Companies: 10,793     total market cap: $140.274 T
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Penns Woods Bancorp
PWOD
#8445
Rank
$0.22 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$30.00
Share price
0.00%
Change (1 day)
4.86%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Penns Woods Bancorp
  2. Quarterly Reports (10-Q)
  3. Submitted on 2021-11-09

Penns Woods Bancorp - 10-Q quarterly report FY


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

☑Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2021. 
☐Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from                    to                   .

No. 0-17077
(Commission File Number)

PENNS WOODS BANCORP INC.
(Exact name of Registrant as specified in its charter) 
Pennsylvania300 Market Street, P.O. Box 96723-2226454
(State or other jurisdiction ofWilliamsport(I.R.S. Employer Identification No.)
incorporation or organization)Pennsylvania17703-0967
(Address of principal executive offices)(Zip Code)

(570) 322-1111
Registrant’s telephone number, including area code


Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $5.55 par valuePWODThe Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company. or an emerging growth company.  See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer☐Accelerated filer☐
  Non-accelerated filer☒   Smaller reporting company☒
Emerging growth company☐

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒
On November 1, 2021 there were 7,069,518 shares of the Registrant’s common stock outstanding.


PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

  Page
  Number
 
   
3
   
3
  
4
  
5
  
6
 
8
  
9
   
34
   
49
   
49
   
 
   
50
   
50
   
50
   
50
   
50
   
50
   
51
   
52
  
53
2

Part I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30,December 31,
(In Thousands, Except Share Data)20212020
ASSETS: 
Noninterest-bearing balances$35,523 $31,821 
Interest-bearing balances in other financial institutions206,124 181,537 
Federal funds sold40,000 — 
Total cash and cash equivalents281,647 213,358 
Investment debt securities, available for sale, at fair value166,760 162,261 
Investment equity securities, at fair value1,263 1,288 
Investment securities, trading40 40 
Restricted investment in bank stock, at fair value14,649 15,377 
Loans held for sale3,246 5,239 
Loans1,347,225 1,344,327 
Allowance for loan losses(14,557)(13,803)
Loans, net1,332,668 1,330,524 
Premises and equipment, net34,434 32,702 
Accrued interest receivable8,529 8,394 
Bank-owned life insurance33,836 33,638 
Investment in limited partnerships5,014 3,944 
Goodwill17,104 17,104 
Intangibles524 671 
Operating lease right-of-use asset2,899 3,136 
Deferred tax asset4,049 2,526 
Other assets4,129 4,441 
TOTAL ASSETS$1,910,791 $1,834,643 
LIABILITIES:  
Interest-bearing deposits$1,111,144 $1,045,086 
Noninterest-bearing deposits481,875 449,357 
Total deposits1,593,019 1,494,443 
Short-term borrowings9,404 5,244 
Long-term borrowings126,007 153,475 
Accrued interest payable828 1,112 
Operating lease liability2,947 3,175 
Other liabilities10,105 13,048 
TOTAL LIABILITIES1,742,310 1,670,497 
SHAREHOLDERS’ EQUITY:  
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued
— — 
Common stock, par value 5.55, 22,500,000 shares authorized; 7,545,922 and 7,532,576 shares issued; 7,065,697 and 7,052,351 outstanding
41,921 41,847 
Additional paid-in capital53,508 52,523 
Retained earnings87,146 82,769 
Accumulated other comprehensive loss:  
Net unrealized gain on available for sale securities3,504 4,714 
Defined benefit plan(5,486)(5,596)
Treasury stock at cost, 480,225
(12,115)(12,115)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY168,478 164,142 
Non-controlling interest3 4 
TOTAL SHAREHOLDERS' EQUITY168,481 164,146 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,910,791 $1,834,643 
See accompanying notes to the unaudited consolidated financial statements.
3

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands, Except Per Share Data)2021202020212020
INTEREST AND DIVIDEND INCOME:    
Loans, including fees$13,382 $14,080 $39,826 $43,403 
Investment securities:    
Taxable834 925 2,491 2,958 
Tax-exempt160 170 495 484 
Dividend and other interest income338 212 903 747 
TOTAL INTEREST AND DIVIDEND INCOME14,714 15,387 43,715 47,592 
INTEREST EXPENSE:    
Deposits1,308 2,569 4,481 8,406 
Short-term borrowings3 8 7 37 
Long-term borrowings771 965 2,430 2,893 
TOTAL INTEREST EXPENSE2,082 3,542 6,918 11,336 
NET INTEREST INCOME12,632 11,845 36,797 36,256 
PROVISION FOR LOAN LOSSES75 645 940 2,040 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES12,557 11,200 35,857 34,216 
NON-INTEREST INCOME:    
Service charges456 388 1,218 1,249 
Net debt securities gains, available for sale48 1,013 323 1,220 
Net equity securities (losses) gains(6)— (25)30 
Net securities (losses) gains, trading(2)(2)1 (16)
Bank-owned life insurance279 156 614 492 
Gain on sale of loans456 1,449 2,034 2,921 
Insurance commissions129 101 436 320 
Brokerage commissions237 224 663 779 
Debit card income388 352 1,166 936 
Other966 354 2,044 1,162 
TOTAL NON-INTEREST INCOME2,951 4,035 8,474 9,093 
NON-INTEREST EXPENSE:    
Salaries and employee benefits5,837 5,465 17,107 16,362 
Occupancy745 599 2,438 1,927 
Furniture and equipment883 837 2,663 2,525 
Software amortization226 257 632 743 
Pennsylvania shares tax373 340 1,097 948 
Professional fees615 608 1,882 1,888 
Federal Deposit Insurance Corporation deposit insurance220 271 705 650 
Marketing231 61 434 170 
Intangible amortization44 53 147 174 
Other1,273 1,216 3,541 4,041 
TOTAL NON-INTEREST EXPENSE10,447 9,707 30,646 29,428 
INCOME BEFORE INCOME TAX PROVISION5,061 5,528 13,685 13,881 
INCOME TAX PROVISION932 1,051 2,516 2,563 
CONSOLIDATED NET INCOME$4,129 $4,477 $11,169 $11,318 
Less: Net income attributable to noncontrolling interest4 5 15 13 
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.$4,125 $4,472 $11,154 $11,305 
EARNINGS PER SHARE - BASIC$0.58 $0.63 $1.58 $1.61 
EARNINGS PER SHARE - DILUTED$0.58 $0.63 $1.58 $1.61 
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 7,063,994 7,045,336 7,059,625 7,042,578 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED7,063,994 7,045,336 7,059,625 7,042,578 
DIVIDENDS DECLARED PER SHARE$0.32 $0.32 $0.96 $0.96 
See accompanying notes to the unaudited consolidated financial statements.
4



PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Net Income$4,125 $4,472 $11,154 $11,305 
Other comprehensive income (loss):    
Change in unrealized (loss) gain on available for sale securities(687)1,324 (1,208)3,733 
Tax effect145 (278)254 (784)
Net realized gain on available for sale securities included in net income(48)(1,013)(323)(1,220)
Tax effect9 213 67 256 
   Amortization of unrecognized pension gain45 52 138 144 
        Tax effect(8)(11)(28)(30)
Total other comprehensive (loss) income(544)287 (1,100)2,099 
Comprehensive income$3,581 $4,759 $10,054 $13,404 
 
See accompanying notes to the unaudited consolidated financial statements.
5

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)



 Three months ended:
COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS 		TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)SHARESAMOUNT
Balance, June 30, 20217,541,627 $41,897 $53,205 $85,281 $(1,438)$(12,115)$5 $166,835 
Net income4,125 4 4,129 
Other comprehensive loss(544)(544)
Stock-based compensation 227 227 
Dividends declared ($0.32 per share)
(2,260)(2,260)
Common shares issued for employee stock purchase plan889 5 15 20 
Director Compensation Plan3,406 19 61 80 
Distributions to noncontrolling interest (6)(6)
Balance, September 30, 20217,545,922 $41,921 $53,508 $87,146 $(1,982)$(12,115)$3 $168,481 


COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS 		TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)SHARESAMOUNT
Balance, June 30, 20207,522,573 $41,792 $51,956 $78,910 $(965)$(12,115)$30 $159,608 
Net income4,472 5 4,477 
Other comprehensive income287 287 
Stock-based compensation239 239 
Dividends declared ($0.32 per share)
(2,255)(2,255)
Common shares issued for employee stock purchase plan1,055 6 15 21 
Director Compensation Plan3,977 22 58 80 
Distributions to noncontrolling interest(28)(28)
Balance, September 30, 20207,527,605 $41,820 $52,268 $81,127 $(678)$(12,115)$7 $162,429 






6



PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)



 Nine months ended:

COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS		TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)SHARESAMOUNT
Balance, December 31, 20207,532,576 $41,847 $52,523 $82,769 $(882)$(12,115)$4 $164,146 
Net income   11,154   15 11,169 
Other comprehensive loss    (1,100) (1,100)
Stock-based compensation 754 754 
Dividends declared ($0.96 per share)
   (6,777)  (6,777)
Common shares issued for employee stock purchase plan2,873 16 49    65 
Director Compensation Plan10,473 58 182240 
Distributions to noncontrolling interest(16)(16)
Balance, September 30, 20217,545,922 $41,921 $53,508 $87,146 $(1,982)$(12,115)$3 $168,481 


COMMON STOCKADDITIONAL
PAID-IN CAPITAL		RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS 		TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)SHARESAMOUNT
Balance, December 31, 20197,520,740 $41,782 $51,487 $76,583 $(2,777)$(12,115)$22 $154,982 
Net income   11,305   13 11,318 
Other comprehensive income  2,099  2,099 
Stock-based compensation675 675 
Dividends declared ($0.96 per share)
   (6,761)  (6,761)
Common shares issued for employee stock purchase plan2,888 16 48    64 
Director Compensation Plan3,977 22 58 80 
Distributions to noncontrolling interest(28)(28)
Balance, September 30, 20207,527,605 $41,820 $52,268 $81,127 $(678)$(12,115)$7 $162,429 

See accompanying notes to the unaudited consolidated financial statements.
7

PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
Nine Months Ended September 30,
(In Thousands)20212020
OPERATING ACTIVITIES:  
Net Income$11,169 $11,318 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization2,235 2,310 
Gain on sale of premise and equipment(18)(14)
Amortization of intangible assets147 174 
Provision for loan losses940 2,040 
Stock based compensation754 675 
Accretion and amortization of investment security discounts and premiums829 382 
Net securities gains, available for sale(323)(1,220)
Originations of loans held for sale(68,328)(95,661)
Proceeds of loans held for sale72,355 96,167 
Gain on sale of loans(2,034)(2,921)
Net equity securities losses (gains)25 (30)
Net securities (gains) losses, trading(1)16 
Earnings on bank-owned life insurance(614)(492)
Increase in deferred tax asset(1,201)(599)
Other, net(3,548)2,756 
Net cash provided by operating activities12,387 14,901 
INVESTING ACTIVITIES:  
Proceeds from sales of available for sale securities13,689 37,252 
Proceeds from calls and maturities of available for sale securities15,898 567 
Purchases of available for sale securities(36,124)(35,524)
Net (increase) decrease in loans(3,167)5,692 
Acquisition of premises and equipment(939)(2,830)
Proceeds from the sale of premises and equipment2 336 
Proceeds from the sale of foreclosed assets335 226 
Purchase of bank-owned life insurance(30)(3,970)
Proceeds from bank-owned life insurance death benefit453 248 
Investment in limited partnership(1,070)(628)
Proceeds from redemption of regulatory stock2,167 2,881 
Purchases of regulatory stock(1,439)(4,359)
Net cash used for investing activities(10,225)(109)
FINANCING ACTIVITIES:  
Net increase in interest-bearing deposits66,058 68,303 
Net increase in noninterest-bearing deposits32,518 99,502 
Proceeds from long-term borrowings— 35,000 
Repayment of long-term borrowings(30,000)(43,333)
Net increase in short-term borrowings4,160 10,089 
Finance lease principal payments(121)(53)
Dividends paid(6,777)(6,761)
Distributions to non-controlling interest(16)— 
Issuance of common stock305 144 
Net cash provided by financing activities66,127 162,891 
NET INCREASE IN CASH AND CASH EQUIVALENTS68,289 177,683 
CASH AND CASH EQUIVALENTS, BEGINNING213,358 48,589 
CASH AND CASH EQUIVALENTS, ENDING$281,647 $226,272 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
Interest paid$7,202 $11,516 
Income taxes paid3,175 2,375 
Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities2,653 — 
Transfer of loans to foreclosed real estate83 207 
See accompanying notes to the unaudited consolidated financial statements.
8

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

Note 1.  Basis of Presentation
 
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”).  The Company also owned a controlling interest in United Insurance Solutions, LLC, which on October 15, 2021 became a wholly owned subsidiary of the Company. All significant inter-company balances and transactions have been eliminated in the consolidation.

The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.

Note 2.  Accumulated Other Comprehensive Gain (Loss)

The changes in accumulated other comprehensive gain (loss) by component shown net of tax and parenthesis indicating debits, as of September 30, 2021 and 2020 were as follows:
Three Months Ended September 30, 2021Three Months Ended September 30, 2020
(In Thousands)Net Unrealized Gain on Available
for Sale Securities		Defined
Benefit 
Plan		TotalNet Unrealized
Gain on Available
for Sale Securities		Defined
Benefit 
Plan		Total
Beginning balance$4,085 $(5,523)$(1,438)$4,194 $(5,159)$(965)
Other comprehensive (loss) gain before reclassifications(542)— (542)1,046 — 1,046 
Amounts reclassified from accumulated other comprehensive (loss) gain(39)37 (2)(800)41 (759)
Net current-period other comprehensive (loss) income(581)37 (544)246 41 287 
Ending balance$3,504 $(5,486)$(1,982)$4,440 $(5,118)$(678)
 Nine Months Ended September 30, 2021Nine Months Ended September 30, 2020
(In Thousands)Net Unrealized Gain (Loss) on Available for Sale SecuritiesDefined
Benefit 
Plan		TotalNet Unrealized Gain (Loss) on Available
for Sale Securities		Defined
Benefit 
Plan		Total
Beginning balance$4,714 $(5,596)$(882)$2,455 $(5,232)$(2,777)
Other comprehensive gain (loss) before reclassifications(954)— (954)2,949 — 2,949 
Amounts reclassified from accumulated other comprehensive (loss) gain(256)110 (146)(964)114 (850)
Net current-period other comprehensive (loss) income(1,210)110 (1,100)1,985 114 2,099 
Ending balance$3,504 $(5,486)$(1,982)$4,440 $(5,118)$(678)

9

The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of September 30, 2021 and 2020 were as follows:
Details about Accumulated Other Comprehensive Loss ComponentsAmount Reclassified from Accumulated Other Comprehensive LossAffected Line Item
 in the Consolidated 
Statement of Income
Three Months Ended September 30, 2021Three Months Ended September 30, 2020
Net unrealized gain on available for sale securities$48 $1,013 Net debt securities gains, available for sale
Income tax effect(9)(213)Income tax provision
Total reclassifications for the period$39 $800 
Net unrecognized pension costs$(46)$(52)Other non-interest expense
Income tax effect9 11 Income tax provision
Total reclassifications for the period$(37)$(41)
Details about Accumulated Other Comprehensive Loss ComponentsAmount Reclassified from Accumulated Other Comprehensive LossAffected Line Item
 in the Consolidated 
Statement of Income
Nine months ended September 30, 2021Nine months ended September 30, 2020
Net unrealized gain on available for sale securities$323 $1,220 Net debt securities gains, available for sale
Income tax effect(67)(256)Income tax provision
Total reclassifications for the period$256 $964 
Net unrecognized pension costs$(139)$(144)Other non-interest expense
Income tax effect29 30 Income tax provision
Total reclassifications for the period$(110)$(114)

Note 3.  Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives, and Hedging (Topic 815); and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-04 makes clarifying amendments to certain financial instrument standards. For entities that have not yet adopted ASU 2016-13, the
10

effective dates for the amendments related to ASU 2016-13 are the same as the effective dates in ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2017-12 as of April 25, 2019, the effective dates for the amendments to Topic 815 are the same as the effective dates in ASU 2017-12. For entities that have adopted ASU 2017-12 as of April 25, 2019, the effective date is as of the beginning of the first annual period beginning after April 25, 2019. The amendments related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted the credit losses standard, the ASU is effective when they implement the credit losses standard. For entities that already have adopted the credit losses standard, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that
11

reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, which clarifies that, for each reporting period, an entity should reevaluate whether a callable debt security is within the scope of ASC 310-20-35-33. For public business entities, ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

In October 2020, the FASB issued ASU 2020-09, Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762, which codifies, as appropriate, the amended financial statement disclosure requirements in Regulation S-X Rules 13-01 and 13-02. The amendments were effective January 4, 2021. This Update did not have a significant impact on the Company’s financial statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which makes minor technical corrections and clarifications to the ASC. The amendments in Sections B and C of the ASU are effective for annual periods beginning after December 15, 2020, for public business entities. For all other entities, the amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2020, the FASB issued ASU 2020-11, Financial Services – Insurance (Topic 944), which was made in consideration of the implications of the Coronavirus Disease 2019 (COVID-19) pandemic on an insurance entity’s ability to effectively implement the amendments in Accounting Standards Update No. 2018-12, Financial Services— Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI). The amendments in this Update defer the effective date of LDTI for all entities by one year, as (1) for public business entities that meet the definition of an SEC filer and are not SRCs, LDTI is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years; and (2) for all other entities, LDTI is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made,
12

as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which requires an entity to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. An entity should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update), to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU was effective upon issuance and did not have a significant impact on the Company’s financial statements.

Note 4. Per Share Data

There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 1,045,475 stock options, with an average exercise price of $27.25, outstanding on September 30, 2021. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $23.70 being less than the exercise price of the options issued. There were a total of 864,300 stock options, with an average exercise price of $28.20 that were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $24.20 being less than the strike price for the period ending September 30, 2020.
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Weighted average common shares issued7,544,219 7,525,561 7,539,850 7,522,803 
Weighted average treasury stock shares(480,225)(480,225)(480,225)(480,225)
Weighted average common shares outstanding - basic and diluted
7,063,994 7,045,336 7,059,625 7,042,578 
 


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Note 5. Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at September 30, 2021 and December 31, 2020 are as follows:
 September 30, 2021
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
Mortgage-backed securities$1,765 $10 $— $1,775 
State and political securities112,308 4,610 (444)116,474 
Other debt securities48,251 727 (467)48,511 
Total debt securities$162,324 $5,347 $(911)$166,760 
Investment equity securities:
Other equity securities$1,300 $— $(37)$1,263 
Trading:
Other equity securities$50 $— $(10)$40 
 December 31, 2020
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
Mortgage-backed securities$2,118 $23 $— $2,141 
State and political securities102,690 5,382 (59)108,013 
Other debt securities51,486 828 (207)52,107 
Total debt securities$156,294 $6,233 $(266)$162,261 
Investment equity securities:
Other equity securities$1,300 $10 $(22)$1,288 
Trading:
Other equity securities$50 $— $(10)$40 

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at September 30, 2021 and December 31, 2020.
 September 30, 2021
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
State and political securities$29,367 $(431)$888 $(13)$30,255 $(444)
Other debt securities10,107 (172)2,766 (295)12,873 (467)
Total debt securities$39,474 $(603)$3,654 $(308)$43,128 $(911)
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 December 31, 2020
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
State and political securities$12,311 $(51)$900 $(8)$13,211 $(59)
Other debt securities5,964 (74)4,429 (133)10,393 (207)
Total debt securities$18,275 $(125)$5,329 $(141)$23,604 $(266)
 
At September 30, 2021, there were a total of 71 securities in a continuous unrealized loss position for less than twelve months and 7 individual securities that were in a continuous unrealized loss position for twelve months or greater.

The Company reviews its position quarterly and has determined that, at September 30, 2021, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.  The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at September 30, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands)Amortized CostFair Value
Due in one year or less$11,076 $10,828 
Due after one year to five years76,785 78,108 
Due after five years to ten years69,469 72,703 
Due after ten years4,994 5,121 
Total$162,324 $166,760 

Total gross proceeds from sales of debt securities available for sale for the nine months ended September 30, 2021 was $13,689,000, compared to $37,252,000 for the corresponding 2020 period.

The following table represents gross realized gains and losses from the sales of debt securities available for sale:
 Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Available for sale (AFS):
Gross realized gains:    
Mortgage-backed securities$— $— $— $83 
State and political securities1 839 1 943 
Other debt securities48 174 323 194 
Total gross realized gains$49 $1,013 $324 $1,220 
Gross realized losses:    
State and political securities$1 $— $1 $— 
Other debt securities— — — — 
Total gross realized losses$1 $— $1 $— 

There were no impairment charges included in gross realized losses for the three and nine months ended September 30, 2021 and 2020, respectively.

15

Investment securities with a carrying value of approximately $121,299,000 and $111,247,000 at September 30, 2021 and December 31, 2020, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

At September 30, 2021 and December 31, 2020, we had $1,263,000 and $1,288,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Net (losses) gains recognized in equity securities during the period$(6)$— $(25)$30 
Less: Net gains realized on the sale of equity securities during the period— — — — 
Unrealized (losses) gains recognized in equity securities held at reporting date$(6)$— $(25)$30 

Net gains and losses on trading account securities are as follows for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Net gains on sale transactions$— $— $— $— 
Net mark-to-market (losses) gains(2)(2)1 (16)
Net (loss) gain on trading account securities$(2)$(2)$1 $(16)


Note 6. Loans

Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics.  Loans are segmented based on the underlying collateral characteristics.  Categories include commercial, financial, and agricultural, real estate, and installment loans.  Real estate loans are further segmented into three categories: residential, commercial, and construction, while installment loans are classified as either consumer automobile loans or other installment loans.

The following table presents the related aging categories of loans, by segment, as of September 30, 2021 and December 31, 2020:
 September 30, 2021
  Past DuePast Due 90  
  30 To 89Days Or MoreNon- 
(In Thousands)CurrentDays& Still AccruingAccrualTotal
Commercial, financial, and agricultural$179,079 $147 $— $422 $179,648 
Real estate mortgage:     
Residential584,765 1,709 511 940 587,925 
Commercial371,197 315 — 5,498 377,010 
Construction45,899 — — 49 45,948 
Consumer automobile loans146,094 552 17 — 146,663 
Other consumer installment loans9,363 48 326 — 9,737 
 1,336,397 $2,771 $854 $6,909 1,346,931 
Net deferred loan fees and discounts294    294 
Allowance for loan losses(14,557)   (14,557)
Loans, net$1,322,134    $1,332,668 
16

 December 31, 2020
  Past DuePast Due 90  
  30 To 89Days Or MoreNon- 
(In Thousands)CurrentDays& Still AccruingAccrualTotal
Commercial, financial, and agricultural$163,583 $247 $48 $865 $164,743 
Real estate mortgage:     
Residential580,292 6,386 983 2,060 589,721 
Commercial366,363 533 150 6,142 373,188 
Construction38,587 667 — 55 39,309 
Consumer automobile loans155,472 900 31 — 156,403 
Other consumer installment loans19,485 455 — — 19,940 
 1,323,782 $9,188 $1,212 $9,122 1,343,304 
Net deferred loan fees and discounts1,023    1,023 
Allowance for loan losses(13,803)   (13,803)
Loans, net$1,311,002    $1,330,524 
 
The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three and nine months ended September 30, 2021 and 2020:
 Three Months Ended September 30,
 20212020
(In Thousands)Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate		Interest
Income
Recorded on
a Cash Basis		Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate		Interest
Income
Recorded on
a Cash Basis
Commercial, financial, and agricultural$28 $— $2 $14 
Real estate mortgage:    
Residential6 — 14 2 
Commercial89 — 52 — 
Construction— — — — 
Consumer automobile loans— — — — 
Other consumer installment loans— — — — 
 $123 $— $68 $16 
 Nine Months Ended September 30,
 20212020
(In Thousands)Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate		Interest
Income
Recorded on
a Cash Basis		Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate		Interest
Income
Recorded on
a Cash Basis
Commercial, financial, and agricultural$84 $— $37 $14 
Real estate mortgage:    
Residential22 — 27 2 
Commercial144 — 116 — 
Construction2 — 1 — 
Consumer automobile loans— — 2 3 
Other consumer installment loans— — 3 — 
 $252 $— $186 $19 




17

Impaired Loans

Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement.  The Banks individually evaluate such loans for impairment and do not aggregate loans by major risk classifications.  The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap.  The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value.  The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan.  When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard or worse.  Management may also elect to measure an individual loan for impairment if less than $100,000 on a case-by-case basis.

Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively with the exception of loans identified as troubled debt restructurings. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired.  Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.  Interest income for impaired loans is recorded consistent to the Banks' policy.


































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The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of September 30, 2021 and December 31, 2020:
September 30, 2021
RecordedUnpaid PrincipalRelated
(In Thousands)InvestmentBalanceAllowance
With no related allowance recorded:   
Commercial, financial, and agricultural$1,265 $1,265 $— 
Real estate mortgage:   
Residential4,003 4,003 — 
Commercial3,919 3,919 — 
Construction114 114 — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 9,301 9,301 — 
With an allowance recorded:   
Commercial, financial, and agricultural420 3,207 2 
Real estate mortgage:   
Residential1,273 1,273 246 
Commercial6,366 6,366 902 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals20 20 20 
 8,079 10,866 1,170 
Total:   
Commercial, financial, and agricultural1,685 4,472 2 
Real estate mortgage:   
Residential5,276 5,276 246 
Commercial10,285 10,285 902 
Construction114 114 — 
Consumer automobile loans— — — 
Installment loans to individuals20 20 20 
 $17,380 $20,167 $1,170 
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 December 31, 2020
 RecordedUnpaid PrincipalRelated
(In Thousands)InvestmentBalanceAllowance
With no related allowance recorded:  
Commercial, financial, and agricultural$865 $3,652 $— 
Real estate mortgage:   
Residential5,023 5,023 — 
Commercial6,354 6,354 — 
Construction124 124 — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 12,366 15,153 — 
With an allowance recorded:   
Commercial, financial, and agricultural— — — 
Real estate mortgage:   
Residential1,294 1,294 224 
Commercial3,023 3,023 811 
Construction— — — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 4,317 4,317 1,035 
Total:   
Commercial, financial, and agricultural865 3,652 — 
Real estate mortgage:   
Residential6,317 6,317 224 
Commercial9,377 9,377 811 
Construction124 124 — 
Consumer automobile loans— — — 
Installment loans to individuals— — — 
 $16,683 $19,470 $1,035 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three and nine months ended September 30, 2021 and 2020:
 Three Months Ended September 30,
 20212020
(In Thousands)Average
Investment in
Impaired Loans		Interest Income
Recognized on an
Accrual Basis on
Impaired Loans		Interest Income
Recognized on a
Cash Basis on
Impaired Loans		Average
Investment in
Impaired Loans		Interest Income
Recognized on an
Accrual Basis on
Impaired Loans		Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural$2,052 $13 $— $1,543 $33 $14 
Real estate mortgage:       
Residential5,218 53 — 5,117 63 2 
Commercial10,530 61 — 6,587 71 — 
Construction115 1 — 54 1 — 
Consumer automobile— — — 147 — — 
Other consumer installment loans20 — — — — — 
 $17,935 $128 $— $13,448 $168 $16 
20

 Nine Months Ended September 30,
 20212020
(In Thousands)Average
Investment in
Impaired Loans		Interest Income
Recognized on an
Accrual Basis on
Impaired Loans		Interest Income
Recognized on a
Cash Basis on
Impaired Loans		Average
Investment in
Impaired Loans		Interest Income
Recognized on an
Accrual Basis on
Impaired Loans		Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural$1,458 $43 $— $1,849 $34 $14 
Real estate mortgage:      
Residential5,650 151 — 5,535 177 2 
Commercial9,848 126 — 7,577 118 — 
Construction119 4 — 60 1 — 
Consumer automobile38 — — 111 1 3 
Other consumer installment loans10 9 — 4 — — 
$17,123 $333 $— $15,136 $331 $19 


Troubled Debt Restructurings

The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties.  These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There were five loan modifications considered to be TDRs completed during the nine months ended September 30, 2021, respectively. There were no loan modifications considered TDRs completed during the three and nine months ended September 30, 2020. Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2021 were as follows:

Three Months Ended September 30,
2021
(In Thousands, Except Number of Contracts)Number
of
Contracts		Pre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural— $— $— 
Real estate mortgage:   
Residential— — — 
Commercial— — — 
Construction— — — 
 — $— $— 
21

 Nine Months Ended September 30,
 2021
(In Thousands, Except Number of Contracts)Number
of
Contracts		Pre-Modification
Outstanding
Recorded
Investment		Post-Modification
Outstanding
Recorded
Investment
Commercial, financial, and agricultural1 $949 $949 
Real estate mortgage:   
Residential2 865 865 
Commercial2 855 855 
Construction— — — 
 5 $2,669 $2,669 

There were two loan modifications considered to be TDRs made during the twelve months prior to September 30, 2021 that defaulted during the nine months ended September 30, 2021. The defaulted loan type and recorded investment at September 30, 2021 are as follows: two residential real estate loan with a recorded investment of $706,000. There were two loan modifications considered to be TDRs made during the twelve months previous to September 30, 2020 that defaulted during the nine months ended September 30, 2020. The defaulted loan types and recorded investments at September 30, 2020 are as follows: one commercial real estate loan with a recorded investment of $1,040,000, and one commercial and agricultural loans with a recorded investment of $640,000.

Troubled debt restructurings amounted to $12,612,000 and $12,359,000 as of September 30, 2021 and December 31, 2020, respectively.

The amount of foreclosed residential real estate held at September 30, 2021 and December 31, 2020, totaled $83,000 and $401,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 2021 and December 31, 2020, totaled $193,000 and $629,154, respectively.

The Company began offering short-term loan modifications to provide relief to borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made in a good faith basis in response to COVID-19 who were current at the time the modification program is implemented do not need to be accounted for as TDRs. Loan modifications and payment deferrals have been at historical high levels as the impact of the pandemic continues. As of September 30, 2021, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on 1,371 loans with 14 loans remaining in their deferral period with an aggregate outstanding balance of $1,346,000. These loan modifications met applicable requirements to not be considered troubled debt restructurings. The Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act (the “Economic Aid Act”) passed in December 2020 extended the CARES Act provisions permitting financial institutions to suspend TDR assessment and reporting requirements under generally accepted accounting principles until the earlier of 60 days after the date that the President terminates the COVID-19 national emergency or January 1, 2022. The number of customers seeking loan modifications or payment deferrals may increase as the effects of the pandemic continue.

Internal Risk Ratings

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated for substandard classification.  Loans in the doubtful category exhibit the same weaknesses found in the substandard loans, however, the weaknesses are more pronounced.  Such loans are static and collection in full is improbable.  However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.  Loans classified loss are considered uncollectible and charge-off is imminent.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and
22

residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 2021 loan review has an aggregate commercial relationship threshold of $1,750,000 which can consist of outstanding loans, commercial real estate mortgages and outstanding commitments. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.

The following table presents the credit quality categories identified above as of September 30, 2021 and December 31, 2020:
 September 30, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment loans 
(In Thousands)ResidentialCommercialConstructionTotals
Pass$176,189 $584,538 $360,033 $45,144 $146,663 $9,718 $1,322,285 
Special Mention442 240 6,160 686 — — 7,528 
Substandard3,017 3,147 10,817 118 — 19 17,118 
$179,648 $587,925 $377,010 $45,948 $146,663 $9,737 $1,346,931 
 December 31, 2020
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobile Other consumer installment loans 
(In Thousands)ResidentialCommercialConstructionTotals
Pass$162,694 $584,599 $355,616 $39,192 $156,403 $19,938 $1,318,442 
Special Mention180 556 7,973 — — — 8,709 
Substandard1,869 4,566 9,599 117 — 2 16,153 
 $164,743 $589,721 $373,188 $39,309 $156,403 $19,940 $1,343,304 

Allowance for Loan Losses

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.

The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  The total of the two components represents the Banks' ALL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate.  Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring.  Loans that are collectively evaluated for impairment are grouped into two classes for evaluation.  A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.

For the general allowances, historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualitative factors.  A historical charge-off factor is calculated utilizing a twelve quarter moving average.  However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the economic cycle. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.  Management also monitors industry loss factors by loan segment for applicable adjustments to actual loss experience.
23


Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

Activity in the allowance is presented for the three and nine months ended September 30, 2021 and 2020:
 Three Months Ended September 30, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,846 $4,619 $4,436 $212 $1,824 $44 $1,457 $14,438 
Charge-offs(10)(29)— — (12)(116)— (167)
Recoveries8 — 84 5 107 7 — 211 
Provision277 175 (500)11 (226)194 144 75 
Ending Balance$2,121 $4,765 $4,020 $228 $1,693 $129 $1,601 $14,557 
 Three Months Ended September 30, 2020
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,953 $4,478 $3,335 $150 $2,214 $127 $720 $12,977 
Charge-offs— (6)— — (200)(33)— (239)
Recoveries9 1 — — 10 26 — 46 
Provision17 (24)(290)20 (27)135 814 645 
Ending Balance$1,979 $4,449 $3,045 $170 $1,997 $255 $1,534 $13,429 
 
tNine Months Ended September 30, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,936 $4,460 $3,635 $134 $1,906 $261 $1,471 $13,803 
Charge-offs(45)(172)— — (235)(173)— (625)
Recoveries22 112 109 10 139 47 — 439 
Provision208 365 276 84 (117)(6)130 940 
Ending Balance$2,121 $4,765 $4,020 $228 $1,693 $129 $1,601 $14,557 
 Nine Months Ended September 30, 2020
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,779 $4,306 $3,210 $118 $1,780 $278 $423 $11,894 
Charge-offs(22)(174)— — (289)(215)— (700)
Recoveries32 48 — 5 17 93 — 195 
Provision190 269 (165)47 489 99 1,111 2,040 
Ending Balance$1,979 $4,449 $3,045 $170 $1,997 $255 $1,534 $13,429 

The shift in allocation and the decrease in the loan provision is primarily due to changes in the credit metrics within the loan portfolio, several commercial loans with specific loan loss allocations being paid off, and the economic uncertainty caused by the COVID-19 pandemic including supply chain disruptions.

The Company grants commercial, industrial, residential, and installment loans to customers primarily throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.

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The Company has a concentration of the following to gross loans at September 30, 2021 and 2020: 
 September 30,
 20212020
Owners of residential rental properties18.84 %16.29 %
Owners of commercial rental properties14.03 %12.98 %

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2021 and December 31, 2020:
 September 30, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer AutomobileOther consumer installmentUnallocated 
(In Thousands)ResidentialCommercialConstructionTotals
Allowance for Loan Losses:       
Ending allowance balance attributable to loans:       
Individually evaluated for impairment$2 $246 $902 $— $— $20 $— $1,170 
Collectively evaluated for impairment2,119 4,519 3,118 228 1,693 109 1,601 13,387 
Total ending allowance balance$2,121 $4,765 $4,020 $228 $1,693 $129 $1,601 $14,557 
Loans:       
Individually evaluated for impairment$1,685 $5,276 $10,285 $114 $— $20 $17,380 
Collectively evaluated for impairment177,963 582,649 366,725 45,834 146,663 9,717 1,329,551 
Total ending loans balance$179,648 $587,925 $377,010 $45,948 $146,663 $9,737 $1,346,931 

 December 31, 2020
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer AutomobileOther consumer installmentUnallocated 
(In Thousands)ResidentialCommercialConstructionTotals
Allowance for Loan Losses:       
Ending allowance balance attributable to loans:       
Individually evaluated for impairment$— $224 $811 $— $— $— $— $1,035 
Collectively evaluated for impairment1,936 4,236 2,824 134 1,906 261 1,471 12,768 
Total ending allowance balance$1,936 $4,460 $3,635 $134 $1,906 $261 $1,471 $13,803 
Loans:       
Individually evaluated for impairment$865 $6,317 $9,377 $124 $— $—  $16,683 
Collectively evaluated for impairment163,878 583,404 363,811 39,185 156,403 19,940  1,326,621 
Total ending loans balance$164,743 $589,721 $373,188 $39,309 $156,403 $19,940  $1,343,304 


Note 7.  Net Periodic Benefit Cost-Defined Benefit Plans

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2020.






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The following sets forth the components of the net periodic benefit/cost of the domestic non-contributory defined benefit plan for the three and nine months ended September 30, 2021 and 2020, respectively:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Interest cost$127 $161 $381 $481 
Expected return on plan assets(386)(330)(1,158)(956)
Amortization of net loss45 52 138 144 
Net periodic benefit$(214)$(117)$(639)$(331)

Employer Contributions

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2020, that it expected to contribute a minimum of $500,000 to its defined benefit plan in 2021.  As of September 30, 2021, there were contributions of $600,000 made to the plan with additional contributions of at least $100,000 anticipated during the remainder of 2021.

Note 8.  Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (“Plan”).  The Plan is intended to encourage employee participation in the ownership and economic progress of the Company.  The Plan allows for up to 1,500,000 shares to be purchased by employees.  The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually.  During the nine months ended September 30, 2021 and 2020, there were 2,873 and 2,888 shares issued under the Plan, respectively.

Note 9.  Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments are primarily comprised of commitments to extend credit, standby letters of credit, and credit exposure from the sale of assets with recourse.  These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the Consolidated Balance Sheet.  The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.

Financial instruments whose contract amounts represent credit risk are as follows at September 30, 2021 and December 31, 2020:
(In Thousands)September 30, 2021December 31, 2020
Commitments to extend credit$236,397 $198,512 
Standby letters of credit9,949 10,120 
Credit exposure from the sale of assets with recourse10,031 9,182 
$256,377 $217,814 

Commitments to extend credit are legally binding agreements to lend to customers.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements.  The Company evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company, on an extension of credit is based on management’s credit assessment of the counterparty.

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  These instruments are issued primarily to support bid or performance related contracts.  The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. 
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Fees earned from the issuance of these letters are recognized upon expiration of the coverage period.  For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.


Note 10.  Fair Value Measurements

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
   
Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
   
Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

This hierarchy requires the use of observable market data when available.

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of September 30, 2021 and December 31, 2020, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 September 30, 2021
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
Mortgage-backed securities$— $1,775 $— $1,775 
State and political securities— 116,474 — 116,474 
Other debt securities— 48,511 — 48,511 
Investment equity securities:
  Other equity securities1,263 — — 1,263 
Investment securities, trading:
  Other equity securities40 — — 40 

 December 31, 2020
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
Mortgage-backed securities$— $2,141 $— $2,141 
State and political securities— 108,013 — 108,013 
Other debt securities— 52,107 — 52,107 
Investment equity securities:
  Other equity securities1,288 — — 1,288 
Investment securities, trading:
  Other equity securities40 — — 40 


The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of September 30, 2021 and December 31, 2020, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 
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 September 30, 2021
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$— $— $16,210 $16,210 
Other real estate owned— — 83 83 
 December 31, 2020
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$— $— $15,648 $15,648 
Other real estate owned— — 401 401 

The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of September 30, 2021 and December 31, 2020: 
 September 30, 2021
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans$13,826 Discounted cash flowTemporary reduction in payment amount
3% to (63)%
(7)%
 2,384 
Appraisal of collateral (1)
Appraisal adjustments (1)
0% to (30)%
(15)%
Other real estate owned$83 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
 December 31, 2020
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans$8,624 Discounted cash flowTemporary reduction in payment amount
17% to (63)%
(18)%
 7,024 
Appraisal of collateral (1)
Appraisal adjustments (1)
0% to (30)%
(8)%
Other real estate owned$401 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The discounted cash flow valuation technique is utilized to determine the fair value of performing impaired loans, while non-performing impaired loans utilize the appraisal of collateral method.

The significant unobservable inputs used in the fair value measurement of the Company’s impaired loans using the discounted cash flow valuation technique include temporary changes in payment amounts and the probability of default.  Significant increases (decreases) in payment amounts would result in significantly higher (lower) fair value measurements.  The probability of default is 0% for impaired loans using the discounted cash flow valuation technique because all defaulted impaired loans are valued using the appraisal of collateral valuation technique.

The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The significant unobservable input used in the fair value measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of collateral valuation technique. 





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Note 11. Fair Value of Financial Instruments

The Company is required to disclose fair values for its financial instruments.  Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions can significantly affect the fair values.

Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments.  The Company’s fair values, methods, and assumptions are set forth below for the Company’s other financial instruments.

As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, this fair value of financial instruments would not represent the full market value of the Company.

The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at September 30, 2021 and December 31, 2020:
 CarryingFairFair Value Measurements at September 30, 2021
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Cash and cash equivalents (1)$281,647 $281,647 $281,647 $— $— 
Restricted investment in bank stock (1)14,649 14,649 14,649 — — 
Loans held for sale (1)3,246 3,246 3,246 — — 
Loans, net1,332,668 1,340,252 — — 1,340,252 
Bank-owned life insurance (1)33,836 33,836 33,836 — — 
Accrued interest receivable (1)8,529 8,529 8,529 — — 
Financial liabilities:     
Interest-bearing deposits$1,111,144 $1,114,193 $876,786 $— $237,407 
Noninterest-bearing deposits (1)481,875 481,875 481,875 — — 
Short-term borrowings (1)9,404 9,404 9,404 — — 
Long-term borrowings126,007 129,392 — — 129,392 
Accrued interest payable (1)828 828 828 — — 
(1) The financial instrument is carried at cost at September 30, 2021, which approximate the fair value of the instruments
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 CarryingFairFair Value Measurements at December 31, 2020
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Cash and cash equivalents (1)$213,358 $213,358 $213,358 $— $— 
Restricted investment in bank stock (1)15,377 15,377 15,377 — — 
Loans held for sale (1)5,239 5,239 5,239 — — 
Loans, net1,330,524 1,339,993 — — 1,339,993 
Bank-owned life insurance (1)33,638 33,638 33,638 — — 
Accrued interest receivable (1)8,394 8,394 8,394 — — 
Financial liabilities:     
Interest-bearing deposits$1,045,086 $1,048,281 $781,441 $— $266,840 
Noninterest-bearing deposits (1)449,357 449,357 449,357 — — 
Short-term borrowings (1)5,244 5,244 5,244 — — 
Long-term borrowings153,475 159,575 — — 159,575 
Accrued interest payable (1)1,112 1,112 1,112 — — 
(1) The financial instrument is carried at cost at December 31, 2020, which approximate the fair value of the instruments

The methods and assumptions used by the Company in estimating fair values of financial instruments at September 30, 2021 is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables.


Note 12.  Stock Options

In 2020, the Company adopted the 2020 Equity Incentive Plan which replaced the 2014 Equity Incentive Plan that did not have any remaining shares available for issuance. The plans are designed to help the Company attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, restricted stock, restricted stock units, and other equity-based awards may be granted as part of the plan.

As of January 1, 2021, the Company had a total of 841,275 stock options outstanding. During the period ended September 30, 2021, the Company issued 234,500 stock options with a strike price of $24.23 to a group of employees. The options granted in 2021 all expire ten years from the grant date. Of the 234,500 grants awarded in 2021, 156,500 of the options vest in three years while the 78,000 remaining options vest in five years.

Stock Options Granted
DateSharesForfeitedOutstandingStrike PriceVesting PeriodExpiration
April 9, 2021156,500 — 156,500 $24.23 3 years10 years
April 9, 202178,000 — 78,000 24.23 5 years10 years
March 11, 2020119,300 — 119,300 25.31 3 years10 years
March 11, 2020119,200 — 119,200 25.31 5 years10 years
March 15, 2019120,900 (12,900)108,000 28.01 3 years10 years
March 15, 2019119,100 (12,600)106,500 28.01 5 years10 years
August 24, 201875,300 (9,900)65,400 30.67 3 years10 years
August 24, 2018149,250 (19,800)129,450 30.67 5 years10 years
January 5, 201818,750 — 18,750 30.07 3 years10 years
January 5, 201818,750 — 18,750 30.07 5 years10 years
March 24, 201769,375 (11,250)58,125 29.47 3 years10 years
March 24, 201735,625 (2,250)33,375 29.47 5 years10 years
August 27, 201558,125 (24,000)34,125 28.02 5 years10 years


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A summary of stock option activity is presented below:
September 30, 2021September 30, 2020
SharesWeighted Average Exercise PriceSharesWeighted Average Exercise Price
Outstanding, beginning of year841,275 $28.17 625,800 $29.29 
Granted234,500 24.23 238,500 25.34 
Exercised— — — — 
Forfeited(30,300)29.33 — — 
Expired— — — — 
Outstanding, end of period1,045,475 $27.25 864,300 $28.20 
Exercisable, end of period176,400 $29.70 97,875 $28.95 

The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straightline basis over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the value of the vested portion of the award at that date. The Company determines the fair value of options granted using the Black-Scholes option-pricing model. The risk-free interest rate is based on the United States Treasury bond with a similar term to the expected life of the options at the grant date. Expected volatility was estimated based on the adjusted historic volatility of the Company’s shares. The expected life was estimated to equal the contractual life of the options. The dividend yield rate was based upon recent historical dividends paid on shares.

Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense related to stock options was $227,000 and $754,000 for the three and nine months ended September 30, 2021 compared to $239,000 and $675,000 for the same periods of 2020. As of September 30, 2021, a total of 176,400 stock options were exercisable and the weighted average years to expiration of all options was 7.19 years. Total unrecognized compensation cost for non-vested options was $2,142,000 and will be recognized over their weighted average remaining vesting period of 1.17 years.


Note 13.  Leases

The following table shows finance lease right of use assets and finance lease liabilities as of:
(In Thousands)Statement of Financial Condition classificationSeptember 30, 2021December 31, 2020
Finance lease right of use assetsPremises and equipment, net$7,543 $5,257 
Finance lease liabilitiesLong-term borrowings8,007 5,475 

The following table shows the components of finance and operating lease expense for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Finance Lease Cost:
Amortization of right-of-use asset$108 $50 $367 $150 
Interest expense62 53 195 159 
Operating lease cost73 76 223 243 
Variable lease cost— — — — 
Total Lease Cost$243 $179 $785 $552 



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A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
(In Thousands)OperatingFinance
2021$71 $104 
2022290 420 
2023265 421 
2024255 427 
2025257 929 
2026 and thereafter2,829 9,664 
Total undiscounted cash flows3,967 11,965 
Discount on cash flows(1,020)(3,958)
Total lease liability$2,947 $8,007 

The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of September 30, 2021.
OperatingFinance
Weighted-average term (years)17.824.6
Weighted-average discount rate3.52 %3.19 %

Note 14.  Reclassification of Comparative Amounts

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.

Note 15.  Subsequent Events

All events subsequent to the date of the consolidated financial statements through November 9, 2021, and for which U.S. GAAP requires adjustment or disclosure, have been adjusted or disclosed, including that the 2019 novel coronavirus (or COVID-19) has adversely affected, and may continue to adversely affect, economic activity globally, nationally, and locally.  In response to COVID-19, among other things, the Company has incurred loan rate modifications and payment deferrals of up to 180 days.  For further discussion, see COVID-19 Impact section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.


Note 16.  Risks and Uncertainties

The impact of COVID-19 on the Corporation’s financial results is evolving and uncertain. The pandemic and its associated impacts on trade, travel, employee productivity, unemployment and consumer spending has resulted in less economic activity and volatility and disruption in the financial markets. The ultimate extent of the impact of the COVID-19 pandemic on the Company 's business, financial condition, and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory, and private sector responses to the pandemic, and the associated impacts on the economy, financial markets and our customers, employees, and vendors. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees, and communities during this difficult time.

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CAUTIONARY STATEMENT FOR 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 Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein:  (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company 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 may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’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 negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; (vi) the length and extent of the economic contraction as a result of the COVID-19 pandemic; or (vii) the effect of changes in the business cycle and downturns in the local, regional or national economies; and (viii) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 and in other filings made by the Company under the Securities Exchange Act of 1934.

You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise.  The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operation

EARNINGS SUMMARY

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

Summary Results

Net income for the three and nine months ended September 30, 2021 was $4,125,000 and $11,154,000 compared to $4,472,000 and $11,305,000 for the same periods of 2020. Results for the three and nine months ended September 30, 2021 compared to 2020 were impacted by a decrease in after-tax securities gains of $767,000 (from a gain of $799,000 to a gain of $32,000) for the three month period and a decrease in after-tax securities gains of $739,000 (from a gain of $975,000 to a gain of $236,000) for the nine month period. Basic and diluted earnings per share for the three and nine months ended September 30, 2021 were $0.58 and $1.58 compared to basic and diluted earnings per share of $0.63 and $1.61, respectively, for the corresponding periods of 2020. Return on average assets and return on average equity were 0.86% and 9.85% for the three months ended September 30, 2021 compared to 0.97% and 11.05% for the corresponding period of 2020. Return on average assets and return on average equity were 0.79% and 9.17% for the nine months ended September 30, 2021 compared to 0.85% and 9.57% for the corresponding period of 2020. Net income from core operations (“core earnings”) was $4,093,000 and $10,918,000 for the three and nine months ended September 30, 2021 compared to $3,673,000 and $10,330,000 for the corresponding periods of 2020. Core basic and diluted earnings per share for the three and nine months ended September 30, 2021 were $0.58 and $1.55 compared to $0.52 and $1.47 basic and diluted for the corresponding periods of 2020.

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

Reconciliation of GAAP and Non-GAAP Financial Measures
(Dollars in Thousands, Except Per Share Data)Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
GAAP net income$4,125 $4,472 $11,154 $11,305 
Less: net securities gains, net of tax32 799 236 975 
Non-GAAP core earnings$4,093 $3,673 $10,918 $10,330 
Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Return on average assets (ROA)0.86 %0.97 %0.79 %0.85 %
Less: net securities gains, net of tax— %0.18 %0.02 %0.07 %
Non-GAAP core ROA0.86 %0.79 %0.77 %0.78 %
Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Return on average equity (ROE)9.85 %11.05 %9.17 %9.57 %
Less: net securities gains, net of tax0.07 %1.97 %0.19 %0.82 %
Non-GAAP core ROE.9.78 %9.08 %8.98 %8.75 %
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Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Basic earnings per share (EPS)$0.58 $0.63 $1.58 $1.61 
Less: net securities gains, net of tax— 0.11 0.03 0.14 
Non-GAAP core operating EPS$0.58 $0.52 $1.55 $1.47 
Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Diluted EPS$0.58 $0.63 $1.58 $1.61 
Less: net securities gains, net of tax— 0.11 0.03 0.14 
Non-GAAP diluted core EPS$0.58 $0.52 $1.55 $1.47 
 
Interest and Dividend Income

Interest and dividend income for the three and nine months ended September 30, 2021 decreased to $14,714,000 and $43,715,000, respectively, compared to $15,387,000 and $47,592,000 for the same periods of 2020 as the interest rate environment remains at a level below historical levels. Loan portfolio income decreased due to a decrease in average rate paid on loans and a decrease in the average loan portfolio balance. Investment securities income decreased as the increase in the average portfolio balance was more than offset by a decrease in the average rate earned on the portfolio. The increase in dividend and other interest income is due to an increase in the amount of dividends received on restricted investment in bank stock held.

Interest and dividend income composition for the three and nine months ended September 30, 2021 and 2020 was as follows:
 Three Months Ended
 September 30, 2021September 30, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$13,382 90.95 %$14,080 91.51 %$(698)(4.96)%
Investment securities:      
Taxable834 5.67 925 6.01 (91)(9.84)
Tax-exempt160 1.09 170 1.10 (10)(5.88)
Dividend and other interest income338 2.29 212 1.38 126 59.43 
Total interest and dividend income$14,714 100.00 %$15,387 100.00 %$(673)(4.37)%
 Nine Months Ended
 September 30, 2021September 30, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$39,826 91.10 %$43,403 91.20 %$(3,577)(8.24)%
Investment securities:      
Taxable2,491 5.70 2,958 6.22 (467)(15.79)
Tax-exempt495 1.13 484 1.02 11 2.27 
Dividend and other interest income903 2.07 747 1.57 156 20.88 
Total interest and dividend income$43,715 100.00 %$47,592 100.01 %$(3,877)(8.15)%

Interest Expense

Interest expense for the three and nine months ended September 30, 2021 decreased $1,460,000 and $4,418,000, respectively, compared to the same periods of 2020. Since March 31, 2020, interest-bearing deposit rates have been significantly reduced due to the economic impact of COVID-19 and an increased level of excess balance sheet liquidity. The decrease in deposit rates was offset in part by a significant increase in average interest-bearing demand deposits. Growth in the deposit portfolio has allowed for a decrease in average short and long-term borrowings resulting in decreased expense levels for the three and nine month periods.
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Interest expense composition for the three and nine months ended September 30, 2021 and 2020 was as follows:
 Three Months Ended
 September 30, 2021September 30, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$1,308 62.83 %$2,569 72.53 %$(1,261)(49.09)%
Short-term borrowings3 0.14 8 0.23 (5)(62.50)
Long-term borrowings771 37.03 965 27.24 (194)(20.10)
Total interest expense$2,082 100.00 %$3,542 100.00 %$(1,460)(41.22)%
 Nine Months Ended
 September 30, 2021September 30, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$4,481 64.77 %$8,406 74.15 %$(3,925)(46.69)%
Short-term borrowings7 0.10 37 0.33 (30)(81.08)
Long-term borrowings2,430 35.13 2,893 25.52 (463)(16.00)
Total interest expense$6,918 100.00 %$11,336 100.00 %$(4,418)(38.97)%

Net Interest Margin

The net interest margin for the three and nine months ended September 30, 2021 was 2.85% and 2.84%, compared to 2.76% and 2.97% for the corresponding periods of 2020. The decrease in the net interest margin for the nine month period was driven by a decrease in the yield of the loan portfolio of 19 and 32 basis points ("bps"), while the investment portfolio yield declined 51 and 59 bps, respectively, during the current low interest rate environment. Further compressing the net interest margin was the significant increase of interest-bearing deposits. These deposits carry a current yield of a few basis points as commercial customers have received PPP funding and retail customers have received stimulus funding. Rates paid on interest-bearing deposit liabilities decreased 48 and 53 bps as rates paid on interest-bearing deposits were decreased significantly during 2020 and 2021 due to the economic impact of COVID-19 prolonging the low interest rate environment. These deposit rate decreases have partially offset the decline in earning asset yield.



























36


The following is a schedule of average balances and associated yields for the three and nine months ended September 30, 2021 and 2020:
 AVERAGE BALANCES AND INTEREST RATES
 Three Months Ended September 30, 2021Three Months Ended September 30, 2020
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)
$46,193 $307 2.64 %$42,047 $386 3.65 %
All other loans1,296,790 13,139 4.02 %1,313,474 13,775 4.17 %
Total loans (2)
1,342,983 13,446 3.97 %1,355,521 14,161 4.16 %
Federal funds sold40,000 72 0.71 %— — — %
Taxable securities150,308 1,022 2.76 %140,695 1,116 3.23 %
Tax-exempt securities (3)
37,069 203 2.22 %30,587 216 2.87 %
Total securities187,377 1,225 2.65 %171,282 1,332 3.16 %
Interest-bearing deposits205,715 78 0.15 %203,817 21 0.04 %
Total interest-earning assets1,776,075 14,821 3.32 %1,730,620 15,514 3.57 %
Other assets132,820   121,901   
Total assets$1,908,895   $1,852,521   
Liabilities and shareholders’ equity:      
Savings$228,255 22 0.04 %$199,420 51 0.10 %
Super Now deposits308,591 219 0.28 %273,190 489 0.71 %
Money market deposits306,177 238 0.31 %263,926 330 0.50 %
Time deposits248,649 829 1.32 %329,190 1,699 2.05 %
Total interest-bearing deposits1,091,672 1,308 0.48 %1,065,726 2,569 0.96 %
Short-term borrowings8,696 3 0.14 %17,517 8 0.18 %
Long-term borrowings133,536 771 2.29 %165,064 965 2.33 %
Total borrowings142,232 774 2.16 %182,581 973 2.12 %
Total interest-bearing liabilities1,233,904 2,082 0.67 %1,248,307 3,542 1.13 %
Demand deposits490,500   424,753   
Other liabilities17,027   17,644   
Shareholders’ equity167,464   161,817   
Total liabilities and shareholders’ equity$1,908,895   $1,852,521   
Interest rate spread  2.65 %  2.44 %
Net interest income/margin $12,739 2.85 % $11,972 2.76 %
37

 AVERAGE BALANCES AND INTEREST RATES
 Nine Months Ended September 30, 2021Nine Months Ended September 30, 2020
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)$46,217 $991 2.87 %$46,476 $1,138 3.27 %
All other loans1,292,028 39,043 4.04 %1,304,207 42,504 4.35 %
Total loans (2)1,338,245 40,034 4.00 %1,350,683 43,642 4.32 %
Federal funds sold21,993 117 0.71 %— — — %
Taxable securities147,942 3,105 2.84 %143,601 3,582 3.38 %
Tax-exempt securities36,638 627 2.31 %27,558 613 3.02 %
Total securities184,580 3,732 2.73 %171,159 4,195 3.32 %
Interest-bearing deposits206,895 172 0.11 %125,447 123 0.13 %
Total interest-earning assets1,751,713 44,055 3.37 %1,647,289 47,960 3.89 %
Other assets128,567   116,868   
Total assets$1,880,280  $1,764,157   
Liabilities and shareholders’ equity:    
Savings$222,889 94 0.06 %$189,205 209 0.15 %
Super Now deposits294,570 694 0.31 %248,327 1,322 0.71 %
Money market deposits307,309 761 0.33 %234,772 1,225 0.70 %
Time deposits253,130 2,932 1.55 %356,897 5,650 2.11 %
Total interest-bearing deposits1,077,898 4,481 0.56 %1,029,201 8,406 1.09 %
Short-term borrowings7,152 7 0.13 %13,195 37 0.37 %
Long-term borrowings138,669 2,430 2.34 %165,702 2,893 2.33 %
Total borrowings145,821 2,437 2.23 %178,897 2,930 2.19 %
Total interest-bearing liabilities1,223,719 6,918 0.76 %1,208,098 11,336 1.25 %
Demand deposits473,088   378,889   
Other liabilities21,327   19,682   
Shareholders’ equity162,146   157,488   
Total liabilities and shareholders’ equity$1,880,280   $1,764,157   
Interest rate spread  2.61 %  2.64 %
Net interest income/margin $37,137 2.84 % $36,624 2.97 %

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2021202020212020
Total interest income$14,714 $15,387 $43,715 $47,592 
Total interest expense2,082 3,542 6,918 11,336 
Net interest income12,632 11,845 36,797 36,256 
Tax equivalent adjustment107 127 340 368 
Net interest income (fully taxable equivalent)$12,739 $11,972 $37,137 $36,624 
 
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The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2021 and 2020:
 Three Months Ended September 30,Nine Months Ended September 30,
 2021 vs. 20202021 vs. 2020
 Increase (Decrease) Due toIncrease (Decrease) Due to
(In Thousands)VolumeRateNetVolumeRateNet
Interest income:      
Tax-exempt loans$35 $(114)$(79)$(6)$(141)$(147)
All other loans(166)(470)(636)(401)(3,060)(3,461)
Federal funds sold72 — 72 117 — 117 
Taxable investment securities76 (170)(94)47 (524)(477)
Tax-exempt investment securities42 (55)(13)121 (107)14 
Interest bearing deposits— 57 57 53 (4)49 
Total interest-earning assets59 (752)(693)(69)(3,836)(3,905)
Interest expense:      
Savings deposits6 (35)(29)12 (127)(115)
Super Now deposits56 (326)(270)89 (717)(628)
Money market deposits47 (139)(92)147 (611)(464)
Time deposits(354)(516)(870)(1,421)(1,297)(2,718)
Short-term borrowings(3)(2)(5)(12)0(18)(30)
Long-term borrowings(178)(16)(194)(467)04 (463)
Total interest-bearing liabilities(426)(1,034)(1,460)(1,652)(2,766)(4,418)
Change in net interest income$485 $282 $767 $1,583 $(1,070)$513 

Provision for Loan Losses

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

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

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at September 30, 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, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance.  The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

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

The allowance for loan losses increased from $13,803,000 at December 31, 2020 to $14,557,000 at September 30, 2021. The increase in the allowance for loan losses was primarily driven by the economic uncertainity caused by the COVID-19 pandemic. At September 30, 2021 and December 31, 2020, the allowance for loan losses to total loans was 1.08% and 1.03%, respectively.
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The provision for loan losses totaled $75,000 and $940,000 for the three and nine months ended September 30, 2021 and the amount for the corresponding 2020 periods was $645,000 and $2,040,000, respectively. The decrease in the provision for loan losses for the three and nine months ended September 30, 2021 compared to the corresponding 2020 periods was the result of economic improvement and a decrease in the loan portfolio, offset by continued economic uncertainty caused by COVID-19 and supply chain shortages.

Nonperforming loans decreased to $7,763,000 at September 30, 2021 from $10,553,000 at September 30, 2020 primarily due to a commercial loan relationship that was paid-off during the fourth quarter of 2020. The majority of nonperforming loans involve loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses. The ratio of nonperforming loans to total loans was 0.58% and 0.78% at September 30, 2021 and 2020, respectively, and the ratio of the allowance for loan losses to nonperforming loans was 187.52% and 127.25% at September 30, 2021 and 2020, respectively. Internal loan review and analysis coupled with changes in the loan portfolio composition and the impact of the COVID-19 pandemic resulted in a provision for loan losses of $940,000 for the nine months ended September 30, 2021.

The following is a table showing total nonperforming loans as of:
 Total Nonperforming Loans
(In Thousands)90 Days Past DueNon-accrualTotal
September 30, 2021$854 $6,909 $7,763 
June 30, 2021529 7,402 7,931 
March 31, 2021607 8,665 9,272 
December 31, 20201,212 9,122 10,334 
September 30, 2020791 9,762 10,553 
 
Non-interest Income

Total non-interest income for the three and nine months ended September 30, 2021 compared to the same periods in 2020 decreased $1,084,000 and $619,000, respectively. Excluding net securities gains, non-interest income for the three and nine months ended September 30, 2021 decreased $113,000 and increased $315,000, respectively, compared to the same periods in 2020. Gain on sale of loans decreased for the three and nine month periods as the product mix has caused the Company to increasingly act in a broker capacity with the fee income from broker activity included in other income. Service charges increased for the three month period as the economy continued to reopen during the three months ended September 30, 2021. Service charges declined for the nine month period as overdraft fee income has declined as a result of the impact of the COVID-19 pandemic. Brokerage commissions have fluctuated due to changes in the product mix and reduced consumer activity during the COVID-19 pandemic, while the further reopening of the economy during the three months ended September 30, 2021 has led to increased activity. The increase in debit card fees is a result of an increase in debit card usage. The fluctuation in other income results primarily from other fees associated with loans sold on the secondary market as the Company acted in a broker capacity. Insurance commissions continue to increase as the insurance company continues to build a customer base.


















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Non-interest income composition for the three and nine months ended September 30, 2021 and 2020 was as follows:
 Three Months Ended
 September 30, 2021September 30, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$456 15.45 %$388 9.62 %$68 17.53 %
Net debt securities gains, available for sale48 1.63 1,013 25.11 (965)95.26 
Net equity securities losses(6)(0.20)— — (6)n/a
Net securities losses, trading(2)(0.07)(2)(0.05)— — 
Bank-owned life insurance279 9.45 156 3.87 123 78.85 
Gain on sale of loans456 15.45 1,449 35.91 (993)(68.53)
Insurance commissions129 4.37 101 2.50 28 27.72 
Brokerage commissions237 8.03 224 5.55 13 5.80 
Debit card income388 13.15 352 8.72 36 10.23 
Other966 32.74 354 8.77 612 172.88 
Total non-interest income$2,951 100.00 %$4,035 100.00 %$(1,084)(26.86)%
 Nine Months Ended
 September 30, 2021September 30, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$1,218 14.37 %$1,249 13.74 %$(31)(2.48)%
Net debt securities gains, available for sale323 3.81 1,220 13.42 (897)73.52 
Net equity securities (losses) gains(25)(0.30)30 0.33 (55)183.33 
Net securities gains (losses), trading1 0.01 (16)(0.18)17 (106.25)
Bank-owned life insurance614 7.25 492 5.41 122 24.80 
Gain on sale of loans2,034 24.00 2,921 32.12 (887)(30.37)
Insurance commissions436 5.15 320 3.52 116 36.25 
Brokerage commissions663 7.82 779 8.57 (116)(14.89)
Debit card income1,166 13.76 936 10.29 230 24.57 
Other2,044 24.13 1,162 12.78 882 75.90 
Total non-interest income$8,474 100.00 %$9,093 100.00 %$(619)(6.81)%

Non-interest Expense

Total non-interest expense increased $740,000 and $1,218,000 for the three and nine months ended September 30, 2021 compared to the same periods of 2020. The increase in salaries and employee benefits is attributable to a branch opening and the callback of employees who were in lay off status during a portion of the 2020 periods due to the COVID-19 pandemic. Furniture and equipment expenses in addition to occupancy expenses increased as maintenance costs have increased and an increase in the level of depreciation. Software amortization decreased as the number of vendors is being consolidated resulting in new licensing fee structures at a lower cost. Other expense decreased for the nine month period primarily from the change in expense associated with the defined benefit pension and a decrease in the amortization of the low income housing partnerships. Marketing expense increased for the three and nine months ended September 30, 2021 compared to the same periods of 2020 as direct mail marketing significantly increased from 2020 levels when the COVID-19 pandemic limited economic activity and included government mandated economic restrictions.










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Non-interest expense composition for the three and nine months ended September 30, 2021 and 2020 was as follows:
 Three Months Ended
 September 30, 2021September 30, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$5,837 55.87 %$5,465 56.30 %$372 6.81 %
Occupancy745 7.13 599 6.17 146 24.37 
Furniture and equipment883 8.45 837 8.62 46 5.50 
Software amortization226 2.16 257 2.65 (31)(12.06)
Pennsylvania shares tax373 3.57 340 3.50 33 9.71 
Professional fees615 5.89 608 6.26 7 1.15 
Federal Deposit Insurance Corporation deposit insurance220 2.11 271 2.79 (51)(18.82)
Marketing231 2.21 61 0.63 170 278.69 
Intangible amortization44 0.42 53 0.55 (9)(16.98)
Other1,273 12.19 1,216 12.53 57 4.69 
Total non-interest expense$10,447 100.00 %$9,707 100.00 %$740 7.62 %
 Nine Months Ended
 September 30, 2021September 30, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$17,107 55.82 %$16,362 55.60 %$745 4.55 %
Occupancy2,438 7.96 1,927 6.55 511 26.52 
Furniture and equipment2,663 8.69 2,525 8.58 138 5.47 
Software amortization632 2.06 743 2.52 (111)(14.94)
Pennsylvania shares tax1,097 3.58 948 3.22 149 15.72 
Professional fees1,882 6.14 1,888 6.42 (6)(0.32)
Federal Deposit Insurance Corporation deposit insurance705 2.30 650 2.21 55 8.46 
Marketing434 1.42 170 0.58 264 155.29 
Intangible amortization147 0.48 174 0.59 (27)(15.52)
Other3,541 11.55 4,041 13.73 (500)(12.37)
Total non-interest expense$30,646 100.00 %$29,428 100.00 %$1,218 4.14 %

Provision for Income Taxes

Income taxes decreased $119,000 and $47,000 for the three and nine months ended September 30, 2021 compared to the same periods of 2020. The effective tax rate for the three and nine months ended September 30, 2021 was 18.42% and 18.39% compared to 19.01% and 18.46% for the same periods of 2020. The Company currently is in a deferred tax asset position. Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate carry forward period and therefore does not require a valuation allowance.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents increased $68,289,000 from $213,358,000 at December 31, 2020 to $281,647,000 at September 30, 2021, primarily as a result of the following activities during the nine months ended September 30, 2021. The increase in fed funds sold of $40,000,000 comprised the majority of the change in cash and cash equivalents.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds being greater than loan originations, less $2,034,000 in realized gains, by $1,993,000 for the nine months ended September 30, 2021.


42

Loans

Gross loans increased $2,898,000 since December 31, 2020 due primarily to an increase in both commercial, financial, and agricultural and construction real estate mortgage categories. Consumer automobile loans decreased as used car inventories declined due to factors such as COVID-19 and the associated supply chain disruption the virus has caused. The economic environment caused by the COVID-19 pandemic has negatively impacted loan demand; however, demand has seen an uptick during 2021.

The allocation of the loan portfolio, by category, as of September 30, 2021 and December 31, 2020 is presented below:
 September 30, 2021December 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Commercial, financial, and agricultural$179,648 13.33 %$164,743 12.25 %$14,905 9.05 %
Real estate mortgage:      
Residential587,925 43.64 589,721 43.87 (1,796)(0.30)%
Commercial377,010 27.98 373,188 27.76 3,822 1.02 %
Construction45,948 3.41 39,309 2.92 6,639 16.89 %
Consumer automobile loans146,663 10.89 156,403 11.63 (9,740)(6.23)%
Other consumer installment loans9,737 0.72 19,940 1.48 (10,203)(51.17)%
Net deferred loan fees and discounts294 0.03 1,023 0.09 (729)(71.26)%
Gross loans$1,347,225 100.00 %$1,344,327 100.00 %$2,898 0.22 %

The following table shows the amount of accrual and non-accrual TDRs at September 30, 2021 and December 31, 2020:
 September 30, 2021December 31, 2020
(In Thousands)AccrualNon-accrualTotalAccrualNon-accrualTotal
Commercial, financial, and agricultural$320 $1,363 $1,683 $988 $862 $1,850 
Real estate mortgage:      
Residential4,101 178 4,279 3,889 90 3,979 
Commercial2,595 4,055 6,650 2,107 4,423 6,530 
 $7,016 $5,596 $12,612 $6,984 $5,375 $12,359 
 
Investments

The fair value of the investment debt securities portfolio at September 30, 2021 increased $4,499,000 since December 31, 2020, while the amortized cost of the portfolio increased $6,030,000.  The increase in the investment portfolio amortized value occurred within the state and political segment of the portfolio. The mortgage-backed segment was reduced as bonds prepaid due to the low interest rate environment. The other debt segment of the investment portfolio is primarily corporate bonds and this segment decreased as bonds matured with limited reinvestment. The municipal segment was increased as bonds with a final maturity of one to five years have been purchased. The portfolio continues to be actively managed in order to reduce interest rate and market risk. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 84.41% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

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

The bond portion of the portfolio review is conducted with emphases on several factors.  Continued payment of principal and interest is given primary importance with credit rating and financial condition of the issuer following as the next most important.  Credit ratings were reviewed with the ratings of the bonds being satisfactory.  Bonds that were not currently rated were discussed with a third party and/or underwent an internal financial review. Each bond is reviewed to determine whether it
43

is a general obligation bond, which is backed by the credit and taxing power of the issuing jurisdiction, or a revenue bond, which is only payable from specified revenues.  Based on the review undertaken by the Company, the Company determined that the decline in value of the various bond holdings were temporary and were the result of the general market downturns and interest rate/yield curve changes, not credit issues.  The fact that almost all of such bonds are general obligation bonds further solidified the Company’s determination that the decline in the value of these bond holdings is temporary.

The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at $1,300,000 for September 30, 2021 and December 31, 2020 while the fair value decreased $25,000 over the same time period.

The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at September 30, 2021 follows:
 A- to AAAB- to BBB+C- to CCC+Not RatedTotal
(In Thousands)Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Available for sale (AFS):        
Mortgage-backed securities $1,765 7$1,775 $— $— $— $— $— $— $1,765 $1,775 
State and political securities109,859 113,884 1,268 1,402 — — 1,181 1,188 112,308 116,474 
Other debt securities25,399 25,613 6,001 6,131 2,000 1,720 14,851 15,047 48,251 48,511 
Total debt securities AFS$137,023 $141,272 $7,269 $7,533 $2,000 $1,720 $16,032 $16,235 $162,324 $166,760 
 
Financing Activities

Deposits

Total deposits increased $98,576,000 from December 31, 2020 to September 30, 2021. The increase in core deposits (deposits less time deposits) has provided relationship driven funding for the loan and investment portfolios. Driving deposit growth was the receipt of PPP funding by commercial customers, stimulus funding by retail customers, and customers becoming more risk averse and seeking safety in a bank deposit. Emphasis during 2020 and 2021 has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking has increased since the start of 2020 due to these efforts coupled with a change in consumer behavior due to the business and travel restrictions caused by the COVID-19 pandemic.

Deposit balances and their changes for the periods being discussed follow:
 September 30, 2021December 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Demand deposits$481,875 30.25 %$449,357 30.07 %$32,518 7.24 %
NOW accounts340,441 21.37 287,775 19.26 52,666 18.30 
Money market deposits305,156 19.16 283,742 18.99 21,414 7.55 
Savings deposits231,189 14.51 209,924 14.05 21,265 10.13 
Time deposits234,358 14.71 263,645 17.63 (29,287)(11.11)
 Total deposits$1,593,019 100.00 %$1,494,443 100.00 %$98,576 6.60 %

Borrowed Funds

Total borrowed funds decreased 14.69%, or $23,308,000, to $135,411,000 at September 30, 2021 compared to $158,719,000 at December 31, 2020. The decrease in long term borrowings occurred as fixed rate borrowings matured. Securities sold under agreement to repurchase have increased as customers balances have increased.

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 September 30, 2021December 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Short-term borrowings:      
Securities sold under agreement to repurchase$9,404 6.94 %$5,244 3.30 %$4,160 79.33 %
Total short-term borrowings9,404 6.94 5,244 3.30 4,160 79.33 
Long-term borrowings:
Long-term FHLB borrowings118,000 87.13 148,000 93.25 (30,000)(20.27)
Long-term finance lease8,007 5.91 5,475 3.45 2,532 46.25 
Total long-term borrowings126,007 93.06 153,475 96.70 (27,468)(17.90)
Total borrowed funds$135,411 100.00 %$158,719 100.00 %$(23,308)(14.69)%

Short-Term Borrowings

The following table provides further information in regards to secured borrowings that have been accounted for as repurchase agreements.
Remaining Contractual Maturity Overnight and Continuous
(In Thousands)September 30, 2021December 31, 2020
Investment debt securities pledged, fair value$13,352 $11,672 
Repurchase agreements9,404 5,244 

Capital

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

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

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











45

The Company's capital ratios as of September 30, 2021 and December 31, 2020 were as follows:
 September 30, 2021December 31, 2020
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$153,469 10.882 %$147,887 11.267 %
For Capital Adequacy Purposes63,464 4.500 59,066 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date98,721 7.000 91,880 7.000 
To Be Well Capitalized91,670 6.500 85,317 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$162,757 11.541 %$159,490 12.151 %
For Capital Adequacy Purposes112,820 8.000 105,005 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date148,076 10.500 137,820 10.500 
To Be Well Capitalized141,025 10.000 131,257 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$153,469 10.882 %$147,887 11.267 %
For Capital Adequacy Purposes84,618 6.000 78,754 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date119,876 8.500 111,568 8.500 
To Be Well Capitalized112,824 8.000 105,005 8.000 
Tier I Capital (to Average Assets)   
Actual$153,469 8.286 %$147,887 8.436 %
For Capital Adequacy Purposes74,086 4.000 70,122 4.000 
To Be Well Capitalized92,607 5.000 87,652 5.000 
 
Jersey Shore State Bank's capital ratios as of September 30, 2021 and December 31, 2020 were as follows:
 September 30, 2021December 31, 2020
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$108,508 10.487 %$103,812 10.906 %
For Capital Adequacy Purposes46,561 4.500 42,835 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date72,428 7.000 66,632 7.000 
To Be Well Capitalized67,255 6.500 61,872 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$113,468 10.967 %$112,862 11.857 %
For Capital Adequacy Purposes82,770 8.000 76,149 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date108,636 10.500 99,945 10.500 
To Be Well Capitalized103,463 10.000 95,186 10.000 
Tier I Capital (to Risk-weighted Assets)- - 
Actual$108,508 10.487 %$103,812 10.906 %
For Capital Adequacy Purposes62,081 6.000 57,113 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date87,949 8.500 80,910 8.500 
To Be Well Capitalized82,775 8.000 76,150 8.000 
Tier I Capital (to Average Assets)   
Actual$108,508 8.312 %$103,812 8.062 %
For Capital Adequacy Purposes52,218 4.000 51,507 4.000 
To Be Well Capitalized65,272 5.000 64,384 5.000 





46

Luzerne Bank's capital ratios as of September 30, 2021 and December 31, 2020 were as follows:
 September 30, 2021December 31, 2020
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$41,392 11.020 %$40,206 11.156 %
For Capital Adequacy Purposes16,902 4.500 16,218 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date26,293 7.000 25,228 7.000 
To Be Well Capitalized24,415 6.500 23,426 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$45,720 12.172 %$42,759 11.865 %
For Capital Adequacy Purposes30,049 8.000 28,830 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date39,440 10.500 37,840 10.500 
To Be Well Capitalized37,562 10.000 36,038 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$41,392 11.020 %$40,206 11.156 %
For Capital Adequacy Purposes22,536 6.000 21,624 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date31,927 8.500 30,634 8.500 
To Be Well Capitalized30,049 8.000 28,832 8.000 
Tier I Capital (to Average Assets)   
Actual$41,392 7.198 %$40,206 7.860 %
For Capital Adequacy Purposes23,002 4.000 20,461 4.000 
To Be Well Capitalized28,752 5.000 25,576 5.000 

Liquidity; Interest Rate Sensitivity and Market Risk

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

The following liquidity measures are monitored for compliance and were within the limits cited at September 30, 2021:

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

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

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

Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating
47

money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides core funding to satisfy depositor, borrower, and creditor needs.

Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a total current maximum borrowing capacity at the FHLB of $576,229,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $100,000,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled $118,000,000 as of September 30, 2021.

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

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

Interest Rate Sensitivity

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

The following is a rate shock forecast for the twelve month period ending September 30, 2022 assuming a static balance sheet as of September 30, 2021.
 Parallel Rate Shock in Basis Points
(In Thousands)-200-100Static+100+200+300+400
Net interest income$45,065 $48,132 $51,811 $56,578 $61,243 $65,512 $69,649 
Change from static(6,746)(3,679)— 4,767 9,432 13,701 17,838 
Percent change from static-13.02 %-7.10 %— 9.20 %18.20 %26.44 %34.43 %
 
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities.  Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change.  In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change.  Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

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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 Company’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 which are not measured by a price index.

Paycheck Protection Program

The Company participated in the Paycheck Protection Program ('PPP"). Loans retained by the bank through this program totaled $30,600,000 with $10,600,000 remaining on the balance sheet as of September 30, 2021.
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk.  Interest rate risk and liquidity risk management is performed at both the level of the Company and the Banks.  The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party.  There have been no substantial changes in the Company’s gap analysis or simulation analysis compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 2020.  Additional information and details are provided in the “Liquidity, Interest Rate Sensitivity, and Market Risk” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
49

Part II.  OTHER INFORMATION
Item 1.                           Legal Proceedings
 
None.

Item 1A.  Risk Factors
 
Certain risk factors are set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

The following table provides certain information with respect to the Company's repurchase of common stock during the quarter ended September 30, 2021.
PeriodTotal
Number of
Shares (or
Units) Purchased		Average
Price Paid
per Share
(or Units) Purchased		Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced Plans or Programs		Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased Under the Plans or Programs
Month #1 (July 1 - July 31, 2021)— — — 353,000 
Month #2 (August 1 - August 31, 2021)— — — 353,000 
Month #3 (September 1 - September 30, 2021)— — — 353,000 



Item 3.                           Defaults Upon Senior Securities
 
None.
 
Item 4.                           Mine Safety Disclosures
 
Not applicable.
 
Item 5.                           Other Information
 
None.
 
50
Table of Contents

Item 6.                           Exhibits
 
 Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2019).
 Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020).
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
 Section 1350 Certification of Chief Executive Officer.
 Section 1350 Certification of Chief Financial Officer.
101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at September 30, 2021 and December 31, 2020; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, 2021 and 2020; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2021 and 2020 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.
51

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 PENNS WOODS BANCORP, INC.
 (Registrant)
  
Date:    November 9, 2021/s/ Richard A. Grafmyre
 Richard A. Grafmyre, Chief Executive Officer
 (Principal Executive Officer)
  
  
Date:November 9, 2021/s/ Brian L. Knepp
 Brian L. Knepp, President and Chief Financial Officer
 (Principal Financial Officer and Principal Accounting
 Officer)
52

EXHIBIT INDEX
 
Exhibit 3(i)Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2019).
Exhibit 3(ii)Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020).
Exhibit 31(i) Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer
Exhibit 31(ii) Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer
Exhibit 32(i) Section 1350 Certification of Chief Executive Officer
Exhibit 32(ii) Section 1350 Certification of Chief Financial Officer
Exhibit 101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at September 30, 2021 and December 31, 2020; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, 2021 and 2020; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2021 and 2020 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.
53

What is the market capitalization of a company?

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In most cases it can be easily calculated by multiplying the share price with the amount of outstanding shares.

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