professional fees                                             1,582     1,062
Postage and telephone                                           993       983
Office supplies                                                 443       555
Taxes, other than income                                      1,122       997
Foreclosed real estate                                          115        53
Amortization of intangible assets                               123       114
Merger related                                                    -     2,049
Other                                                         5,201     4,117
Total                                                      $ 38,578  $ 34,440


INCOME TAXES

Income tax expense for the year ended December 31, 2021 totaled $5,945,000,
which resulted in an effective tax rate of 19.3%, compared to $3,286,000 and
17.9% for 2020. The higher effective tax rate reflects the increase in taxable
income.

CAPITAL AND DIVIDENDS

Total stockholders' equity as of December 31, 2021, was $205.3 million, compared
to $194.8 million as of December 31, 2020. Earnings retention net of an
$8.7 million reduction resulting from cash dividends declared, contributed to
the increase. Fluctuations in interest rates impacted the fair value of the
Company's Available-for Sale securities, and contributed to $5.4 million
decrease in capital as a reduction in accumulated other comprehensive income. As
of December 31, 2021 the Company had a leverage capital ratio of

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8.51%, a Tier 1 risk-based capital ratio and a Common Equity Tier 1 risk-based capital ratio of 12.49%, and a total risk-based capital ratio of 13.66%, compared to 8.71%, 11.65% and 12.62%, respectively, at December 31, 2020.

NON-GAAP FINANCIAL MEASURES

This Annual Report contains or references tax-equivalent interest income and net
interest income, which are non-GAAP financial measures. Tax-equivalent interest
income and net interest income are derived from GAAP interest income and net
interest income using a marginal tax rate of 21%. We believe the presentation of
interest income and net interest income on a tax-equivalent basis ensures
comparability of interest income and net interest income arising from both
taxable and tax-exempt sources and is consistent with industry practice.

The following table reconciles net interest income to net interest income on a
tax-equivalent basis:

(dollars in thousands)               Years ended December 31,
                                     2021                   2020
Net interest income             $       65,313            $ 50,476
Tax-equivalent basis adjustment
using a 21% marginal tax rate              787                 883
Net interest income on a fully
taxable equivalent basis        $       66,100              51,359


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AVERAGE CONSOLIDATED BALANCE SHEET WITH INTEREST AND RESULTING RATES

(Fiscal equivalency basis, in thousands of dollars)

Year Ended December
31                                  2021                                   2020
                       Average                  Average       Average                  Average
                       Balance      Interest     Rate         Balance      Interest     Rate
                          (2)           (1)                      (2)           (1)
ASSETS
Interest-earning
assets:
Interest-bearing
deposits with banks  $   175,854   $      266      0.15 %   $    65,812   $       72      0.11 %
Securities available
for sale:
Taxable                  261,912        4,055      1.55         150,019        2,915      1.94
Tax-exempt                61,610        1,889      3.06          53,502        1,800      3.37
Total securities
available for sale       323,522        5,944      1.84         203,521        4,715      2.32
Loans receivable
(3)(4)                 1,386,893       65,647      4.73       1,177,773       54,551      4.63
Total
interest-earning
assets                 1,886,269       71,857      3.81       1,447,106       59,338      4.10
Noninterest earning
assets:
Cash and due from
banks                     23,828                                 18,693
Allowance for loan
losses                  (15,263)                               (10,388)
Other assets             114,210                                100,144
Total noninterest
earning assets           122,775                                108,449
TOTAL ASSETS         $ 2,009,044                            $ 1,555,555
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
demand and money
market               $   475,706          894      0.19     $   308,386          683      0.22
Savings                  265,981          169      0.06         200,042          112      0.06
Time                     517,087        3,694      0.71         457,844        5,815      1.27
Total
interest-bearing
deposits               1,258,774        4,757      0.38         966,272        6,610      0.68
Short-term
borrowings                73,810          284      0.38          57,014          325      0.57
Other borrowings          36,196          716      1.98          50,286        1,044      2.08
Total
interest-bearing
liabilities            1,368,780        5,757      0.42       1,073,572        7,979      0.74
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits          423,404                                297,175
Other liabilities         15,179                                 18,381
Total
noninterest-bearing
liabilities              438,583                                315,556
Stockholders' equity     201,681                                166,427
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY               $ 2,009,044                            $ 1,555,555

Net Interest
Income/spread
(tax equivalent
basis)                                 66,100      3.39 %                     51,359      3.36 %
Tax-equivalent basis
adjustment                              (787)                                  (883)
Net Interest Income                $   65,313                             $   50,476
Net interest margin
(tax equivalent
basis)                                             3.50 %                                 3.55 %

(1) Interest and returns are presented on a tax equivalent basis using a marginal tax rate of 21%.

(2) Average balances were calculated based on daily balances.

(3) Loan balances include unearned loans and are net of unearned income.

(4) Loan yields include the effect of amortization of purchased credit brands and deferred charges net of fees.

?

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RATE/VOLUME ANALYSIS

The following table shows the fully taxable equivalent effect of volume and rate changes on interest income and interest expense.

                                                Increase/(Decrease)
(dollars in thousands)                         2021 compared to 2020
                                                  Variance due to
                                            Volume     Rate        Net
INTEREST-EARNING ASSETS:
Interest-bearing deposits                  $    135  $      59  $     194
Securities available for sale:
Taxable                                       2,002      (862)      1,140
Tax-exempt securities                           267      (178)         89
Total securities available for sale           2,269    (1,040)      1,229
Loans receivable                              9,731      1,365     11,096
Total interest-earning assets                12,135        384     12,519

INTEREST-BEARING LIABILITIES Demand and money market 344 (133) 211 Savings

                                          57          -         57
Time                                            468    (2,589)    (2,121)
Total interest-bearing deposits                 869    (2,722)    (1,853)
Short-term borrowings                            76      (117)       (41)
Other borrowings                              (291)       (37)      (328)
Total interest-bearing liabilities              654    (2,876)    (2,222)

Net interest income (tax equivalent basis) $11,481 $3,260 $14,741

Changes in net interest income that could not be specifically identified as rate or volume changes were allocated proportionately to volume changes and rate changes.

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