UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

~~FORM~~
~~10-Q~~



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

for the Quarterly Period Ended ~~June 30, 2020~~.March 31, 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~~.INC.

(Exact name of Registrant as specified in its charter)



Pennsylvania	300 Market Street, P.O. Box 967	23-2226454
(State or other jurisdiction of	Williamsport	(I.R.S. Employer Identification No.)
incorporation or organization)	Pennsylvania	17703-0967
	(Address of principal executive offices)	(Zip Code)

(~~570~~) (570) 322-1111

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $5.55 par value

PWOD

The 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 ~~August~~May 1, 2020 there were ~~7,046,676~~7,060,829 shares of the Registrant’s common stock outstanding.

Table of Contents

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q


			Page
			Number

Part I		Financial Information	~~Page~~
			~~Number~~

~~Part I~~Item 1.		Financial ~~Information~~Statements	3

~~Item 1.~~			~~Financial Statements~~	3

Consolidated Balance Sheet (Unaudited) as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020	3

Consolidated Statement of Income (Unaudited) for the Three ~~and Six~~ Months Ended ~~June~~March 30, ~~2020~~2021 and ~~2019~~2020			4

Consolidated Statement of Comprehensive Income (Unaudited) for the Three Ended March 31, 2021 and ~~Six Months Ended June 30,~~ 2020 ~~and 2019~~			5

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three Ended March 31, 2021 and ~~Six Months Ended June 30,~~ 2020 ~~and 2019~~			6

Consolidated Statement of Cash Flows (Unaudited) for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			87

Notes to Consolidated Financial Statements (Unaudited)			98

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	3430

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	5042

Item 4.		Controls and Procedures	5142

Part II		Other Information

Item 1.		Legal Proceedings	5243

Item 1A.		Risk Factors	5243

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	5243

Item 3.		Defaults Upon Senior Securities	5243

Item 4.		Mine Safety Disclosures	5343

Item 5.		Other Information	5343

Item 6.		Exhibits	5444

Signatures			5545

Exhibit Index and Exhibits			5646

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


	March 31,		December 31,
(In Thousands, Except Share Data)	2021		2020
ASSETS:
Noninterest-bearing balances	$	28,539	$	31,821
Interest-bearing balances in other financial institutions	249,149		181,537

Total cash and cash equivalents	277,688		213,358

Investment debt securities, available for sale, at fair value	166,895		162,261
Investment equity securities, at fair value	1,265		1,288
Investment securities, trading	44		40
Restricted investment in bank stock, at fair value	15,032		15,377
Loans held for sale	2,568		5,239
Loans	1,335,899		1,344,327
Allowance for loan losses	(14,202)		(13,803)
Loans, net	1,321,697		1,330,524
Premises and equipment, net	34,910		32,702
Accrued interest receivable	8,583		8,394
Bank-owned life insurance	33,839		33,638

Goodwill	17,104		17,104
Intangibles	618		671
Operating lease right-of-use asset	3,088		3,136
Deferred tax asset	3,717		2,526
Other assets	9,144		8,385
TOTAL ASSETS	$	1,896,192	$	1,834,643

LIABILITIES:
Interest-bearing deposits	$	1,085,448	$	1,045,086
Noninterest-bearing deposits	478,916		449,357
Total deposits	1,564,364		1,494,443

Short-term borrowings	6,650		5,244
Long-term borrowings	141,094		153,475
Accrued interest payable	988		1,112
Operating lease liability	3,130		3,175
Other liabilities	15,903		13,048
TOTAL LIABILITIES	1,732,129		1,670,497

SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; 0 shares issued	0		0
Common stock, par value 5.55, 22,500,000 shares authorized; 7,537,242 and 7,532,576 shares issued; 7,057,017 and 7,052,351 outstanding	41,873		41,847
Additional paid-in capital	52,818		52,523
Retained earnings	83,948		82,769
Accumulated other comprehensive loss:
Net unrealized gain on available for sale securities	3,095		4,714
Defined benefit plan	(5,560)		(5,596)
Treasury stock at cost, 480,225	(12,115)		(12,115)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY	164,059		164,142
Non-controlling interest	4		4
TOTAL SHAREHOLDERS' EQUITY	164,063		164,146
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,896,192	$	1,834,643

June 30, December 31,
(In Thousands, Except Share Data) 2020 2019
ASSETS:

Noninterest-bearing balances $ 26,932
$ 24,725
Interest-bearing balances in other financial institutions 188,242
23,864
Total cash and cash equivalents 215,174
48,589

Investment debt securities, available for sale, at fair value 164,369
148,619
Investment equity securities, at fair value 1,291

1,261
Investment securities, trading 37
51
Restricted investment in bank stock, at fair value 14,849
13,528
Loans held for sale 5,146
4,232
Loans 1,349,347
1,355,544
Allowance for loan losses (12,977 ) (11,894 )
Loans, net 1,336,370
1,343,650
Premises and equipment, net 32,873
32,929
Accrued interest receivable 8,068
5,246
Bank-owned life insurance 29,368
29,253
Goodwill 17,104
17,104
Intangibles 777
898
Operating lease right-of-use asset 3,231
4,154
Deferred tax asset 3,284
3,338
Other assets 6,423
12,471
TOTAL ASSETS $ 1,838,364
$ 1,665,323

LIABILITIES:

Interest-bearing deposits $ 1,055,981
$ 989,259
Noninterest-bearing deposits 418,324
334,746
Total deposits 1,474,305
1,324,005

Short-term borrowings 15,133
4,920
Long-term borrowings 171,885
161,920
Accrued interest payable 1,530
1,671
Operating lease liability 3,263
4,170
Other liabilities 12,640
13,655
TOTAL LIABILITIES 1,678,756
1,510,341

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; 7,522,573 and 7,520,740 shares issued; 7,042,348 and 7,040,515 outstanding 41,792
41,782
Additional paid-in capital 51,956
51,487
Retained earnings 78,910
76,583
Accumulated other comprehensive loss:

Net unrealized gain on available for sale securities 4,194
2,455
Defined benefit plan (5,159 ) (5,232 )
Treasury stock at cost, 480,225 (12,115 ) (12,115 )
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY 159,578
154,960
Non-controlling interest 30
22
TOTAL SHAREHOLDERS' EQUITY 159,608
154,982
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,838,364
$ 1,665,323

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)


	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended March 31,
(In Thousands, Except Per Share Data)	2020		2019			2020			2019		(In Thousands, Except Per Share Data)		2021		2020
INTEREST AND DIVIDEND INCOME:											INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	14,666	$	15,300		$	29,323		$	30,169	Loans, including fees		$	13,345	$	14,657
Investment securities:											Investment securities:
Taxable	1,023		967			2,033			1,901		Taxable		819		1,010
Tax-exempt	169		179			314			353		Tax-exempt		171		145
Dividend and other interest income	186		395			535			852		Dividend and other interest income		260		349
TOTAL INTEREST AND DIVIDEND INCOME	16,044		16,841			32,205			33,275		TOTAL INTEREST AND DIVIDEND INCOME		14,595		16,161
INTEREST EXPENSE:											INTEREST EXPENSE:
Deposits	2,802		2,871			5,837			5,171		Deposits		1,684		3,035
Short-term borrowings	7		178			29			783		Short-term borrowings		2		22
Long-term borrowings	985		879			1,928			1,730		Long-term borrowings		839		943
TOTAL INTEREST EXPENSE	3,794		3,928			7,794			7,684		TOTAL INTEREST EXPENSE		2,525		4,000
NET INTEREST INCOME	12,250		12,913			24,411			25,591		NET INTEREST INCOME		12,070		12,161
PROVISION FOR LOAN LOSSES	645		315			1,395			675		PROVISION FOR LOAN LOSSES		515		750
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	11,605		12,598			23,016			24,916		NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,555		11,411
NON-INTEREST INCOME:											NON-INTEREST INCOME:
Service charges	312		592			861			1,154		Service charges		383		549
Net debt securities gains (losses), available for sale	186		(2		)	207			11
Net equity securities gains	10		22			30			65
Net debt securities gains, available for sale											Net debt securities gains, available for sale		138		21
Net equity securities (losses) gains											Net equity securities (losses) gains		(23)		20
Net securities gains (losses), trading	—		3			(14		)	13		Net securities gains (losses), trading		4		(14)
Bank-owned life insurance	144		123			336			291		Bank-owned life insurance		173		192
Gain on sale of loans	1,028		347			1,472			663		Gain on sale of loans		908		444
Insurance commissions	92		119			219			253		Insurance commissions		157		127
Brokerage commissions	186		356			555			679		Brokerage commissions		219		369
Debit card fees	310		389			584			699
Debit card income											Debit card income		380		274
Other	353		520			808			895		Other		275		455
TOTAL NON-INTEREST INCOME	2,621		2,469			5,058			4,723		TOTAL NON-INTEREST INCOME		2,614		2,437
NON-INTEREST EXPENSE:											NON-INTEREST EXPENSE:
Salaries and employee benefits	5,230		5,523			10,897			11,024		Salaries and employee benefits		5,598		5,667
Occupancy	626		668			1,328			1,447		Occupancy		976		702
Furniture and equipment	828		784			1,688			1,536		Furniture and equipment		809		860
Software amortization	236		188			486			395		Software amortization		198		250
Pennsylvania shares tax	323		285			608			578		Pennsylvania shares tax		352		285
Professional fees	658		727			1,280			1,249		Professional fees		583		622
Federal Deposit Insurance Corporation deposit insurance	185		236			379			504		Federal Deposit Insurance Corporation deposit insurance		221		194

Marketing	56		33			109			135		Marketing		63		53
Intangible amortization	59		69			121			140		Intangible amortization		53		62
Other	1,410		1,546			2,825			2,865		Other		1,098		1,415
TOTAL NON-INTEREST EXPENSE	9,611		10,059			19,721			19,873		TOTAL NON-INTEREST EXPENSE		9,951		10,110
INCOME BEFORE INCOME TAX PROVISION	4,615		5,008			8,353			9,766		INCOME BEFORE INCOME TAX PROVISION		4,218		3,738
INCOME TAX PROVISION	851		759			1,512			1,571		INCOME TAX PROVISION		771		661
CONSOLIDATED NET INCOME	$	3,764	$	4,249		$	6,841		$	8,195	CONSOLIDATED NET INCOME		$	3,447	$	3,077
Less: Net income attributable to noncontrolling interest	4		4			8			6		Less: Net income attributable to noncontrolling interest		6		4
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.	$	3,760	$	4,245		$	6,833		$	8,189	NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.		$	3,441	$	3,073
EARNINGS PER SHARE - BASIC	$	0.53	$	0.60		$	0.97		$	1.16	EARNINGS PER SHARE - BASIC		$	0.49	$	0.44
EARNINGS PER SHARE - DILUTED	$	0.53	$	0.60		$	0.97		$	1.16	EARNINGS PER SHARE - DILUTED		$	0.49	$	0.43
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	7,041,629		7,038,503			7,041,185			7,038,068		WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC		7,055,116		7,040,740
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	7,041,629		7,038,503			7,041,185			7,038,068		WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED		7,055,116		7,102,990
DIVIDENDS DECLARED PER SHARE	$	0.32	$	0.31		$	0.64		$	0.63	DIVIDENDS DECLARED PER SHARE		$	0.32	$	0.32

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
(In Thousands)	2020			2019			2020			2019			(In Thousands)		2021		2020
Net Income	$	3,760		$	4,245		$	6,833		$	8,189		Net Income		$	3,441	$	3,073
Other comprehensive income:
Change in unrealized gain on available for sale securities	1,715			2,811			2,409			4,795
Other comprehensive (loss) income:													Other comprehensive (loss) income:
Change in unrealized (loss) gain on available for sale securities													Change in unrealized (loss) gain on available for sale securities		(1,911)		694
Tax effect	(360		)	(590		)	(506		)	(1,007		)	Tax effect		401		(146)
Net realized (gain) loss on available for sale securities included in net income	(186		)	2			(207		)	(11		)
Net realized gain on available for sale securities included in net income													Net realized gain on available for sale securities included in net income		(138)		(21)
Tax effect	39			(1		)	43			2			Tax effect		29		4
Amortization of unrecognized pension gain	51			47			92			94			Amortization of unrecognized pension gain		46		41
Tax effect	(11		)	(10		)	(19		)	(20		)	Tax effect		(10)		(8)
Total other comprehensive income	1,248			2,259			1,812			3,853
Total other comprehensive (loss) income													Total other comprehensive (loss) income		(1,583)		564
Comprehensive income	$	5,008		$	6,504		$	8,645		$	12,042		Comprehensive income		$	1,858	$	3,637

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

Three months ended:


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS				ACCUMULATED OTHER COMPREHENSIVE LOSS			TREASURY STOCK				NON-CONTROLLING INTEREST				TOTAL SHAREHOLDERS’ EQUITY							COMMON STOCK					ADDITIONAL PAID-IN CAPITAL				RETAINED EARNINGS				ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK				NON-CONTROLLING INTEREST				TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)	SHARES	AMOUNT								(In Thousands, Except Per Share Data)							SHARES								AMOUNT
Balance, March 31, 2020	7,521,491	$	41,786			$		51,701				$	77,403				$			(2,213	)				$	(12,115	)	$	26	$	156,588
Balance, December 31, 2020																									Balance, December 31, 2020				7,532,576			$	41,847			$	52,523			$	82,769			$	(882)			$	(12,115)			$	4			$	164,146
Net income							3,760											4				3,764			Net income													3,441												6				3,447
Other comprehensive income											1,248											1,248

Other comprehensive loss																									Other comprehensive loss																	(1,583)												(1,583)
Stock-based compensation				238																		238			Stock-based compensation									220																				220
Dividends declared ($0.32 per share)							(2,253		)													(2,253		)	Dividends declared ($0.32 per share)													(2,262)																(2,262)
Common shares issued for employee stock purchase plan	1,082	6		17																		23			Common shares issued for employee stock purchase plan				939			5		15																				20
Balance, June 30, 2020	7,522,573	$	41,792	$	51,956		$	78,910			$	(965	)	$	(12,115	)		$	30			$	159,608
Director Compensation Plan																									Director Compensation Plan				3,727			21		60																				81
Distributions to noncontrolling interest																									Distributions to noncontrolling interest																									(6)				(6)
Balance, March 31, 2021																									Balance, March 31, 2021				7,537,242			$	41,873	$	52,818			$	83,948			$	(2,465)			$	(12,115)			$	4			$	164,063

SHAREHOLDERS’ EQUITY

~~Six months ended:~~

SHAREHOLDERS’ EQUITY

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	Three Months Ended March 31,
(In Thousands)	2021		2020
OPERATING ACTIVITIES:
Net Income	$	3,447	$	3,077
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	839		760
Gain on sale of premise and equipment	0		(14)
Amortization of intangible assets	53		62
Provision for loan losses	515		750
Stock based compensation	220		198
Accretion and amortization of investment security discounts and premiums	251		171
Net securities gains, available for sale	(138)		(21)
Originations of loans held for sale	(26,658)		(14,977)
Proceeds of loans held for sale	30,237		15,359
Gain on sale of loans	(908)		(444)
Net equity securities losses (gains)	23		(20)
Net securities (gains) losses, trading	(4)		14


Earnings on bank-owned life insurance	(173)		(192)
Increase in deferred tax asset	(761)		(84)
Proceeds on sales of investment securities receivable	0		6,627
Other, net	2,447		(2,658)
Net cash provided by operating activities	9,390		8,608
INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities	11,372		2,774
Proceeds from calls and maturities of available for sale securities	3,428		2,598
Purchases of available for sale securities	(21,955)		(11,753)
Net decrease in loans	8,312		5,861
Acquisition of premises and equipment	(197)		(1,547)
Proceeds from the sale of premises and equipment	0		336
Proceeds from the sale of foreclosed assets	246		226
Purchase of bank-owned life insurance	(26)		(26)
Proceeds from bank-owned life insurance death benefit	0		248
Investment in limited partnership	(711)		(370)
Proceeds from redemption of regulatory stock	1,082		1,139
Purchases of regulatory stock	(737)		(2,222)
Net cash used for investing activities	814		(2,736)
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits	40,362		4,716
Net increase (decrease) in noninterest-bearing deposits	29,559		(1,987)
Proceeds from long-term borrowings	0		35,000
Repayment of long-term borrowings	(15,000)		(25,000)
Net increase in short-term borrowings	1,406		12,821
Finance lease principal payments	(34)		(17)
Dividends paid	(2,262)		(2,253)
Distributions to non-controlling interest	(6)		0
Issuance of common stock	101		20

Net cash provided by financing activities	54,126		23,300
NET INCREASE IN CASH AND CASH EQUIVALENTS	64,330		29,172
CASH AND CASH EQUIVALENTS, BEGINNING	213,358		48,589
CASH AND CASH EQUIVALENTS, ENDING	$	277,688	$	77,761

Six Months Ended June 30,
(In Thousands) 2020 2019
OPERATING ACTIVITIES:

Net Income $ 6,841
$ 8,195
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 1,286
1,376
Gain on sale of premise and equipment (14 ) —
Amortization of intangible assets 121
140
Provision for loan losses 1,395
675
Stock based compensation 436
313
Accretion and amortization of investment security discounts and premiums 371
326
Net securities gains, available for sale (207 ) (11 )
Originations of loans held for sale (49,660 ) (21,400 )
Proceeds of loans held for sale 50,218
22,112
Gain on sale of loans (1,472 ) (663 )
Net equity securities gains (30 ) (65 )
Net securities losses (gains), trading 14
(13 )
Proceeds from the sale of trading securities —
78
Purchases of trading securities —
(73 )
Earnings on bank-owned life insurance (336 ) (291 )
(Increase) decrease in deferred tax asset (408 ) 437
Other, net 3,434
(2,754 )
Net cash provided by operating activities 11,989
8,382
INVESTING ACTIVITIES:

Proceeds from sales of available for sale securities 5,163
8,132
Proceeds from calls and maturities of available for sale securities 6,691
1,951
Purchases of available for sale securities (25,567 ) (17,018 )
Net decrease in loans 5,746
4,680
Acquisition of premises and equipment (2,286 ) (1,324 )
Proceeds from the sale of premises and equipment 336
—
Proceeds from the sale of foreclosed assets 226
195
Purchase of bank-owned life insurance (27 ) (26 )
Proceeds from bank-owned life insurance death benefit 248
—
Investment in limited partnership (628 ) —
Proceeds from redemption of regulatory stock 1,795
10,515
Purchases of regulatory stock (3,116 ) (6,740 )
Net cash (used for) provided by investing activities (11,419 ) 365
FINANCING ACTIVITIES:

Net increase in interest-bearing deposits 66,722
105,242
Net increase in noninterest-bearing deposits 83,578
1,941
Proceeds from long-term borrowings 35,000
25,000
Repayment of long-term borrowings (25,000 ) (15,317 )
Net increase (decrease) in short-term borrowings 10,213
(108,412 )
Finance lease principal payments (35 ) (54 )
Dividends paid (4,506 ) (4,411 )
Issuance of common stock 43
47
Net cash provided by financing activities 166,015
4,036
NET INCREASE IN CASH AND CASH EQUIVALENTS 166,585
12,783
CASH AND CASH EQUIVALENTS, BEGINNING 48,589
66,742
CASH AND CASH EQUIVALENTS, ENDING $ 215,174
$ 79,525


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:					SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	7,935	$	7,352	Interest paid	$	2,649	$	4,036
Income taxes paid	—		—		Income taxes paid	0		0
Non-cash investing and financing activities:					Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities	—		6,026		Right-of-use lease assets obtained in exchange for lessee finance lease liabilities	2,653		0
Right-of-use lease assets obtained in exchange for lessee operating lease liabilities	—		4,298

Transfer of loans to foreclosed real estate	139		281		Transfer of loans to foreclosed real estate	0		139

See accompanying notes to the unaudited consolidated financial statements.

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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 owns a controlling interest in United Insurance Solutions, LLC. 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, ~~2019.~~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 (loss) gain ~~(loss)~~ by component shown net of tax and parenthesis indicating debits, as of ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ were as follows:

Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
(In Thousands)
Net Unrealized Gain (Loss) on Available
for Sale Securities

Defined
Benefit
Plan
Total
Net Unrealized
Gain on Available
for Sale Securities

Defined
Benefit
Plan
Total
Beginning balance $ 2,986
$ (5,199 ) $ (2,213 ) $ 197
$ (5,239 ) $ (5,042 )
Other comprehensive gain before reclassifications 1,355
—
1,355
2,221
—
2,221
Amounts reclassified from accumulated other comprehensive (loss) gain (147 ) 40
(107 ) 1
37
38
Net current-period other comprehensive income 1,208
40
1,248
2,222
37
2,259
Ending balance $ 4,194
$ (5,159 ) $ (965 ) $ 2,419
$ (5,202 ) $ (2,783 )

Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
(In Thousands) Net Unrealized Gain (Loss) on Available for Sale Securities
Defined
Benefit
Plan
Total
Net Unrealized (Loss) Gain on Available
for Sale Securities

Defined
Benefit
Plan
Total
Beginning balance $ 2,455
$ (5,232 ) $ (2,777 ) $ (1,360 ) $ (5,276 ) $ (6,636 )
Other comprehensive gain before reclassifications 1,903
—
1,903
3,788
—
3,788
Amounts reclassified from accumulated other comprehensive (loss) gain (164 ) 73
(91 ) (9 ) 74
65
Net current-period other comprehensive income 1,739
73
1,812
3,779
74
3,853
Ending balance $ 4,194
$ (5,159 ) $ (965 ) $ 2,419
$ (5,202 ) $ (2,783 )


	Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
(In Thousands)	Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total		Net 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 (loss) gain before reclassifications	(1,510)		0		(1,510)		548		0		548
Amounts reclassified from accumulated other comprehensive (loss) gain	(109)		36		(73)		(17)		33		16
Net current-period other comprehensive (loss) income	(1,619)		36		(1,583)		531		33		564

Ending balance	$	3,095	$	(5,560)	$	(2,465)	$	2,986	$	(5,199)	$	(2,213)

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The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ were as follows:

Details about Accumulated Other Comprehensive Loss Components Amount Reclassified from Accumulated Other Comprehensive Loss Affected Line Item
in the Consolidated
Statement of Income
Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
Net unrealized gain (loss) on available for sale securities $ 186
$ (2 ) Net debt securities gains (losses), available for sale
Income tax effect (39 ) 1
Income tax provision
Total reclassifications for the period $ 147
$ (1 )

Net unrecognized pension costs $ (51 ) $ (47 ) Salaries and employee benefits
Income tax effect 11
10
Income tax provision
Total reclassifications for the period $ (40 ) $ (37 )

Details about Accumulated Other Comprehensive Loss Components Amount Reclassified from Accumulated Other Comprehensive Loss
Affected Line Item
in the Consolidated
Statement of Income
Six months ended June 30, 2020 Six months ended June 30, 2019
Net unrealized gain on available for sale securities $ 207
$ 11
Net debt securities gains, available for sale
Income tax effect (43 ) (2 ) Income tax provision
Total reclassifications for the period $ 164
$ 9

Net unrecognized pension costs $ (92 ) $ (94 ) Salaries and employee benefits
Income tax effect 19
20
Income tax provision
Total reclassifications for the period $ (73 ) $ (74 )


Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss				Affected Line Item in the Consolidated Statement of Income
	Three months ended March 31, 2021		Three months ended March 31, 2020
Net unrealized gain on available for sale securities	$	138	$	21	Net debt securities gains, available for sale
Income tax effect	(29)		(4)		Income tax provision
Total reclassifications for the period	$	109	$	17

Net unrecognized pension costs	$	(46)	$	(41)	Other non-interest expense
Income tax effect	10		8		Income tax provision
Total reclassifications for the period	$	(36)	$	(33)

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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 ~~effected~~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. ~~ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018.~~ With certain exceptions, transition to the new requirements will be through a ~~cumulative effect~~cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ~~On October 16, 2019, the FASB voted~~This Update is effective for SEC filers that are eligible to ~~defer the effective date for ASC 326,~~ ~~Financial Instruments - Credit Losses, for~~be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, ~~and~~including interim periods within those fiscal years. We expect to recognize a one-time ~~cumulative effect~~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~~.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 ~~units~~unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ~~A public business entity that~~The Update is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after

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~~December 15, 2021. On October 16, 2019, the FASB voted to defer the~~ effective ~~date for ASC 350, Intangibles - Goodwill and Other~~, for smaller reporting companies toand all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update ~~did not to have a significant impact on the Company’s financial statements.~~

~~In August 2018, the FASB issued ASU 2018-14,~~ ~~Compensation - Retirement Benefits (Topic 715-20).~~ This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. 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, ~~Topic 815,~~ Derivatives, and Hedging (Topic 815); and ~~Topic 825,~~ 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. ~~Topic 326, Financial Instruments - Credit Losses~~ ASU 2019-04 makes clarifying amendments ~~are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.~~to certain financial instrument standards. For ~~all other public business~~ entities that have not yet adopted ASU 2016-13, the effective ~~date is~~dates for ~~fiscal years beginning after December 15, 2020, and for all other entities,~~the amendments related to ASU 2016-13 are the same as the effective ~~date is for fiscal years beginning after December 15, 2021.On October 16, 2019,~~dates in ASU 2016-13. For entities that have adopted ASU 2016-13, the ~~FASB voted~~amendments related to ~~defer the effective date for ASC 326,~~ ~~Financial Instruments - Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final~~ ASU ~~is expected to be issued in mid-November.~~ ~~Topic 815, Derivatives and Hedging~~ ~~amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments~~2016-13 are effective for fiscal years beginning after December 15, 2019, ~~and~~including interim periods ~~beginning after December 15, 2020.~~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 ~~the amendments in Update 2017- 12,~~ASU 2017-12 as of April 25, 2019, the effective date is as of the beginning of the first annual period beginning after ~~the issuance of this Update.~~ ~~Topic 825, Financial Instruments~~ April 25, 2019. The amendments related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, ~~and~~including interim periods within those fiscal years. ~~This Update is~~The Company qualifies as a smaller reporting company and does not ~~expected~~expect to ~~have a significant impact on the Company’s financial statements.~~early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments -– Credit Losses ~~Topic 326~~(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 ~~the~~ 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 ~~2016-13,~~is effective when they implement the ~~effective dates and transition requirements are the same as those in ASU 2016-13.~~credit losses standard. For entities that already have adopted the credit losses standard, the ASU ~~2016-13, ASU 2019-05~~ is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ~~Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326,~~ ~~Financial Instruments - Credit Losses~~, for smaller reporting companies to 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 November 2019, the FASB issued ASU 2019-09,~~ ~~Financial Services - Insurance (Topic 944), which defers the effective date of the amendments in Update 2018-12,~~ ~~Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts~~. For public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies, as defined by the SEC, the amendments in Update 2018-12 are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early application of the amendments in Update 2018-12 is permitted. For all other entities, the amendments in Update 2018-12 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early application of the amendments in Update 2018-12 is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

~~In November 2019, the FASB issued ASU 2019-10,~~ ~~Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)~~. The Update defers the effective dates of ASU 2016-13 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. This Update also amends the mandatory effective date for the elimination of Step 2 from

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~~the goodwill impairment test under ASU No. 2017-04,~~ ~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill)~~,to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt ~~these ASUs.~~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

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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. ~~The~~For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates ~~in this Update~~for ASU 2019-11 are the same as ~~those applicable for~~the effective dates and transition requirements in ASU ~~2019-10. This Update~~2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is ~~not expected to have a significant impact on the Company’s financial statements.~~

~~In December 2019, the FASB issued ASU 2019-12,~~ ~~Income Taxes (Topic 740)~~, to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are 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 January 2020, the FASB issued ASU 2020-1,~~ ~~Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)~~, to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option, in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and2019, including interim periods within those fiscal years. ~~For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021,~~The Company qualifies as a smaller reporting company and ~~interim periods within those fiscal years. This Update is~~does not ~~expected~~expect to ~~have a significant impact on the Company’s financial statements.~~early adopt these ASUs.

~~In January 2020, the FASB issued ASU 2020-2,~~ Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Company’s financial statements.

In March 2020, the FASB issued ASU ~~2020-3~~,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.

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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. ~~This Update~~The Company is ~~not expected to~~currently evaluating the impact the adoption of the standard will have ~~a significant impact~~ on the Company’s financial ~~statements.~~

position or results of operations.

In January 2020, the FASB issued ASU ~~2020-4,~~ 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~~“reference rate ~~reform,~~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 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

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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 are 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, 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.

Note 4. Per Share Data

There are 0 convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 841,275 stock options, with an average exercise price of $28.17, outstanding on March 31, 2021. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the three period due to the average market price of common shares of $20.21, respectively, exceeding the exercise price of the options issued. There were a total of 864,300 stock options, with an average exercise price of ~~$28.20,~~$29.20, outstanding on ~~June 30,~~March 31, 2020. ~~These~~A portion of these options were ~~excluded,~~included, 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 ~~$22.32~~$29.57 exceeding the exercise price of the options ~~issued. There were a total~~issuedfor all years except for 2017.


	Three Months Ended March 31,
		2021	2020
Weighted average common shares issued		7,535,341	7,520,965
Weighted average treasury stock shares		(480,225)	(480,225)
Weighted average common shares outstanding - basic		7,055,116	7,040,740
Dilutive effect of outstanding stock options		0	62,250
Weighted average common shares outstanding - basic and diluted		7,055,116	7,102,990

Table of 635,550 stock options outstanding for the same period end in 2019 that had an average exercise price of $29.30 and were excluded, on a weighted average basis, in the computation of diluted earnings per share because the quarterly average closing market price of common shares was $27.89 for the period.Contents

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Weighted average common shares issued 7,521,854
7,518,728
7,521,410
7,518,293
Weighted average treasury stock shares (480,225 ) (480,225 ) (480,225 ) (480,225 )
Weighted average common shares outstanding - basic 7,041,629
7,038,503
7,041,185
7,038,068
Dilutive effect of outstanding stock options —
—
—
—
Weighted average common shares outstanding - basic and diluted 7,041,629
7,038,503
7,041,185
7,038,068

~~Table of Contents~~

Note 5. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are as follows:


	March 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):

Mortgage-backed securities	$	1,792	$	4	$	0	$	1,796

State and political securities	109,662		4,132		(542)		113,252
Other debt securities	51,523		740		(416)		51,847
Total debt securities	$	162,977	$	4,876	$	(958)	$	166,895

Investment equity securities:

Other equity securities	$	1,300	$	1	$	(36)	$	1,265


Trading:

Other equity securities	$	50	$	0	$	(6)	$	44


	June 30, 2020										December 31, 2020
			Gross		Gross								Gross		Gross
	Amortized		Unrealized		Unrealized			Fair			Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses			Value		(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):										Available for sale (AFS):

Mortgage-backed securities	$	2,316	$	51	$	—		$	2,367	Mortgage-backed securities	$	2,118	$	23	$	0	$	2,141

State and political securities	92,209		5,104		(49		)	97,264		State and political securities	102,690		5,382		(59)		108,013
Other debt securities	64,535		951		(748		)	64,738		Other debt securities	51,486		828		(207)		52,107
Total debt securities	$	159,060	$	6,106	$	(797	)	$	164,369	Total debt securities	$	156,294	$	6,233	$	(266)	$	162,261

Investment equity securities:										Investment equity securities:

Other equity securities	$	1,300	$	11	$	(20	)	$	1,291	Other equity securities	$	1,300	$	10	$	(22)	$	1,288


Trading:										Trading:

Other equity securities	$	50	$	—	$	(13	)	$	37	Other equity securities	$	50	$	0	$	(10)	$	40

December 31, 2019
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
Available for sale (AFS):

Mortgage-backed securities $ 4,956
$ 56
$ (46 ) $ 4,966
State and political securities 79,064
3,299
(77 ) 82,286
Other debt securities 61,492
401
(526 ) 61,367
Total debt securities $ 145,512
$ 3,756
$ (649 ) $ 148,619

Investment equity securities:
Other equity securities $ 1,300
$ —
$ (39 ) $ 1,261

Trading:
Other equity securities $ 50
$ 3
$ (2 ) $ 51

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.


	March 31, 2021
	Less than Twelve Months				Twelve Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):



State and political securities	$	27,816	$	(532)	$	897	$	(10)	$	28,713	$	(542)
Other debt securities	19,500		(289)		3,953		(127)		23,453		(416)
Total debt securities	$	47,316	$	(821)	$	4,850	$	(137)	$	52,166	$	(958)

June 30, 2020
Less than Twelve Months Twelve Months or Greater Total
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
(In Thousands) Value Losses Value Losses Value Losses
Available for sale (AFS):
Mortgage-backed securities $ —
$ —
$ —
$ —
$ —
$ —
State and political securities 4,190
(30 ) 240
(19 ) 4,430
(49 )
Other debt securities 12,809
(287 ) 7,049
(461 ) 19,858
(748 )
Total debt securities $ 16,999
$ (317 ) $ 7,289
$ (480 ) $ 24,288
$ (797 )

Table of Contents

December 31, 2019
Less than Twelve Months Twelve Months or Greater Total
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
(In Thousands) Value Losses Value Losses Value Losses
Available for sale (AFS):
Mortgage-backed securities $ —
$ —
$ 2,115
$ (46 ) $ 2,115
$ (46 )
State and political securities 7,958
(40 ) 224
(37 ) 8,182
(77 )
Other debt securities 13,373
(216 ) 14,258
(310 ) 27,631
(526 )
Total debt securities $ 21,331
$ (256 ) $ 16,597
$ (393 ) $ 37,928
$ (649 )


	December 31, 2020
	Less than Twelve Months				Twelve Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):



State and political securities	$	12,311	$	(51)	$	900	$	(8)	$	13,211	$	(59)
Other debt securities	5,964		(74)		4,429		(133)		10,393		(207)
Total debt securities	$	18,275	$	(125)	$	5,329	$	(141)	$	23,604	$	(266)

At ~~June 30, 2020,~~March 31, 2021, there were a total of 1562 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 ~~June 30, 2020,~~March 31, 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 ~~June 30, 2020,~~March 31, 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 Cost		Fair Value
Due in one year or less	$	11,176	$	11,158
Due after one year to five years	71,403		72,665
Due after five years to ten years	70,964		73,612
Due after ten years	9,434		9,460
Total	$	162,977	$	166,895

(In Thousands) Amortized Cost Fair Value
Due in one year or less $ 6,714
$ 6,769
Due after one year to five years 65,192
65,796
Due after five years to ten years 67,627
72,018
Due after ten years 19,527
19,786
Total $ 159,060
$ 164,369

Total gross proceeds from sales of debt securities available for sale for the three ~~and six~~ months ended ~~June 30, 2020 were $2,389,000 and $5,163,000 respectively,~~March 31, 2021 was $11,372,000, compared to ~~2019 totals of $1,146,000 and 8,132,000.~~$2,774,000 for the corresponding 2020 periods.

The following table represents gross realized gains and losses from the sales of debt securities available for sale:


	Three Months Ended March 31,
(In Thousands)		2021		2020
Available for sale (AFS):
Gross realized gains:



State and political securities		$	0	$	1
Other debt securities		138		20
Total gross realized gains		$	138	$	21

Gross realized losses:



State and political securities		$	0	$	0
Other debt securities		0		0
Total gross realized losses		$	0	$	0

Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2020 2019 2020 2019
Available for sale (AFS):
Gross realized gains:

Mortgage-backed securities $ 83
$ —
$ 83
$ —
State and political securities 103
—
104
15
Other debt securities —
—
20
4
Total gross realized gains $ 186
$ —
$ 207
$ 19

Gross realized losses:

State and political securities $ —
$ 1
$ —
$ 3
Other debt securities —
1
—
5
Total gross realized losses $ —
$ 2
$ —
$ 8

There were 0 impairment charges included in gross realized losses for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

~~Table of Contents~~

Investment securities with a carrying value of approximately ~~$111,168,381~~$109,699,000 and ~~$74,163,000~~$111,247,000 at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

Table of Contents

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, we had ~~$1,291,000~~$1,265,000 and ~~$1,261,000,~~$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 six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:



	Three Months Ended March 31,
(In Thousands)		2021		2020
Net (losses) gains recognized in equity securities during the period		$	(23)	$	20
Less: Net gains realized on the sale of equity securities during the period		0		0
Unrealized gains recognized in equity securities held at reporting date		$	(23)	$	20

Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2020 2019 2020 2019
Net gains recognized in equity securities during the period $ 10
$ 22
$ 30
$ 65
Less: Net gains realized on the sale of equity securities during the period —
—
—
—
Unrealized gains recognized in equity securities held at reporting date $ 10
$ 22
$ 30
$ 65

Net gains and losses on trading account securities are as follows for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended March 31,
(In Thousands)		2021		2020
Net gains on sale transactions		$	0	$	0
Net mark-to-market gains (losses)		4		(14)
Net gain (loss) on trading account securities		$	4	$	(14)

Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2020 2019 2020 2019
Net gains on sale transactions $ —
$ 3
$ —
$ 8
Net mark-to-market (losses) gains —
—
(14 ) 5
Net (loss) gain on trading account securities $ —
$ 3
$ (14 ) $ 13

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 3 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	March 31, 2021
			Past Due		Past Due 90
			30 To 89		Days Or More		Non-
(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	181,171	$	23	$	2	$	863	$	182,059
Real estate mortgage:
Residential	575,008		2,513		476		1,739		579,736
Commercial	357,225		584		57		5,859		363,725
Construction	39,604		128		0		53		39,785
Consumer automobile loans	149,917		316		72		151		150,456
Other consumer installment loans	19,241		417		0		0		19,658
	1,322,166		$	3,981	$	607	$	8,665	1,335,419
Net deferred loan fees and discounts	480								480
Allowance for loan losses	(14,202)								(14,202)
Loans, net	$	1,308,444							$	1,321,697

June 30, 2020
Past Due Past Due 90
30 To 89 Days Or More Non-
(In Thousands) Current Days & Still Accruing Accrual Total
Commercial, financial, and agricultural $ 167,025
$ 41
$ 2
$ 1,836
$ 168,904
Real estate mortgage:

Residential 602,480
1,709
933
1,092
606,214
Commercial 345,638
25
331
6,536
352,530
Construction 43,960
—
—
60
44,020
Consumer automobile loans 155,219
199
9
294
155,721
Other consumer installment loans 20,583
431
4
—
21,018
1,334,905
$ 2,405
$ 1,279
$ 9,818
1,348,407
Net deferred loan fees and discounts 940

940
Allowance for loan losses (12,977 )

(12,977 )
Loans, net $ 1,322,868

$ 1,336,370

Table of Contents

December 31, 2019
Past Due Past Due 90
30 To 89 Days Or More Non-
(In Thousands) Current Days & Still Accruing Accrual Total
Commercial, financial, and agricultural $ 153,737
$ 249
$ 30
$ 2,197
$ 156,213
Real estate mortgage:

Residential 615,580
4,881
1,529
1,266
623,256
Commercial 355,597
775
164
6,725
363,261
Construction 37,871
131
—
65
38,067
Consumer automobile loans 149,703
709
—
105
150,517
Other consumer installment loans 22,124
579
324
16
23,043
1,334,612
$ 7,324
$ 2,047
$ 10,374
1,354,357
Net deferred loan fees and discounts 1,187

1,187
Allowance for loan losses (11,894 )

(11,894 )
Loans, net $ 1,323,905

$ 1,343,650


	December 31, 2020
			Past Due		Past Due 90
			30 To 89		Days Or More		Non-
(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	163,583	$	247	$	48	$	865	$	164,743
Real estate mortgage:
Residential	580,292		6,386		983		2,060		589,721
Commercial	366,363		533		150		6,142		373,188
Construction	38,587		667		0		55		39,309
Consumer automobile loans	155,472		900		31		0		156,403
Other consumer installment loans	19,485		455		0		0		19,940
	1,323,782		$	9,188	$	1,212	$	9,122	1,343,304
Net deferred loan fees and discounts	1,023								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 six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended June 30,									Three Months Ended March 31,
	2020				2019					2021				2020
(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		(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	$	26	$	—	$	33	$	44	Commercial, financial, and agricultural	$	28	$	0	$	9	$	0
Real estate mortgage:									Real estate mortgage:
Residential	4		—		33		19		Residential	9		0		9		0
Commercial	22		—		76		34		Commercial	30		0		42		0
Construction	1		—		1		1		Construction	1		0		0		0
Consumer automobile loans	—		3		1		1		Consumer automobile loans	0		0		2		0
Other consumer installment loans	3		—		—		—		Other consumer installment loans	0		0		0		0
	$	56	$	3	$	144	$	99		$	68	$	0	$	62	$	0

Six Months Ended June 30,
2020 2019
(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 $ 35
$ —
$ 57
$ 83
Real estate mortgage:

Residential 13
—
66
42
Commercial 64
—
165
74
Construction 1
—
2
2
Consumer automobile loans 2
3
3
2
Other consumer installment loans 3
—
1
—
$ 118
$ 3
$ 294
$ 203

~~Table of Contents~~

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.

Table of Contents

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.

~~Table of Contents~~

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	March 31, 2021
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	803	$	3,590	$	—
Real estate mortgage:
Residential	4,626		4,626		—
Commercial	5,886		5,886		—
Construction	120		120		—
Consumer automobile loans	0		0		—
Installment loans to individuals	0		0		—
	11,435		14,222		—
With an allowance recorded:
Commercial, financial, and agricultural	60		60		1
Real estate mortgage:
Residential	1,543		1,543		330
Commercial	5,841		5,841		1,638
Construction	8		8		1
Consumer automobile loans	201		201		73
Installment loans to individuals	0		0		0
	7,653		7,653		2,043
Total:
Commercial, financial, and agricultural	863		3,650		1
Real estate mortgage:
Residential	6,169		6,169		330
Commercial	11,727		11,727		1,638
Construction	128		128		1
Consumer automobile loans	201		201		73
Installment loans to individuals	0		0		0
	$	19,088	$	21,875	$	2,043

June 30, 2020
Recorded Unpaid Principal Related
(In Thousands) Investment Balance Allowance
With no related allowance recorded:

Commercial, financial, and agricultural $ 1,820
$ 4,607
$ —
Real estate mortgage:

Residential 4,305
4,305
—
Commercial 4,113
4,113
—
Construction 60
60
—
Consumer automobile loans —
—
—
Installment loans to individuals —
—
—
10,298
13,085
—
With an allowance recorded:

Commercial, financial, and agricultural 16
16
—
Real estate mortgage:

Residential 1,168
1,168
180
Commercial 3,311
3,361
959
Construction —
—
—
Consumer automobile loans 111
293
151
Installment loans to individuals —
—
—
4,606
4,838
1,290
Total:

Commercial, financial, and agricultural 1,836
4,623
—
Real estate mortgage:

Residential 5,473
5,473
180
Commercial 7,424
7,474
959
Construction 60
60
—
Consumer automobile loans 111
293
151
Installment loans to individuals —
—
—
$ 14,904
$ 17,923
$ 1,290

Table of Contents

December 31, 2019
Recorded Unpaid Principal Related
(In Thousands) Investment Balance Allowance
With no related allowance recorded:

Commercial, financial, and agricultural $ 2,285
$ 5,072
$ —
Real estate mortgage:

Residential 5,008
5,008
—
Commercial 5,035
5,035
—
Construction 65
65
—
Consumer automobile loans —
—
—
Installment loans to individuals —
—
—
12,393
15,180
—
With an allowance recorded:

Commercial, financial, and agricultural —
—
—
Real estate mortgage:

Residential 1,168
1,200
211
Commercial 3,540
3,590
1,104
Construction —
—
—
Consumer automobile loans 130
130
62
Installment loans to individuals 16
16
16
4,854
4,936
1,393
Total:

Commercial, financial, and agricultural 2,285
5,072
—
Real estate mortgage:

Residential 6,176
6,208
211
Commercial 8,575
8,625
1,104
Construction 65
65
—
Consumer automobile loans 130
130
62
Installment loans to individuals 16
16
16
$ 17,247
$ 20,116
$ 1,393


	December 31, 2020
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	865	$	3,652	$	—
Real estate mortgage:
Residential	5,023		5,023		—
Commercial	6,354		6,354		—
Construction	124		124		—
Consumer automobile loans	0		0		—
Installment loans to individuals	0		0		—
	12,366		15,153		—
With an allowance recorded:
Commercial, financial, and agricultural	0		0		0
Real estate mortgage:
Residential	1,294		1,294		224
Commercial	3,023		3,023		811
Construction	0		0		0
Consumer automobile loans	0		0		0
Installment loans to individuals	0		0		0
	4,317		4,317		1,035
Total:
Commercial, financial, and agricultural	865		3,652		0
Real estate mortgage:
Residential	6,317		6,317		224
Commercial	9,377		9,377		811
Construction	124		124		0
Consumer automobile loans	0		0		0
Installment loans to individuals	0		0		0
	$	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 six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended March 31,
	2021						2020
(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	$	864	$	0	$	0	$	2,155	$	1	$	0
Real estate mortgage:
Residential	6,081		51		0		5,953		57		0
Commercial	9,167		28		0		8,568		26		0
Construction	122		0		0		65		0		0
Consumer automobile	76		0		0		76		0		0
Other consumer installment loans	0		0		0		8		0		0
	$	16,310	$	79	$	0	$	16,825	$	84	$	0

Three Months Ended June 30,
2020 2019
(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 $ 1,931
$ —
$ —
$ 5,298
$ 2
$ 44
Real estate mortgage:

Residential 5,602
57
—
4,078
27
22
Commercial 7,992
20
—
9,894
30
33
Construction 62
—
—
—
72
—
1
Consumer automobile 157
1
2
—
55
—
—
Other consumer installment loans —
—
—
—
18
—
—
$ 15,744
$ 78
$ 2
$ —
$ 19,415
$ 59
$ 100

Table of Contents

Six Months Ended June 30,
2020 2019
(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 $ 2,049
$ 1
$ —
$ 5,286
$ 2
$ 82
Real estate mortgage:

Residential 5,793
114
—
4,122
55
39
Commercial 8,186
46
—
10,484
61
69
Construction 63
—
—
73
—
2
Consumer automobile 148
1
2
47
—
1
Other consumer installment loans 5
—
—
13
—
—
$ 16,244
$ 162
$ 2
$ 20,025
$ 118
$ 193

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 02 loan modifications considered to be TDRs completed during the three ~~and six~~ months ended ~~June 30, 2020.~~March 31, 2021. There were 40 loan modifications considered TDRs completed during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. Loan modifications that are considered TDRs completed during the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2021 were as follows:

Three Months Ended June 30,
2019
(In Thousands, Except Number of Contracts) Number
of
Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural 2
$ 4,014
$ 4,014
Real estate mortgage:
Residential —
—
—
Commercial —
—
—
Construction 2
2,862
2,862
4
$ 6,876
$ 6,876

Six Months Ended June 30,
2019
(In Thousands, Except Number of Contracts)
Number
of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment
Commercial, financial, and agricultural 2
$ 4,014
$ 4,014
Real estate mortgage:

Residential —
—
—
Commercial —
—
—
Construction 2
2,862
2,860
4
$ 6,876
$ 6,874


	Three Months Ended March 31,
	2021
(In Thousands, Except Number of Contracts)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural	0	$	0	$	0
Real estate mortgage:
Residential	1	687		687
Commercial	1	125		125
Construction	0	0		0
	2	$	812	$	812

~~Table of Contents~~

There was 1 loan modifications considered to be a TDR made during the twelve months previous to March 31, 2021 that defaulted during the three months ended March 31, 2021. The defaulted loan type and recorded investment at March 31, 2021 are as follows: 1 residential real estate loan with a recorded investment of $687,000. There were 23 loan modifications considered to be TDRs made during the twelve months previous to ~~June 30,~~March 31, 2020 that defaulted during the ~~six~~three months ended ~~June 30,~~March 31, 2020. The defaulted loan types and recorded investments at ~~June 30,~~March 31, 2020 are as follows: 1 commercial real estate loan with a recorded investment of $1,040,000, and 12 commercial and agricultural loans with a recorded investment of ~~$640,000. There were no loan modifications considered to be TDRs made during the twelve months previous to June 30, 2019 that defaulted during the six months ended June 30, 2019.~~$1,112,000.

Troubled debt restructurings amounted to ~~$11,546,000~~$13,294,000 and ~~$13,282,000~~$12,359,000 as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

The amount of foreclosed residential real estate held at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, totaled ~~$1,132,000~~$68,000 and ~~$493,000,~~$401,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, totaled ~~$44,000~~$421,000 and ~~$32,000,~~$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 ~~June 30, 2020,~~March 31, 2021, the loan modification/deferral program in place has generated deferrals of up to 90180 days that have been granted on ~~1,490~~1,365 loans with 70 loans remaining in their deferral period with an aggregate outstanding balance of ~~$241,608,000.~~$12,345,000. 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.

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Internal Risk Ratings

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first 6 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 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 ~~2020~~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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	March 31, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)			Residential		Commercial		Construction						Totals
Pass	$	180,038	$	574,785	$	343,898	$	39,595	$	150,456	$	19,658	$	1,308,430
Special Mention	180		2,474		9,253		0		0		0		11,907
Substandard	1,841		2,477		10,574		190		0		0		15,082
	$	182,059	$	579,736	$	363,725	$	39,785	$	150,456	$	19,658	$	1,335,419


	June 30, 2020																												December 31, 2020
	Commercial, Financial, and Agricultural				Real Estate Mortgages											Consumer automobile				Other consumer installment loans									Commercial, Financial, and Agricultural			Real Estate Mortgages									Consumer automobile				Other consumer installment loans
(In Thousands)				Residential				Commercial				Construction							Totals			(In Thousands)						Residential				Commercial			Construction								Totals
Pass		$	162,604			$	603,806			$	339,507			$	44,010			$	155,694				$	21,018		$	1,326,639	Pass			$	162,694		$	584,599		$	355,616		$	39,192			$	156,403		$	19,938		$	1,318,442
Special Mention	5,043				1,444				10,368				10			—				—			16,865		Special Mention					180			556			7,973			0			0				0			8,709
Substandard	1,257				964				2,655				—			27				—			4,903		Substandard				1,869			4,566			9,599			117			0				2			16,153
	$	168,904			$	606,214			$	352,530			$	44,020		$	155,721			$	21,018		$	1,348,407					$	164,743		$	589,721		$	373,188		$	39,309		$	156,403			$	19,940		$	1,343,304

~~Table of Contents~~

December 31, 2019
Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment loans
(In Thousands) Residential Commercial Construction Totals
Pass $ 149,349
$ 618,350
$ 348,864
$ 37,931
$ 150,517
$ 23,039
$ 1,328,050
Special Mention 3,174
2,436
5,080
—
—
—
10,690
Substandard 3,690
2,470
9,317
136
—
4
15,617
$ 156,213
$ 623,256
$ 363,261
$ 38,067
$ 150,517
$ 23,043
$ 1,354,357

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 2 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 2 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.

Table of Contents

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.

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.

~~Table of Contents~~

Activity in the allowance is presented for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Three Months Ended June 30, 2020
Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment
(In Thousands) Residential Commercial Construction Unallocated Totals
Beginning Balance $ 1,897
$ 4,537
$ 3,414
$ 160
$ 1,855
$ 267
$ 370
$ 12,500
Charge-offs (8 ) (127 ) —
—
(14 ) (82 ) —
(231 )
Recoveries 2
26
—
3
6
26
—
63
Provision 62
42
(79 ) (13 ) 367
(84 ) 350
645
Ending Balance $ 1,953
$ 4,478
$ 3,335
$ 150
$ 2,214
$ 127
$ 720
$ 12,977

Three Months Ended June 30, 2019
Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment
(In Thousands) Residential Commercial Construction Unallocated Totals
Beginning Balance $ 1,732
$ 5,730
$ 3,802
$ 130
$ 1,402
$ 278
$ 718
$ 13,792
Charge-offs (30 ) (64 ) (11 ) —
(38 ) (66 ) —
(209 )
Recoveries 36
—
1
2
34
30
—
103
Provision (154 ) 83
(269 ) —
37
(2 ) 620
315
Ending Balance $ 1,584
$ 5,749
$ 3,523
$ 132
$ 1,435
$ 240
$ 1,338
$ 14,001

t Six Months Ended June 30, 2020
Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment
(In Thousands) Residential Commercial Construction Unallocated Totals
Beginning Balance $ 1,779
$ 4,306
$ 3,210
$ 118
$ 1,780
$ 278
$ 423
$ 11,894
Charge-offs (22 ) (168 ) —
—
(89 ) (182 ) —
(461 )
Recoveries 23
47
—
5
7
67
—
149
Provision 173
293
125
27
516
(36 ) 297
1,395
Ending Balance $ 1,953
$ 4,478
$ 3,335
$ 150
$ 2,214
$ 127
$ 720
$ 12,977


	Six Months Ended June 30, 2019
t																													t				Three Months Ended March 31, 2021
	Commercial, Financial, and Agricultural				Real Estate Mortgages											Consumer automobile				Other consumer installment													Commercial, Financial, and Agricultural			Real Estate Mortgages									Consumer automobile				Other consumer installment
(In Thousands)				Residential				Commercial				Construction							Unallocated				Totals		(In Thousands)							Residential				Commercial			Construction								Unallocated					Totals
Beginning Balance		$	1,680			$	5,616			$	4,047			$	143			$	1,328				$	259		$	764			$	13,837	Beginning Balance			$	1,936		$	4,460		$	3,635		$	134			$	1,906		$	261		$	1,471		$	13,803
Charge-offs	(80		)		(137		)		(150		)		—			(138		)		(162		)	—			(667		)	Charge-offs					(35)			(14)			0			0			(96)				(29)			0			(174)
Recoveries	42				1				1				7			60				45			—			156			Recoveries				5			3			0			5			17				28			0			58
Provision	(58		)		269				(375		)		(18		)	185				98			574			675			Provision				700			(48)			541			3			(92)				(25)			(564)			515
Ending Balance	$	1,584			$	5,749			$	3,523			$	132		$	1,435			$	240		$	1,338		$	14,001		Ending Balance				$	2,606		$	4,401		$	4,176		$	142		$	1,735			$	235		$	907		$	14,202


	Three Months Ended March 31, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,779	$	4,306	$	3,210	$	118	$	1,780	$	278	$	423	$	11,894
Charge-offs	(14)		(41)		0		0		(75)		(100)		0		(230)
Recoveries	21		21		0		2		1		41		0		86
Provision	111		251		204		40		149		48		(53)		750
Ending Balance	$	1,897	$	4,537	$	3,414	$	160	$	1,855	$	267	$	370	$	12,500

The shift in allocation of the loan provision is primarily due to changes in the credit metrics within the loan portfolio and the economic uncertainty caused by the COVID-19 ~~pandemic. The decrease~~pandemic which has caused an increase in ~~consumer installment loans is related~~the provision to the ~~decrease in outstanding loan balances.~~commericial segment of the portfolio.

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.

The Company has a concentration of the following to gross loans at ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:

June 30,
2020 2019
Owners of residential rental properties 15.98 % 15.07 %
Owners of commercial rental properties 13.00 % 12.09 %


	March 31,
	2021		2020
Owners of residential rental properties	16.73	%	16.04	%
Owners of commercial rental properties	13.66	%	12.53	%

Table of Contents

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	March 31, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)			Residential		Commercial		Construction								Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1	$	330	$	1,638	$	1	$	73	$	0	$	0	$	2,043
Collectively evaluated for impairment	2,605		4,071		2,538		141		1,662		235		907		12,159
Total ending allowance balance	$	2,606	$	4,401	$	4,176	$	142	$	1,735	$	235	$	907	$	14,202

Loans:
Individually evaluated for impairment	$	863	$	6,169	$	11,727	$	128	$	201	$	0			$	19,088

Collectively evaluated for impairment	181,196		573,567		351,998		39,657		150,255		19,658				1,316,331
Total ending loans balance	$	182,059	$	579,736	$	363,725	$	39,785	$	150,456	$	19,658			$	1,335,419

June 30, 2020
Commercial, Financial, and Agricultural Real Estate Mortgages Consumer Automobile Other consumer installment Unallocated
(In Thousands) Residential Commercial Construction Totals
Allowance for Loan Losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ —
$ 180
$ 959
$ —
$ 151
$ —
$ —
$ 1,290
Collectively evaluated for impairment 1,953
4,298
2,376
150
2,063
127
720
11,687
Total ending allowance balance $ 1,953
$ 4,478
$ 3,335
$ 150
$ 2,214
$ 127
$ 720
$ 12,977

Loans:

Individually evaluated for impairment $ 1,836
$ 5,473
$ 7,424
$ 60
$ 111
$ —

$ 14,904
Collectively evaluated for impairment 167,068
600,741
345,106
43,960
155,610
21,018

1,333,503
Total ending loans balance $ 168,904
$ 606,214
$ 352,530
$ 44,020
$ 155,721
$ 21,018

$ 1,348,407

December 31, 2019
Commercial, Financial, and Agricultural Real Estate Mortgages Consumer Automobile Other consumer installment Unallocated
(In Thousands) Residential Commercial Construction Totals
Allowance for Loan Losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ —
$ 211
$ 1,104
$ —
$ 62
$ 16
$ —
$ 1,393
Collectively evaluated for impairment 1,779
4,095
2,106
118
1,718
262
423
10,501
Total ending allowance balance $ 1,779
$ 4,306
$ 3,210
$ 118
$ 1,780
$ 278
$ 423
$ 11,894

Loans:

Individually evaluated for impairment $ 2,285
$ 6,176
$ 8,575
$ 65
$ 130
$ 16

$ 17,247
Collectively evaluated for impairment 153,928
617,080
354,686
38,002
150,387
23,027

1,337,110
Total ending loans balance $ 156,213
$ 623,256
$ 363,261
$ 38,067
$ 150,517
$ 23,043

$ 1,354,357


	December 31, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)			Residential		Commercial		Construction								Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	0	$	224	$	811	$	0	$	0	$	0	$	0	$	1,035
Collectively evaluated for impairment	1,936		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	$	0	$	0			$	16,683

Collectively evaluated for impairment	163,878		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, ~~2019.~~2020.

The following sets forth the components of the net periodic benefit/cost of the domestic non-contributory defined benefit plan for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively:


	Three Months Ended March 31,
(In Thousands)		2021		2020

Interest cost		$	127	$	160
Expected return on plan assets		(386)		(318)


Amortization of net loss		46		41
Net periodic benefit		$	(213)	$	(117)

Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2020 2019 2020 2019
Interest cost $ 160
$ 191
$ 320
$ 382
Expected return on plan assets (318 ) (249 ) (636 ) (498 )
Amortization of net loss 51
47
92
94
Net periodic benefit $ (107 ) $ (11 ) $ (224 ) $ (22 )

Table of Contents

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, ~~2019,~~2020, that it expected to contribute a minimum of $500,000 to its defined benefit plan in ~~2020.~~2021. As of ~~June 30, 2020,~~March 31, 2021, there were contributions of ~~$1,250,000~~$200,000 made to the plan with additional contributions of at least ~~$250,000~~$300,000 anticipated during the remainder of ~~2020.~~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 1,000,000 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 ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ there were ~~1,833~~939 and ~~1,800~~751 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


(In Thousands)	March 31, 2021		December 31, 2020
Commitments to extend credit	$	216,331	$	198,512
Standby letters of credit	10,091		10,120
Credit exposure from the sale of assets with recourse	9,634		9,182
	$	236,056	$	217,814

(In Thousands) June 30, 2020 December 31, 2019
Commitments to extend credit $ 176,912
$ 187,778
Standby letters of credit 9,937
9,638
Credit exposure from the sale of assets with recourse 7,744
6,826
$ 194,593
$ 204,242

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. 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.

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~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.

June 30, 2020
(In Thousands) Level I Level II Level III Total
Assets measured on a recurring basis:

Investment securities, available for sale:

Mortgage-backed securities $ —
$ 2,367
$ —
$ 2,367
State and political securities —
97,264
—
97,264
Other debt securities —
64,738
—
64,738
Investment equity securities:
Other equity securities 1,291
—
—
1,291
Investment securities, trading:
Other equity securities 37
—
—
37

December 31, 2019
(In Thousands) Level I Level II Level III Total
Assets measured on a recurring basis:

Investment securities, available for sale:

Mortgage-backed securities $ —
$ 4,966
$ —
$ 4,966
State and political securities —
82,286
—
82,286
Other debt securities —
61,367
—
61,367
Investment equity securities:
Other equity securities 1,261
—
—
1,261
Investment securities, trading:
Other equity securities 51
—
—
51

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~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.

December 31, 2019
(In Thousands) Level I Level II Level III Total
Assets measured on a non-recurring basis:

Impaired loans $ —
$ —
$ 15,854
$ 15,854
Other real estate owned —
—
413
413

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

Appraisal of collateral (1)

Appraisal adjustments (1)

Appraisal of collateral (1)

Appraisal adjustments (1)

Appraisal of collateral (1)

Appraisal adjustments (1)

Appraisal of collateral (1)

Appraisal adjustments (1)

Appraisal of collateral (1)

Appraisal adjustments (1)

Appraisal of collateral (1)

Appraisal adjustments (1)

(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Appraisal of collateral (1)

Appraisal adjustments (1)

Appraisal of collateral (1)

Appraisal adjustments (1)

(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.

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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

(1) The financial instrument is carried at cost at ~~June 30, 2020,~~March 31, 2021, which approximate the fair value of the instruments

Carrying Fair Fair Value Measurements at December 31, 2019
(In Thousands) Value Value Level I Level II Level III
Financial assets:

Cash and cash equivalents (1) $ 48,589
$ 48,589
$ 48,589
$ —
$ —
Restricted investment in bank stock (1) 13,528
13,528
13,528
—
—
Loans held for sale (1) 4,232
4,232
4,232
—
—
Loans, net 1,343,650
1,346,395
—
—
1,346,395
Bank-owned life insurance (1) 29,253
29,253
29,253
—
—
Accrued interest receivable (1) 5,246
5,246
5,246
—
—

Financial liabilities:

Interest-bearing deposits $ 989,259
$ 990,747
$ 611,374
$ —
$ 379,373
Noninterest-bearing deposits (1) 334,746
334,746
334,746
—
—
Short-term borrowings (1) 4,920
4,920
4,920
—
—
Long-term borrowings 161,920
163,931
—
—
163,931
Accrued interest payable (1) 1,671
1,671
1,671
—
—


	Carrying		Fair		Fair Value Measurements at December 31, 2020
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:
Cash and cash equivalents (1)	$	213,358	$	213,358	$	213,358	$	0	$	0



Restricted investment in bank stock (1)	15,377		15,377		15,377		0		0
Loans held for sale (1)	5,239		5,239		5,239		0		0
Loans, net	1,330,524		1,339,993		0		0		1,339,993
Bank-owned life insurance (1)	33,638		33,638		33,638		0		0
Accrued interest receivable (1)	8,394		8,394		8,394		0		0

Financial liabilities:
Interest-bearing deposits	$	1,045,086	$	1,048,281	$	781,441	$	0	$	266,840
Noninterest-bearing deposits (1)	449,357		449,357		449,357		0		0
Short-term borrowings (1)	5,244		5,244		5,244		0		0
Long-term borrowings	153,475		159,575		0		0		159,575
Accrued interest payable (1)	1,112		1,112		1,112		0		0

(1) The financial instrument is carried at cost at December 31, ~~2019,~~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 ~~June 30, 2020~~March 31, 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.

In ~~2014,~~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, ~~and~~ restricted stock, restricted stock units, and other equity-based awards may be granted as part of the plan.

As of January 1, ~~2020,~~2021, the Company had a total of ~~625,800~~841,275 stock options outstanding. ~~During~~The Company did not issue any stock options during the period ended June 30, 2020, the Company issued 238,500 stock options with a strike price of $25.34 to a group of employees. The options granted in 2020 all expire ten years from the grant date. Of the 238,500 grants awarded in 2020, 119,300 of the options vest in 3 years while the 119,200 remaining options vest in five years.March 31, 2021.

June 30, 2020 June 30, 2019
Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
Outstanding, beginning of year 625,800
$ 29.29
395,550
$ 30.08
Granted 238,500
25.34
240,000
28.01
Exercised —
—
—
—
Forfeited —
—
—
—
Expired —
—
—
—
Outstanding, end of period 864,300
$ 28.20
635,550
$ 29.30

Exercisable, end of period 62,625
$ 29.47
—
$ —

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 ~~$238,000~~ ~~and~~ ~~$436,000~~$220,000 for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to ~~$177,000~~ ~~and~~$198,000 ~~$313,000~~ for the same period of ~~2019.~~2020. As of ~~June 30, 2020,~~March 31, 2021, a total of ~~62,625~~113,250 stock options were exercisable and the weighted average years to expiration was ~~8.55~~7.69 years. ~~The fair value of options~~

~~granted during the six months ended June 30, 2020 was $1,343,000 or $5.63 per award.~~ Total unrecognized compensation cost for non-vested options was ~~$2,404,000~~$1,671,000 and will be recognized over their weighted average remaining vesting period of ~~1.55~~1.27 years.



(In Thousands)	Statement of Financial Condition classification	March 31, 2021		December 31, 2020
Finance lease right of use assets	Premises and equipment, net	$	7,758	$	5,257
Finance lease liabilities	Long-term borrowings	8,094		5,475

(In Thousands) Statement of Financial Condition classification June 30, 2020 December 31, 2019
Finance lease right of use assets Premises and equipment, net $ 5,356
$ 5,456
Finance lease liabilities Long-term borrowings 5,552
5,587


	Three Months Ended March 31,
(In Thousands)		2021		2020

Finance Lease Cost:
Amortization of right-of-use asset		$	152	$	50
Interest expense		71		53
Operating lease cost		76		91

Variable lease cost		0		0
Total Lease Cost		$	299	$	194

Three Months Ended June 30, Six Months Ended June 30,
(In Thousands) 2020 2019 2020 2019

Finance Lease Cost:
Amortization of right-of-use asset $ 50
$ 64
$ 100
$ 129
Interest expense 53
56
106
112
Operating lease cost 76
84
167
172
Variable lease cost —
1
—
2
Total Lease Cost $ 179
$ 205
$ 373
$ 415

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)	Operating		Finance
2021	$	219	$	314
2022	298		419
2023	273		421
2024	262		427
2025	265		929
2026 and thereafter	2,911		9,664
Total undiscounted cash flows	4,228		12,174
Discount on cash flows	(1,098)		(4,080)
Total lease liability	$	3,130	$	8,094

(In Thousands) Operating Finance
2020 $ 144
$ 140
2021 291
282
2022 298
283
2023 273
284
2024 263
290
2025 and thereafter 3,176
8,004
Total undiscounted cash flows 4,445
9,283
Discount on cash flows (1,182 ) (3,731 )
Total lease liability $ 3,263
$ 5,552

The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of ~~June 30, 2020.~~March 31, 2021.



	Operating		Finance
Weighted-average term (years)	18.1		25.1
Weighted-average discount rate	3.51	%	3.19	%

Operating Finance
Weighted-average term (years) 18.6
27.2
Weighted-average discount rate 3.51 % 3.77 %

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had 0 effect on net income or shareholders’ equity.

Note 15. Subsequent Events

All events subsequent to the date of the consolidated financial statements through ~~August~~May 10, ~~2020,~~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 90180 days. For further discussion, see COVID-19 Impact section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Table of Contents

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, ~~2019~~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.

Table of Contents

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

EARNINGS SUMMARY

Comparison of the Three and ~~Six~~Three Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~

Summary Results

Net income for the three ~~and six~~ months ended ~~June 30, 2020 were $3,760,000 and $6,833,000~~March 31, 2021 was $3,441,000 compared to ~~$4,245,000 and $8,189,000~~$3,073,000 for the same ~~periods~~period of ~~2019, including~~2020. Results for the ~~effects of~~three months ended March 31, 2021 compared to 2020 were impacted by an increase in after-tax securities gains of ~~$138,000~~$72,000 (from a gain of ~~$18,000~~$22,000 to a gain of ~~$156,000) for the three month period and $108,000 (from a gain of $70,000 to a gain of $178,000) for the six month period.~~$94,000). Basic and diluted earnings per share for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 were ~~$0.53 and $0.97, respectively,~~$0.49 compared to ~~the corresponding periods of 2019~~ basic and diluted earnings per share of ~~$0.60~~$0.44 and ~~$1.16.~~$0.43, respectively, for the corresponding period of 2020. Return on average assets and return on average equity were ~~0.85%~~0.75% and ~~9.59%~~8.59% for the three months ended ~~June 30, 2020~~March 31, 2021 compared to ~~1.02%~~0.74% and ~~11.42%~~7.83% for the corresponding period of ~~2019. Return on average assets and return on average equity were 0.79% and 8.75%~~

~~for the six months ended June 30, 2020 compared to 0.99% and 11.27% for the corresponding period of 2019.~~2020. Net income from core operations (“core earnings”) was ~~$3,604,000 and $6,655,000 for~~$3,347,000 the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021 compared to ~~$4,227,000 and $8,119,000~~$3,051,000 for the corresponding ~~periods~~period of ~~2019.~~2020. Core basic and diluted earnings per share for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 were ~~$0.51 and $0.95, respectively,~~$0.47 compared to ~~$0.60~~$0.44 and ~~$1.15~~$0.43 basic and diluted for the corresponding ~~periods~~period of ~~2019.~~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 June 30,				Six Months Ended June 30,				(Dollars in Thousands, Except Per Share Data)	Three Months Ended March 31,
	2020		2019		2020		2019			2021		2020
GAAP net income	$	3,760	$	4,245	$	6,833	$	8,189	GAAP net income	$	3,441	$	3,073
Less: net securities gains, net of tax	156		18		178		70		Less: net securities gains, net of tax	94		22
Non-GAAP core earnings	$	3,604	$	4,227	$	6,655	$	8,119	Non-GAAP core earnings	$	3,347	$	3,051


	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
	2020		2019		2020		2019			2021		2020
Return on average assets (ROA)	0.85	%	1.02	%	0.79	%	0.99	%	Return on average assets (ROA)	0.75	%	0.74	%
Less: net securities gains, net of tax	0.04	%	0.01	%	0.02	%	0.01	%	Less: net securities gains, net of tax	0.02	%	0.01	%
Non-GAAP core ROA	0.81	%	1.01	%	0.77	%	0.98	%	Non-GAAP core ROA	0.73	%	0.73	%

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Return on average equity (ROE) 9.59 % 11.42 % 8.75 % 11.27 %
Less: net securities gains, net of tax 0.40 % 0.05 % 0.23 % 0.09 %
Non-GAAP core ROE . 9.19 % 11.37 % 8.52 % 11.18 %

Table of Contents


	Three Months Ended March 31,
	2021		2020
Diluted EPS	$	0.49	$	0.43
Less: net securities gains, net of tax	0.02		—
Non-GAAP diluted core EPS	$	0.47	$	0.43

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Basic earnings per share (EPS) $ 0.53
$ 0.60
$ 0.97
$ 1.16
Less: net securities gains, net of tax 0.02
—
0.02
0.01
Non-GAAP core operating EPS $ 0.51
$ 0.60
$ 0.95
$ 1.15

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Diluted EPS $ 0.53
$ 0.60
$ 0.97
$ 1.16
Less: net securities gains, net of tax 0.02
—
0.02
0.01
Non-GAAP diluted core EPS $ 0.51
$ 0.60
$ 0.95
$ 1.15

Interest and Dividend Income

Interest and dividend income for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 decreased to ~~$16,044,000 and $32,205,000, respectively,~~$14,595,000 compared to ~~$16,841,000 and $33,275,000~~$16,161,000 for the same ~~periods~~period of ~~2019.~~2020 as the interest rate environment remains at a level below historical levels. Loan portfolio income decreased due to a ~~slight~~ decrease in average rate paid on loans and a decrease in the average loan portfolio balance. Investment securities and dividend 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 decrease in dividend and other interest income is due to a decrease in the amount of dividends received on restricted investment in bank stock held.

Interest and dividend income composition for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was as follows:

Three Months Ended
June 30, 2020 June 30, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Loans including fees $ 14,666
91.41 % $ 15,300
90.85 % $ (634 ) (4.14 ) %
Investment securities:

Taxable 1,023
6.38 967
5.74 56
5.79

Tax-exempt 169
1.05 179
1.06 (10 ) (5.59 )
Dividend and other interest income 186
1.16 395
2.35 (209 ) (52.91 )
Total interest and dividend income $ 16,044
100.00 % $ 16,841
100.00 % $ (797 ) (4.73 ) %


	Three Months Ended
	March 31, 2021				March 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	$	13,345	91.44	%	$	14,657	90.69	%	$	(1,312)	(8.95)	%
Investment securities:
Taxable	819		5.61		1,010		6.25		(191)		(18.91)
Tax-exempt	171		1.17		145		0.90		26		17.93
Dividend and other interest income	260		1.78		349		2.16		(89)		(25.50)
Total interest and dividend income	$	14,595	100.00	%	$	16,161	100.00	%	$	(1,566)	(9.69)	%

Six Months Ended
June 30, 2020 June 30, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Loans including fees $ 29,323
91.05 % $ 30,169
90.67 % $ (846 ) (2.80 ) %
Investment securities:

Taxable 2,033
6.31 1,901
5.71 132
6.94

Tax-exempt 314
0.98 353
1.06 (39 ) (11.05 )
Dividend and other interest income 535
1.66 852
2.56 (317 ) (37.21 )
Total interest and dividend income $ 32,205
100.00 % $ 33,275
100.00 % $ (1,070 ) (3.22 ) %

Interest Expense

Interest expense for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 decreased ~~$134,000 and increased $110,000, respectively,~~$1,475,000 compared to the same ~~periods of 2019. The increase in interest expense for the six month~~ period is the result of growth within the average interest-bearing deposit portfolio led by the use of the time deposit portfolio as part of a deposit acquisition strategy in select markets during the early part of the first quarter of 2020. ~~During the three months ended June 30,~~Since March 31, 2020, interest-bearing deposit rates ~~were~~have been significantly ~~reduced.~~reduced due to the economic impact of COVID-19 and increased level of excess balance sheet liquidity. The decrease in deposit rates was offset in part by a significant increase in average interest-bearing deposits. Long-term borrowings have been utilized to lock in funding ~~and~~at historically low interest rates and to assist with the funding of the loan and investment portfolios. ~~The deposit portfolio growth coupled with increased utilization of long-term borrowings has resulted in a significant reduction in the use of short-term borrowings.~~

~~Table of Contents~~

Interest expense composition for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was as follows:


	Three Months Ended															Three Months Ended
	June 30, 2020				June 30, 2019				Change							March 31, 2021				March 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount			%			(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	$	2,802	73.85	%	$	2,871	73.09	%	$	(69	)	(2.40	)	%	Deposits	$	1,684	66.69	%	$	3,035	75.88	%	$	(1,351)	(44.51)	%
Short-term borrowings	7		0.18		178		4.53		(171		)	(96.07	)		Short-term borrowings	2		0.08		22		0.55		(20)		(90.91)
Long-term borrowings	985		25.97		879		22.38		106			12.06			Long-term borrowings	839		33.23		943		23.58		(104)		(11.03)
Total interest expense	$	3,794	100.00	%	$	3,928	100.00	%	$	(134	)	(3.41	)	%	Total interest expense	$	2,525	100.00	%	$	4,000	100.01	%	$	(1,475)	(36.88)	%

The net interest margin (“NIM”) for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 was ~~3.01% and 3.09%, respectively,~~2.88% compared to ~~3.39% and 3.37%~~3.19% for the corresponding ~~periods~~period of ~~2019. The increase for the six month period was the result of the first quarter 2020 performance prior to the impact of the COVID-19 pandemic being felt.~~2020. The decrease in the net interest margin ~~for the three month period~~ was driven by a decrease in the yield ~~on earning assets~~ of 47the loan portfolio of 31 basis points ("bps") as, while the ~~economic impact of~~ the ~~COVID-19 pandemic drove loan and~~ investment ~~yields downward. In addition,~~portfolio yield declined 77 bps for the ~~balance~~three month period during the current low interest rate environment. The significant increase of interest-bearing deposits ~~increased~~further compressed the net interest margin. 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 liabilities were decreased significantly ~~as deposits swelled which limited the impact of the reduction~~since March 31, 2020 resulting in a decline in rate paid ~~on interest-bearing deposits that occurred during~~of 60 bps as compared to the three months ended ~~June 30,~~March 31, 2020.

securities sold under agreement to repurchase. These rate decreases partially offset the decline in earning asset yield.

The following is a schedule of average balances and associated yields for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~

2020:

AVERAGE BALANCES AND INTEREST RATES
Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
(In Thousands) Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate
Assets:

Tax-exempt loans (3)
$ 44,916
$ 348
3.12 % $ 71,193
$ 548
3.09 %
All other loans 1,294,745
14,391
4.47 % 1,313,388
14,867
4.54 %
Total loans (2)
1,339,661
14,739
4.43 % 1,384,581
15,415
4.47 %

Taxable securities 147,352
1,193
3.29 % 130,802
1,300
4.03 %
Tax-exempt securities (3)
28,280
213
3.06 % 27,971
227
3.29 %
Total securities 175,632
1,406
3.26 % 158,773
1,527
3.90 %

Interest-bearing deposits 144,948
16
0.04 % 10,431
62
2.38 %

Total interest-earning assets 1,660,241
16,161
3.92 % 1,553,785
17,004
4.39 %

Other assets 116,750

113,443

Total assets $ 1,776,991

$ 1,667,228

Liabilities and shareholders’ equity:

Savings $ 190,243
67
0.14 % $ 170,142
51
0.12 %
Super Now deposits 251,691
409
0.65 % 246,454
453
0.74 %
Money market deposits 229,362
418
0.73 % 249,169
596
0.96 %
Time deposits 362,545
1,908
2.12 % 335,721
1,771
2.12 %
Total interest-bearing deposits 1,033,841
2,802
1.09 % 1,001,486
2,871
1.15 %

Short-term borrowings 11,174
7
0.83 % 32,086
178
2.23 %
Long-term borrowings 171,895
985
2.21 % 147,571
879
2.24 %
Total borrowings 183,069
992
2.12 % 179,657
1,057
2.23 %

Total interest-bearing liabilities 1,216,910
3,794
1.24 % 1,181,143
3,928
1.31 %

Demand deposits 384,591

317,623

Other liabilities 18,583

19,747

Shareholders’ equity 156,907

148,715

Total liabilities and shareholders’ equity $ 1,776,991

$ 1,667,228

Interest rate spread

2.68 %

3.08 %
Net interest income/margin
$ 12,367
3.01 %
$ 13,076
3.39 %


	AVERAGE BALANCES AND INTEREST RATES
	Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:
Tax-exempt loans (3)	$	45,534	$	349	3.11	%	$	52,979	$	404	3.07	%
All other loans	1,293,395		13,069		4.10	%	1,303,838		14,338		4.42	%
Total loans (2)	1,338,929		13,418		4.06	%	1,356,817		14,742		4.37	%



Taxable securities	145,047		1,033		2.89	%	142,788		1,273		3.63	%
Tax-exempt securities	36,369		216		2.41	%	23,773		184		3.15	%
Total securities	181,416		1,249		2.79	%	166,561		1,457		3.56	%

Interest-bearing deposits	195,995		46		0.10	%	26,716		86		1.29	%

Total interest-earning assets	1,716,340		14,713		3.48	%	1,550,094		16,285		4.23	%

Other assets	124,074						112,219

Total assets	$	1,840,414					$	1,662,313

Liabilities and shareholders’ equity:
Savings	$	214,636	44		0.08	%	$	177,840	91		0.21	%
Super Now deposits	289,236		267		0.37	%	219,826		424		0.78	%
Money market deposits	306,000		267		0.35	%	210,708		477		0.91	%
Time deposits	254,460		1,106		1.76	%	379,259		2,043		2.17	%
Total interest-bearing deposits	1,064,332		1,684		0.64	%	987,633		3,035		1.24	%

Short-term borrowings	5,680		2		0.14	%	10,847		22		0.85	%
Long-term borrowings	141,483		839		2.40	%	159,920		943		2.37	%
Total borrowings	147,163		841		2.32	%	170,767		965		2.28	%

Total interest-bearing liabilities	1,211,495		2,525		0.85	%	1,158,400		4,000		1.39	%

Demand deposits	445,759						326,817
Other liabilities	22,872						19,991
Shareholders’ equity	160,288						157,105

Total liabilities and shareholders’ equity	$	1,840,414					$	1,662,313
Interest rate spread					2.63	%					2.84	%
Net interest income/margin			$	12,188	2.88	%			$	12,285	3.19	%

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 six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:

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 six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Three Months Ended June 30, Six Months Ended June 30,
2020 vs. 2019 2020 vs. 2019
Increase (Decrease) Due to Increase (Decrease) Due to
(In Thousands) Volume Rate Net Volume Rate Net
Interest income:

Tax-exempt loans $ (205 ) $ 5
$ (200 ) $ (364 ) $ 29
$ (335 )
All other loans (228 ) (248 ) (476 ) (250 ) (331 ) (581 )
Taxable investment securities 154
(261 ) (107 ) 315
(499 ) (184 )
Tax-exempt investment securities 3
(17 ) (14 ) (22 ) (28 ) (50 )
Interest bearing deposits 9
(55 ) (46 ) 10
(11 ) (1 )
Total interest-earning assets (267 ) (576 ) (843 ) (311 ) (840 ) (1,151 )

Interest expense:

Savings deposits 6
10
16
9
68
77
Super Now deposits 10
(54 ) (44 ) (11 ) 12
1
Money market deposits (45 ) (133 ) (178 ) (104 ) (69 ) (173 )
Time deposits 137
—
137
562
199
761
Short-term borrowings (87 ) (84 ) (171 ) (387 ) (367 ) (754 )
Long-term borrowings 118
(12 ) 106
150
48
198
Total interest-bearing liabilities 139
(273 ) (134 ) 219
(109 ) 110
Change in net interest income $ (406 ) $ (303 ) $ (709 ) $ (530 ) $ (731 ) $ (1,261 )

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 ~~June 30, 2020,~~March 31, 2021, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, 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 ~~$11,894,000~~$13,803,000 at December 31, ~~2019~~2020 to ~~$12,977,000~~$14,202,000 at ~~June 30, 2020.~~March 31, 2021. The increase in the allowance for loan losses was ~~allocated~~ primarily todriven by the ~~consumer automobile segment along with~~economic uncertainity caused by the ~~residential and commercial real estate mortgage segments. The majority of the loans charged-off during the three month period had a specific allowance within the allowance for losses.~~COVID-19 pandemic. At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the allowance for loan losses to total loans was ~~0.96%~~1.06% and ~~0.88%~~1.03%, respectively.

The provision for loan losses totaled ~~$645,000 and $1,395,000 for the~~$515,000 three ~~six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021 and the ~~amounts~~amount for the corresponding ~~2019 periods were $315,000 and $675,000.~~2020 period was $750,000. The ~~increase~~decrease in the provision for loan losses for the

three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the corresponding ~~2019 periods~~2020 period was the result of limited economic improvement and a decrease in the loan portfolio. The provision remained above historical levels, however, due to the continued economic ~~impact~~uncertainty caused by ~~the COVID-19 pandemic and the uncertainty for the future that it presents.~~COVID-19.

Nonperforming loans decreased to ~~$11,097,000~~$9,272,000 at ~~June 30, 2020~~March 31, 2021 from ~~$15,383,000~~$11,300,000 at ~~June 30, 2019.~~March 31, 2020. The majority of nonperforming loans ~~are centered on~~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 ~~0.82%~~0.69% and ~~1.12%~~0.84% at ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, and the ratio of the allowance for loan losses to nonperforming loans was ~~116.94%~~153.17% and ~~91.02%~~110.62% at ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. Internal loan review and analysis coupled with changes in the loan portfolio composition and the impact of the COVID-19 pandemic ~~dictated~~resulted in a provision for loan losses of ~~$1,395,000~~$515,000 for the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

The following is a table showing total nonperforming loans as of:

Total non-interest income for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the same ~~periods~~period in ~~2019 increased $152,000~~2020 decreased $177,000 to ~~$2,621,000 and $335,000 to $5,058,000, repectively.~~$2,614,000. Excluding net securities gains, non-interest income for the three ~~and six~~ months ended ~~June 30, 2020 decreased $21,000 and~~March 31, 2021 increased ~~$199,000, respectively,~~$85,000 compared to the same ~~periods~~period in ~~2019.~~2020. Gain on sale of loans increased as the low rate environment has led to an increase in refinancing activity. Service charges declined as the overdraft fee income has declined as a result of the impact of the COVID-19 pandemic. The decrease in brokerage commissions is due to a change in the product mix and reduced consumer activity during the COVID-19 pandemic. The ~~decrease~~increase in debit card fees is a result of ~~a decrease~~an increase in debit card ~~usage resulting from the impact of the COVID-19 pandemic.~~usage. The fluctuation in other income results primarily from other fees associated with loans sold on the secondary market.

Non-interest income composition for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was as follows:

Total non-interest expense decreased ~~$448,000 and $152,000 for the~~$159,000 three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the same ~~periods~~period of ~~2019.~~2020. The decrease in salaries and employee benefits is attributable to ~~employee layoffs~~a staff reduction resulting from a change in banking channels utilized by customers during ~~the three months ended June 30, 2020 due to~~ the COVID-19 pandemic. Furniture and equipment expenses ~~have increased~~decreased as maintenance costs have ~~increased~~decreased and ~~older equipment has been replaced.~~a decrease in the level of depreciation. Software amortization ~~increased due to updating software programs that require~~decreased as the number of vendors is being consolidated resulting in new licensing fee ~~structures. Marketing expenses decreased for the six month periosd as targeted direct mail marketing has replaced mass marketing.~~structures at a lower cost. The fluctuation in professional fees consists primarily of an decrease in legal fees. Occupancy expenses have increased primarily due to recently opened branches. Other expense decreased primarily from the change in expense associated with the defined benefit pension and ~~audit fees. The~~a decrease in ~~deposit insurance reflects~~ the ~~assessment credits issued by~~amortization of the ~~FDIC.~~low income housing partnerships.

Non-interest expense composition for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was as follows:

Income taxes increased ~~$92,000 and a decrease of $59,000~~$110,000 for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 compared to the same ~~periods~~period of ~~2019.~~2020. The effective tax rate for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 was ~~18.44% and 18.10%~~18.28% compared to ~~15.16% and 16.09%~~17.68% for the same period of ~~2019.~~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.

Cash and cash equivalents increased ~~$166,585,000~~$64,330,000 from ~~$48,589,000~~$213,358,000 at December 31, ~~2019~~2020 to ~~$215,174,000~~$277,688,000 at ~~June 30, 2020,~~March 31, 2021, primarily as a result of the following activities during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

Activity regarding loans held for sale resulted in sales proceeds ~~trailing~~being greater than loan originations, less ~~$1,472,000~~$908,000 in realized gains, by ~~$914,000~~$2,671,000 for the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

Gross loans decreased ~~$6,197,000~~$8,428,000 since December 31, ~~2019~~2020 due primarily to a decrease in both residential and commercial real estate mortgage ~~categories. The~~categories in addition to a decrease in the ~~real estate mortgage portfolio was~~consumer automobile loan segment of the portfolio. These decreases were partially offset by ~~the~~ growth in commercial, financial and agricultural ~~loans along with construction real estate mortgages and~~loans. The economic environment caused by the ~~consumer automobile~~COVID-19 pandemic has negatively impacted loan ~~segments.~~demand; however, demand has seen an uptick during the latter part of the first quarter of 2021.

The allocation of the loan portfolio, by category, as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 is presented below:

June 30, 2020 December 31, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Commercial, financial, and agricultural $ 168,904
12.52 % $ 156,213
11.52 % $ 12,691
8.12 %
Real estate mortgage:

Residential 606,214
44.93
623,256
45.98
(17,042 ) (2.73 )%
Commercial 352,530
26.13
363,261
26.80
(10,731 ) (2.95 )%
Construction 44,020
3.26
38,067
2.81
5,953
15.64 %
Consumer automobile loans 155,721
11.54
150,517
11.10
5,204
3.46 %
Other consumer installment loans 21,018
1.56
23,043
1.70
(2,025 ) (8.79 )%
Net deferred loan fees and discounts 940
0.06
1,187
0.09
(247 ) (20.81 )%
Gross loans $ 1,349,347
100.00 % $ 1,355,544
100.00 % $ (6,197 ) (0.46 )%

The following table shows the amount of accrual and non-accrual TDRs at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

The fair value of the investment debt securities portfolio at ~~June 30, 2020~~March 31, 2021 increased ~~$15,750,000~~$4,634,000 since December 31, ~~2019~~2020, while the amortized cost of the portfolio increased ~~$13,548,000.~~$6,683,000. The ~~growth~~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 was held constant. The municipal segment was increased as bonds with a final maturity of ~~approximately ten~~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 ~~78.92%~~82.79% 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 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 while the fair value ~~increased $30,000~~decreased $23,000 over the same time period.

The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at ~~June 30, 2020~~March 31, 2021 follows:

Total deposits increased ~~$150,300,000~~$69,921,000 from December 31, ~~2019~~2020 to ~~June 30, 2020.~~March 31, 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 ~~adverse~~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:

June 30, 2020 December 31, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Demand deposits $ 418,324
28.37 % $ 334,746
25.28 % $ 83,578
24.97 %
NOW accounts 268,348
18.20
218,605
16.51
49,743
22.75
Money market deposits 247,753
16.80
216,038
16.32
31,715
14.68
Savings deposits 195,964
13.29
176,732
13.35
19,232
10.88
Time deposits 343,916
23.34
377,884
28.54
(33,968 ) (8.99 )
Total deposits $ 1,474,305
100.00 % $ 1,324,005
100.00 % $ 150,300
11.35 %

Total borrowed funds ~~increased 12.09%~~decreased 6.91%, or ~~$20,178,000,~~$10,975,000, to ~~$187,018,000~~$147,744,000 at ~~June 30, 2020~~March 31, 2021 compared to ~~$166,840,000~~$158,719,000 at December 31, ~~2019.~~2020. The ~~increase~~decrease in long term borrowings occurred as a fixed rate ~~funding was obtained during this time of low interest rates.~~borrowing matured. Securities sold under agreement to repurchase have increased as customers balances have ~~increased.. The long-term borrowings originating during the six months ended June 30, 2020 have a blended interest rate of 1.60% and mature by 2025.~~increased.

June 30, 2020 December 31, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Short-term borrowings:

FHLB repurchase agreements $ —
— % $ —
— % $ —
n/a
Securities sold under agreement to repurchase 15,133
8.09
4,920
2.95
10,213
207.58
Total short-term borrowings 15,133
8.09
4,920
2.95
10,213
207.58
Long-term borrowings:
Long-term FHLB borrowings 166,333
88.93
156,333
93.70
10,000
6.40
Long-term finance lease 5,552
2.97
5,587
3.35
(35 ) (0.63 )
Total long-term borrowings 171,885
91.91
161,920
97.05
9,965
6.15
Total borrowed funds $ 187,018
100.00 % $ 166,840
100.00 % $ 20,178
12.09 %

Table of Contents

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)	March 31, 2021		December 31, 2020
Investment debt securities pledged, fair value	$	10,256	$	11,672
Repurchase agreements	6,650		5,244

Remaining Contractual Maturity Overnight and Continuous
(In Thousands) June 30, 2020 December 31, 2019
Investment debt securities pledged, fair value $ 17,853
$ 6,752
Repurchase agreements 15,133
4,920

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.

Table of Contents

The Company's capital ratios as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:


	June 30, 2020				December 31, 2019					March 31, 2021				December 31, 2020
(In Thousands)	Amount		Ratio		Amount		Ratio		(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)									Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	143,299	10.803	%	$	140,372	10.674	%	Actual	$	149,476	11.447	%	$	147,887	11.267	%
For Capital Adequacy Purposes	59,691		4.500		59,179		4.500		For Capital Adequacy Purposes	58,761		4.500		59,066		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	92,853		7.000		92,056		7.000		Minimum To Maintain Capital Conservation Buffer At Reporting Date	91,407		7.000		91,880		7.000
To Be Well Capitalized	86,221		6.500		85,480		6.500		To Be Well Capitalized	84,878		6.500		85,317		6.500
Total Capital (to Risk-weighted Assets)									Total Capital (to Risk-weighted Assets)
Actual	$	153,357	11.562	%	$	149,748	11.387	%	Actual	$	158,038	12.102	%	$	159,490	12.151	%
For Capital Adequacy Purposes	106,111		8.000		105,206		8.000		For Capital Adequacy Purposes	104,471		8.000		105,005		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	139,271		10.500		138,083		10.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	137,118		10.500		137,820		10.500
To Be Well Capitalized	132,639		10.000		131,508		10.000		To Be Well Capitalized	130,588		10.000		131,257		10.000
Tier I Capital (to Risk-weighted Assets)									Tier I Capital (to Risk-weighted Assets)
Actual	$	143,299	10.803	%	$	140,372	10.674	%	Actual	$	149,476	11.447	%	$	147,887	11.267	%
For Capital Adequacy Purposes	79,588		6.000		78,905		6.000		For Capital Adequacy Purposes	78,349		6.000		78,754		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	112,750		8.500		111,782		8.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	110,994		8.500		111,568		8.500
To Be Well Capitalized	106,118		8.000		105,207		8.000		To Be Well Capitalized	104,465		8.000		105,005		8.000
Tier I Capital (to Average Assets)									Tier I Capital (to Average Assets)
Actual	$	143,299	8.463	%	$	140,372	8.514	%	Actual	$	149,476	8.224	%	$	147,887	8.436	%
For Capital Adequacy Purposes	67,730		4.000		65,949		4.000		For Capital Adequacy Purposes	72,702		4.000		70,122		4.000
To Be Well Capitalized	84,662		5.000		82,436		5.000		To Be Well Capitalized	90,878		5.000		87,652		5.000

Jersey Shore State Bank's capital ratios as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:

June 30, 2020 December 31, 2019
(In Thousands) Amount Ratio Amount Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)

Actual $ 101,211
10.624 % $ 99,317
10.381 %
For Capital Adequacy Purposes 42,870
4.500
43,052
4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date 66,686
7.000
66,970
7.000
To Be Well Capitalized 61,923
6.500
62,187
6.500
Total Capital (to Risk-weighted Assets)

Actual $ 109,086
11.451 % $ 106,093
11.089 %
For Capital Adequacy Purposes 76,211
8.000
76,539
8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 100,026
10.500
100,458
10.500
To Be Well Capitalized 95,263
10.000
95,674
10.000
Tier I Capital (to Risk-weighted Assets) -

-

Actual $ 101,211
10.624 % $ 99,317
10.381 %
For Capital Adequacy Purposes 57,160
6.000
57,403
6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 80,976
8.500
81,321
8.500
To Be Well Capitalized 76,213
8.000
76,538
8.000
Tier I Capital (to Average Assets)

Actual $ 101,211
7.930 % $ 99,317
8.191 %
For Capital Adequacy Purposes 51,052
4.000
48,501
4.000
To Be Well Capitalized 63,815
5.000
60,626
5.000

Luzerne Bank's capital ratios as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:

June 30, 2020 December 31, 2019
(In Thousands) Amount Ratio Amount Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)

Actual $ 39,292
10.528 % $ 38,340
10.577 %
For Capital Adequacy Purposes 16,795
4.500
16,312
4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date 26,125
7.000
25,374
7.000
To Be Well Capitalized 24,259
6.500
23,562
6.500
Total Capital (to Risk-weighted Assets)

Actual $ 41,475
11.110 % $ 40,940
11.295 %
For Capital Adequacy Purposes 29,865
8.000
28,997
8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 39,198
10.500
38,058
10.500
To Be Well Capitalized 37,331
10.000
36,246
10.000
Tier I Capital (to Risk-weighted Assets)

Actual $ 39,292
10.528 % $ 38,340
10.577 %
For Capital Adequacy Purposes 22,393
6.000
21,749
6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 31,723
8.500
30,811
8.500
To Be Well Capitalized 29,857
8.000
28,999
8.000
Tier I Capital (to Average Assets)

Actual $ 39,292
8.295 % $ 38,340
8.653 %
For Capital Adequacy Purposes 18,947
4.000
17,723
4.000
To Be Well Capitalized 23,684
5.000
22,154
5.000

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 ~~June 30, 2020:~~March 31, 2021:

1. Net Loans to Total Assets, 85% maximum

2. Net Loans to Total Deposits, 100% maximum

3. Cumulative 90 day Maturity GAP %, +/- 20% maximum

4. Cumulative 1 Year Maturity GAP %, +/- 25% maximum

Fundamental objectives of the 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

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 ~~$595,158,000.~~$571,174,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $57,000,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled ~~$166,333,000~~$133,000,000 as of ~~June 30, 2020.~~March 31, 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.

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 ~~June 30, 2021~~March 31, 2022 assuming a static balance sheet as of ~~June 30, 2020.~~March 31, 2021.

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.

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.

~~COVID-19 Impact~~Paycheck Protection Program

The Company has undertaken various actions to maintain a safe work environment for employees during the pandemic, including supplying employees with hand sanitizer, face masks, disinfecting supplies, and gloves. The Company has also allowed approximately one-third of the workforce to work remotely in accordance with the Company’s pre-existing business continuity plans, while also maintaining data security and internal controls. Permitting employees to work remotely has allowed for increased social distancing capabilities within the Company’s buildings. To protect employees and customers and promote social distancing, branch lobbies were closed, other than by appointment, until early June at which time lobbies were reopened with sneeze guards in place and foot traffic being directed in a manner that encourages proper social distancing. During the lobby closure and continuing to today, drive-thru, mobile banking, and internet banking have become more popular channels for customers to complete transactions.

The change to a “drive-thru” only strategy until early June coupled with the mandated closure of nonessential businesses in Pennsylvania for a part of the second quarter led to a reduced workload in certain areas of the Company. As a result, approximately 80 employees were furloughed and other employees had their normal work week hours reduced. As businesses have been reopening, the Company has called back all but a few of the previously furloughed employees. Because the Company views its employees as a critical resource, it took certain steps to mitigate the negative impact on them of workforce disruption: for employees who were furloughed, the Company paid 100% of their health insurance premiums; employees who had hours reduced were paid based on their pre-reduction average normal working hours; and a bonus of $50 per week was paid to employees working in customer servicing areas.

The Company has focused on increasing balance sheet liquidity by means of increased levels of cash within the branches and ATMs, and within correspondent bank accounts. Deposit growth has provided liquidity as commercial customers received PPP funding, retail customers received stimulus funding, and customers became more risk averse and sought greater safety in bank deposits. In addition to the buildup in cash reserves, the Company has remaining borrowing capacity of approximately $650 million with the FHLB and other correspondent banks. The Company anticipates slowly reducing the amount of cash reserves as the economy is reopened and the rate of infections declines. The Company believes that it currently has sufficient liquidity to meet customer needs and the Company’s financial obligations based on present circumstances.

The mandated closure of nonessential businesses and the closure or limited access to many government offices, including court houses, during a portion of the second quarter, has limited the addition of new loans to the portfolio. Indirect auto lending was completely closed for several weeks beginning in late March 2020, and has only recently reopened on a full scale. Secondary mortgage market activity continues to flourish as individuals seek to refinance at historically low interest rates. As businesses begin to reopen, the Company anticipates utilizing its strong liquidity position to offer favorable lending terms to its customers to assist them in returning to normal operations and to grow their businesses.

The yield on the loan portfolio has declined, as the low rate environment has resulted in any new loans generated and any loans repricing to be at yields less than the historical average yield of the portfolio. The Company expects the loan portfolio yield to continue to decline due to the projected low rate environment caused by the COVID-19 pandemic. Looking forward, as in the past, the Company’s focus for building the loan portfolio will be on quality of the credit, not necessarily yield.

Loan modifications and payment deferrals have been at historical high levels as the impact of the pandemic continues. As of June 30, 2020 rate modifications or payment deferrals up to 90 days have been granted on loans with an aggregate balance of $241.6 million. Loan modifications met applicable requirements to not be considered troubled debt restructurings. The number of customers seeking loan modifications or payment deferrals may increase as the effects of the pandemic continue.

The Company has not to date experienced significant credit quality deterioration. However, the provision for loan losses for the three and six months ended June 30, 2020 was increased to $645,000 and $1.4 million (from $315,000 and $675,000 for the corresponding periods of 2019) and is expected to remain at levels above those historically reported. The increase in the provision for the three and six months ended June 30, 2020 is the result of the uncertainty surrounding the strength of the economy as businesses reopen and communities in general attempt to return to pre-pandemic life. From an industry concentration perspective, the Company has minimal exposure to the hospitality and travel industries, which have been greatly affected by the pandemic. The Company does, however, have some potential exposure to student housing in markets such as State College and Williamsport, Pennsylvania; this potential exposure continues to be monitored and to date has not resulted in any credit quality concerns.

The Company’s investment portfolio is weighted toward municipal bonds and, to a lesser extent, corporate bonds. The credit quality of the investment portfolio continues to be monitored for impairment. The reinvestment of cash flows from the investment portfolio is being focused primarily on bonds with solid credit quality and a final maturity before 2027. The Company continues to limit investments in equity securities due to the significant fluctuations in pricing, uncertain economic future, and the belief that the adverse impact of the COVID-19 pandemic may continue for some time.

The impact of the COVID-19 pandemic on the deposit portfolio has been lower rates with an increase in balances. Rates were significantly reduced toward the end of March and beginning April as the Federal Reserve took steps to mitigate the negative economic impact of the pandemic. Although rates have been reduced, in many cases the amount of the rate reduction on the deposit side has not coincided with the amount of rate reduction occurring within the loan portfolio because of the already historically low levels of deposit rates. In many cases, rates on non-maturity deposit products have reduced to levels below 10bps. Time deposits have experienced a significant reduction in rate, with rates for terms less than twelve months being below the current cost of overnight funding from the FHLB or other correspondent banks.

The deposit portfolio has experienced significant growth with a correlation drawn to the stimulus checks sent to certain taxpayers by the federal government under the CARES Act, PPP funding, and customers became more risk averse and sought safety in bank deposits . Although the stimulus checks provided funding, lower debit and credit card usage has resulted in fewer withdrawals from deposit accounts.

~~Net Interest Margin~~

For the reasons noted in the loan, investment, and deposit sections above, the Company anticipates that the net interest margin will compress as the COVID-19 pandemic continues. Although the Company has taken actions to lower the cost of funding, the yield on earning assets continues to decrease due to the volume of loan modifications and the historically low interest rate environment. As the impact of the COVID-19 pandemic lessens, the Company does not anticipate significant increases in the net interest margin quickly. The Company anticipates granting favorable lending terms to assist the economic recovery of the communities in which the Company operates, while anticipated competition for deposits is expected to increase in funding costs.

~~Non-Interest Income~~

Two areas of non-interest income have experienced a significant reduction during the six months ended June 30, 2020 due to the COVID-19 pandemic. Overdraft fees and debit card income have been reduced by approximately one-third. The mandated closure of nonessential businesses coupled with shelter in place orders during the end of the first quarter and into the second quarter have resulted in a reduction in the overall number and the amount of purchases by individuals. The Company anticipates that a return to historical levels for these two non-interest income items could be months after the COVID-19 pandemic wanes and consumer behavior may take significant time to return to normal. Buoying non-interest income during the six months ended June 30, 2020 was the gain on sale of loans as the volume of mortgage refinancing has increased due to the historically low rates. The Company has focused on its mortgage business line and anticipates the strong second quarter to continue into the third quarter in this business line due to the number of individuals expected to refinance existing mortgages.

~~Non-Interest Expense~~

The level of non-interest expense is not expected to change significantly due to the COVID-19 pandemic. Although the Company furloughed certain employees, any compensation expense savings was significantly offset by the Company’s paying 100% of the health insurance for furloughed employees and the weekly bonus being paid to customer service employees who remained working. Other expenses may remain above historical levels as items such as sanitizer, disinfectant, gloves, masks, sneeze guards, directional/social distancing signage, and other safety items continue to be purchased.

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, ~~2019.~~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.

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 ~~June 30, 2020.~~March 31, 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 ~~June 30, 2020~~March 31, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

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, 2019. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business. The risk factor set forth below supplements the risk factors set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.2020.

The continuing COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has materially and negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, increased unemployment levels, and decreased consumer confidence. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and other requirements in many states and communities, including in our primary market areas of Pennsylvania. As a result, the demand for our products and services may be significantly impacted, which could adversely affect our revenue. Federal Reserve actions to address the economic contraction caused by the COVID-19 pandemic, including the reduction in the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect our net interest income, net interest margins, and profitability. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold as well as reductions in other comprehensive income. Our business operations may be further disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.

Moreover, the pandemic has created additional operational and compliance risks, including the need to quickly implement and execute new programs and procedures for the products and services we offer our customers, provide enhanced safety measures for our employees and customers, comply with rapidly changing regulatory requirements, address any increased risk of fraudulent activity, and protect the integrity and functionality of our systems and networks as a larger number of our employees work remotely. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios and our cost of capital, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

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 ~~June 30, 2020.~~

March 31, 2021.



Period	Total 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 ~~(April~~(January 1 - ~~April 30, 2020)~~January 31, 2021)	—	—	—	513,669
Month #2 ~~(May~~(February 1 - ~~May 31, 2020)~~February 28, 2021)	—	—	—	513,669
Month #3 ~~(June~~(March 1 - ~~June 30, 2020)~~March 31, 2021)	—	—	—	513,669

On April ~~30, 2020,~~13, 2021, the Board of Directors ~~extended~~authorized the ~~previously approved authorization to~~ repurchase of up to ~~723,000~~353,000 shares, or approximately ~~10%~~5%, of the outstanding shares of the Company for ~~an additional~~a one year toperiod ending April 30, ~~2021. As of June 30, 2020 there have been 209,331 shares repurchased under this plan.~~2022.

~~Table of Contents~~

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Table of Contents

Item 6. Exhibits



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).
3(ii)						Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~period~~year ended ~~March~~December 31, 2020).
31(i)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
31(ii)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
32(i)						Section 1350 Certification of Chief Executive Officer.
32(ii)						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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019;~~2020; (ii) the Consolidated Statement of Income for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iii) Consolidated Statement of Comprehensive Income for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019;~~2020; (v) the Consolidated Statement of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ 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.

Table of Contents

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:	~~August~~May 10, ~~2020~~2021	/s/ Richard A. Grafmyre
		Richard A. Grafmyre, Chief Executive Officer
		(Principal Executive Officer)


Date:	~~August~~May 10, ~~2020~~2021	/s/ Brian L. Knepp
		Brian L. Knepp, President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting
		Officer)

Table of Contents

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 ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~period~~year ended ~~March~~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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019;~~2020; (ii) the Consolidated Statement of Income for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iii) Consolidated Statement of Comprehensive Income for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019;~~2020; (v) the Consolidated Statement of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ 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.

5646



	June 30,			December 31,
(In Thousands, Except Share Data)	2020			2019
ASSETS:
Noninterest-bearing balances	$	26,932		$	24,725
Interest-bearing balances in other financial institutions	188,242			23,864
Total cash and cash equivalents	215,174			48,589

Investment debt securities, available for sale, at fair value	164,369			148,619
Investment equity securities, at fair value	1,291			1,261
Investment securities, trading	37			51
Restricted investment in bank stock, at fair value	14,849			13,528
Loans held for sale	5,146			4,232
Loans	1,349,347			1,355,544
Allowance for loan losses	(12,977		)	(11,894		)
Loans, net	1,336,370			1,343,650
Premises and equipment, net	32,873			32,929
Accrued interest receivable	8,068			5,246
Bank-owned life insurance	29,368			29,253
Goodwill	17,104			17,104
Intangibles	777			898
Operating lease right-of-use asset	3,231			4,154
Deferred tax asset	3,284			3,338
Other assets	6,423			12,471
TOTAL ASSETS	$	1,838,364		$	1,665,323

LIABILITIES:
Interest-bearing deposits	$	1,055,981		$	989,259
Noninterest-bearing deposits	418,324			334,746
Total deposits	1,474,305			1,324,005

Short-term borrowings	15,133			4,920
Long-term borrowings	171,885			161,920
Accrued interest payable	1,530			1,671
Operating lease liability	3,263			4,170
Other liabilities	12,640			13,655
TOTAL LIABILITIES	1,678,756			1,510,341

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; 7,522,573 and 7,520,740 shares issued; 7,042,348 and 7,040,515 outstanding	41,792			41,782
Additional paid-in capital	51,956			51,487
Retained earnings	78,910			76,583
Accumulated other comprehensive loss:
Net unrealized gain on available for sale securities	4,194			2,455
Defined benefit plan	(5,159		)	(5,232		)
Treasury stock at cost, 480,225	(12,115		)	(12,115		)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY	159,578			154,960
Non-controlling interest	30			22
TOTAL SHAREHOLDERS' EQUITY	159,608			154,982
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,838,364		$	1,665,323



	Three Months Ended June 30, 2020									Three Months Ended June 30, 2019
(In Thousands)	Net Unrealized Gain (Loss) on Available for Sale Securities			Defined Benefit Plan			Total			Net Unrealized Gain on Available for Sale Securities		Defined Benefit Plan			Total
Beginning balance	$	2,986		$	(5,199	)	$	(2,213	)	$	197	$	(5,239	)	$	(5,042	)
Other comprehensive gain before reclassifications	1,355			—			1,355			2,221		—			2,221
Amounts reclassified from accumulated other comprehensive (loss) gain	(147		)	40			(107		)	1		37			38
Net current-period other comprehensive income	1,208			40			1,248			2,222		37			2,259
Ending balance	$	4,194		$	(5,159	)	$	(965	)	$	2,419	$	(5,202	)	$	(2,783	)



	Six Months Ended June 30, 2020									Six Months Ended June 30, 2019
(In Thousands)	Net Unrealized Gain (Loss) on Available for Sale Securities			Defined Benefit Plan			Total			Net Unrealized (Loss) Gain on Available for Sale Securities			Defined Benefit Plan			Total
Beginning balance	$	2,455		$	(5,232	)	$	(2,777	)	$	(1,360	)	$	(5,276	)	$	(6,636	)
Other comprehensive gain before reclassifications	1,903			—			1,903			3,788			—			3,788
Amounts reclassified from accumulated other comprehensive (loss) gain	(164		)	73			(91		)	(9		)	74			65
Net current-period other comprehensive income	1,739			73			1,812			3,779			74			3,853
Ending balance	$	4,194		$	(5,159	)	$	(965	)	$	2,419		$	(5,202	)	$	(2,783	)



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.


	Carrying		Fair		Fair Value Measurements at June 30, 2020							Carrying		Fair		Fair Value Measurements at March 31, 2021
(In Thousands)	Value		Value		Level I		Level II		Level III		(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:											Financial assets:
Cash and cash equivalents (1)	$	215,174	$	215,174	$	215,174	$	—	$	—	Cash and cash equivalents (1)	$	277,688	$	277,688	$	277,688	$	0	$	0

Restricted investment in bank stock (1)	14,849		14,849		14,849		—		—		Restricted investment in bank stock (1)	15,032		15,032		15,032		0		0
Loans held for sale (1)	5,146		5,146		5,146		—		—		Loans held for sale (1)	2,568		2,568		2,568		0		0
Loans, net	1,336,370		1,351,981		—		—		1,351,981		Loans, net	1,321,697		1,314,153		0		0		1,314,153
Bank-owned life insurance (1)	29,368		29,368		29,368		—		—		Bank-owned life insurance (1)	33,839		33,839		33,839		0		0
Accrued interest receivable (1)	8,068		8,068		8,068		—		—		Accrued interest receivable (1)	8,583		8,583		8,583		0		0

Financial liabilities:											Financial liabilities:
Interest-bearing deposits	$	1,055,981	$	1,092,886	$	712,065	$	—	$	380,821	Interest-bearing deposits	$	1,085,448	$	1,088,714	$	839,452	$	0	$	249,262
Noninterest-bearing deposits (1)	418,324		418,324		418,324		—		—		Noninterest-bearing deposits (1)	478,916		478,916		478,916		0		0
Short-term borrowings (1)	15,133		15,133		15,133		—		—		Short-term borrowings (1)	6,650		6,650		6,650		0		0
Long-term borrowings	171,885		178,332		—		—		178,332		Long-term borrowings	141,094		145,456		0		0		145,456
Accrued interest payable (1)	1,530		1,530		1,530		—		—		Accrued interest payable (1)	988		988		988		0		0



Stock Options Granted
Date	Shares	Forfeited		Outstanding	Strike Price		Vesting Period	Expiration
March 11, 2020	119,300	—		119,300	$	25.34	3 years	10 years
March 11, 2020	119,200	—		119,200	25.34		5 years	10 years
March 15, 2019	120,900	(1,950	)	118,950	28.01		3 years	10 years
March 15, 2019	119,100	(1,800	)	117,300	28.01		5 years	10 years
August 24, 2018	75,300	(1,950	)	73,350	30.67		3 years	10 years
August 24, 2018	149,250	(4,050	)	145,200	30.67		5 years	10 years
January 5, 2018	18,750	—		18,750	30.07		3 years	10 years
January 5, 2018	18,750	—		18,750	30.07		5 years	10 years
March 24, 2017	69,375	(6,750	)	62,625	29.47		3 years	10 years
March 24, 2017	35,625	—		35,625	29.47		5 years	10 years
August 27, 2015	58,125	(22,875	)	35,250	28.02		5 years	10 years



	Six Months Ended
	June 30, 2020				June 30, 2019				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount			%
Loans including fees	$	29,323	91.05	%	$	30,169	90.67	%	$	(846	)	(2.80	)	%
Investment securities:
Taxable	2,033		6.31		1,901		5.71		132			6.94
Tax-exempt	314		0.98		353		1.06		(39		)	(11.05	)
Dividend and other interest income	535		1.66		852		2.56		(317		)	(37.21	)
Total interest and dividend income	$	32,205	100.00	%	$	33,275	100.00	%	$	(1,070	)	(3.22	)	%


	Three Months Ended March 31,
	2021 vs. 2020
	Increase (Decrease) Due to
(In Thousands)		Volume		Rate		Net
Interest income:
Tax-exempt loans		$	(60)	$	5	$	(55)
All other loans		(126)		(1,143)		(1,269)

Taxable investment securities		21		(261)		(240)
Tax-exempt investment securities		83		(51)		32
Interest bearing deposits		103		(143)		(40)
Total interest-earning assets		21		(1,593)		(1,572)

Interest expense:
Savings deposits		17		(64)		(47)
Super Now deposits		110		(267)		(157)
Money market deposits		161		(371)		(210)
Time deposits		(595)		(342)		(937)
Short-term borrowings		(7)		(13)		(20)
Long-term borrowings		(116)		12		(104)
Total interest-bearing liabilities		(430)		(1,045)		(1,475)
Change in net interest income		$	451	$	(548)	$	(97)



	Three Months Ended June 30,									Six Months Ended June 30,
	2020 vs. 2019									2020 vs. 2019
	Increase (Decrease) Due to									Increase (Decrease) Due to
(In Thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Tax-exempt loans	$	(205	)	$	5		$	(200	)	$	(364	)	$	29		$	(335	)
All other loans	(228		)	(248		)	(476		)	(250		)	(331		)	(581		)
Taxable investment securities	154			(261		)	(107		)	315			(499		)	(184		)
Tax-exempt investment securities	3			(17		)	(14		)	(22		)	(28		)	(50		)
Interest bearing deposits	9			(55		)	(46		)	10			(11		)	(1		)
Total interest-earning assets	(267		)	(576		)	(843		)	(311		)	(840		)	(1,151		)

Interest expense:
Savings deposits	6			10			16			9			68			77
Super Now deposits	10			(54		)	(44		)	(11		)	12			1
Money market deposits	(45		)	(133		)	(178		)	(104		)	(69		)	(173		)
Time deposits	137			—			137			562			199			761
Short-term borrowings	(87		)	(84		)	(171		)	(387		)	(367		)	(754		)
Long-term borrowings	118			(12		)	106			150			48			198
Total interest-bearing liabilities	139			(273		)	(134		)	219			(109		)	110
Change in net interest income	$	(406	)	$	(303	)	$	(709	)	$	(530	)	$	(731	)	$	(1,261	)


								Total Nonperforming Loans
(In Thousands)							(In Thousands)	90 Days Past Due		Non-accrual		Total
March 31, 2021							March 31, 2021	$	607	$	8,665	$	9,272
December 31, 2020							December 31, 2020	1,212		9,122		10,334
September 30, 2020							September 30, 2020	791		9,762		10,553
June 30, 2020							June 30, 2020	1,279		9,818		11,097
March 31, 2020							March 31, 2020	1,503		9,797		11,300

	Total Nonperforming Loans
(In Thousands)	90 Days Past Due		Non-accrual		Total
June 30, 2020	$	1,279	$	9,818	$	11,097
March 31, 2020	1,503		9,797		11,300
December 31, 2019	2,047		10,374		12,421
September 30, 2019	1,304		15,904		17,208
June 30, 2019	1,245		14,138		15,383


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

Mortgage-backed securities	$	2,316	$	2,367	$	—	$	—	$	—	$	—	$	2,316	$	2,367	Mortgage-backed securities	$	1,792	7	$	1,796	$	—	$	—	$	—	$	—	$	1,792	$	1,796

State and political securities	89,813		94,867		1,380		1,399		1,016		998		92,209		97,264		State and political securities	107,656			111,126		1,320		1,435		686		691		109,662		113,252
Other debt securities	33,399		33,309		19,864		20,153		11,272		11,276		64,535		64,738		Other debt securities	25,473			25,543		12,101		12,301		13,949		14,003		51,523		51,847
Total debt securities AFS	$	125,528	$	130,543	$	21,244	$	21,552	$	12,288	$	12,274	$	159,060	$	164,369	Total debt securities AFS	$	134,921		$	138,465	$	13,421	$	13,736	$	14,635	$	14,694	$	162,977	$	166,895


	Parallel Rate Shock in Basis Points																					Parallel Rate Shock in Basis Points
(In Thousands)	-200			-100			Static		+100			+200			+300			+400			(In Thousands)	-200			-100			Static		+100			+200			+300			+400
Net interest income	$	42,788		$	45,827		$	48,205	$	48,806		$	49,439		$	49,754		$	50,000		Net interest income	$	44,892		$	47,706		$	50,894	$	54,615		$	58,324		$	61,773		$	65,193
Change from static	(5,417		)	(2,378		)	—		601			1,234			1,549			1,795			Change from static	(6,002)			(3,188)			—		3,721			7,430			10,879			14,299
Percent change from static	-11.24		%	-4.93		%	—		1.25		%	2.56		%	3.21		%	3.72		%	Percent change from static	-11.79		%	-6.26		%	—		7.31		%	14.60		%	21.38		%	28.10		%