UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

for the Quarterly Period Ended ~~September 30, 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.

(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) 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 ~~November~~May 1, 2020 there were ~~7,051,783~~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

Item 1.	Financial Statements	3

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

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

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

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

Consolidated Statement of Cash Flows (Unaudited) for the ~~Nine~~Three Months Ended ~~September~~ ~~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	5142

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	5243

Item 5.	Other Information	5243

Item 6.	Exhibits	5344

Signatures		5445

Exhibit Index and Exhibits		5546

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


		September 30,		December 31,			March 31,		December 31,
(In Thousands, Except Share Data)	(In Thousands, Except Share Data)	2020		2019		(In Thousands, Except Share Data)	2021		2020
ASSETS:	ASSETS:					ASSETS:
Noninterest-bearing balances	Noninterest-bearing balances	$	34,987	$	24,725	Noninterest-bearing balances	$	28,539	$	31,821
Interest-bearing balances in other financial institutions	Interest-bearing balances in other financial institutions	191,285		23,864		Interest-bearing balances in other financial institutions	249,149		181,537

Total cash and cash equivalents	Total cash and cash equivalents	226,272		48,589		Total cash and cash equivalents	277,688		213,358

Investment debt securities, available for sale, at fair value	Investment debt securities, available for sale, at fair value	149,675		148,619		Investment debt securities, available for sale, at fair value	166,895		162,261
Investment equity securities, at fair value	Investment equity securities, at fair value	1,291		1,261		Investment equity securities, at fair value	1,265		1,288
Investment securities, trading	Investment securities, trading	35		51		Investment securities, trading	44		40
Restricted investment in bank stock, at fair value	Restricted investment in bank stock, at fair value	15,006		13,528		Restricted investment in bank stock, at fair value	15,032		15,377
Loans held for sale	Loans held for sale	6,647		4,232		Loans held for sale	2,568		5,239
Loans	Loans	1,349,140		1,355,544		Loans	1,335,899		1,344,327
Allowance for loan losses	Allowance for loan losses	(13,429)		(11,894)		Allowance for loan losses	(14,202)		(13,803)
Loans, net	Loans, net	1,335,711		1,343,650		Loans, net	1,321,697		1,330,524
Premises and equipment, net	Premises and equipment, net	32,886		32,929		Premises and equipment, net	34,910		32,702
Accrued interest receivable	Accrued interest receivable	8,540		5,246		Accrued interest receivable	8,583		8,394
Bank-owned life insurance	Bank-owned life insurance	33,474		29,253		Bank-owned life insurance	33,839		33,638

Goodwill	Goodwill	17,104		17,104		Goodwill	17,104		17,104
Intangibles	Intangibles	724		898		Intangibles	618		671
Operating lease right-of-use asset	Operating lease right-of-use asset	3,184		4,154		Operating lease right-of-use asset	3,088		3,136
Deferred tax asset	Deferred tax asset	3,409		3,338		Deferred tax asset	3,717		2,526
Other assets	Other assets	6,821		12,471		Other assets	9,144		8,385
TOTAL ASSETS	TOTAL ASSETS	$	1,840,779	$	1,665,323	TOTAL ASSETS	$	1,896,192	$	1,834,643

LIABILITIES:	LIABILITIES:					LIABILITIES:
Interest-bearing deposits	Interest-bearing deposits	$	1,057,562	$	989,259	Interest-bearing deposits	$	1,085,448	$	1,045,086
Noninterest-bearing deposits	Noninterest-bearing deposits	434,248		334,746		Noninterest-bearing deposits	478,916		449,357
Total deposits	Total deposits	1,491,810		1,324,005		Total deposits	1,564,364		1,494,443

Short-term borrowings	Short-term borrowings	15,009		4,920		Short-term borrowings	6,650		5,244
Long-term borrowings	Long-term borrowings	153,534		161,920		Long-term borrowings	141,094		153,475
Accrued interest payable	Accrued interest payable	1,491		1,671		Accrued interest payable	988		1,112
Operating lease liability	Operating lease liability	3,219		4,170		Operating lease liability	3,130		3,175
Other liabilities	Other liabilities	13,287		13,655		Other liabilities	15,903		13,048
TOTAL LIABILITIES	TOTAL LIABILITIES	1,678,350		1,510,341		TOTAL LIABILITIES	1,732,129		1,670,497

SHAREHOLDERS’ EQUITY:	SHAREHOLDERS’ EQUITY:					SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; 0 shares issued	Preferred stock, no par value, 3,000,000 shares authorized; 0 shares issued	0		0		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; 7,527,605 and 7,520,740 shares issued; 7,047,380 and 7,040,515 outstanding		41,820		41,782
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						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	Additional paid-in capital	52,268		51,487		Additional paid-in capital	52,818		52,523
Retained earnings	Retained earnings	81,127		76,583		Retained earnings	83,948		82,769
Accumulated other comprehensive loss:	Accumulated other comprehensive loss:					Accumulated other comprehensive loss:
Net unrealized gain on available for sale securities	Net unrealized gain on available for sale securities	4,440		2,455		Net unrealized gain on available for sale securities	3,095		4,714
Defined benefit plan	Defined benefit plan	(5,118)		(5,232)		Defined benefit plan	(5,560)		(5,596)
Treasury stock at cost, 480,225	Treasury stock at cost, 480,225	(12,115)		(12,115)		Treasury stock at cost, 480,225	(12,115)		(12,115)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY	TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY	162,422		154,960		TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY	164,059		164,142
Non-controlling interest	Non-controlling interest	7		22		Non-controlling interest	4		4
TOTAL SHAREHOLDERS' EQUITY	TOTAL SHAREHOLDERS' EQUITY	162,429		154,982		TOTAL SHAREHOLDERS' EQUITY	164,063		164,146
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,840,779	$	1,665,323	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,896,192	$	1,834,643

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands, Except Per Share Data)	(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:									INTEREST AND DIVIDEND INCOME:
Loans, including fees	Loans, including fees	$	14,080	$	15,426	$	43,403	$	45,595	Loans, including fees		$	13,345	$	14,657
Investment securities:	Investment securities:									Investment securities:
Taxable	Taxable	925		998		2,958		2,899		Taxable		819		1,010
Tax-exempt	Tax-exempt	170		167		484		520		Tax-exempt		171		145
Dividend and other interest income	Dividend and other interest income	212		493		747		1,345		Dividend and other interest income		260		349
TOTAL INTEREST AND DIVIDEND INCOME	TOTAL INTEREST AND DIVIDEND INCOME	15,387		17,084		47,592		50,359		TOTAL INTEREST AND DIVIDEND INCOME		14,595		16,161
INTEREST EXPENSE:	INTEREST EXPENSE:									INTEREST EXPENSE:
Deposits	Deposits	2,569		3,165		8,406		8,336		Deposits		1,684		3,035
Short-term borrowings	Short-term borrowings	8		7		37		790		Short-term borrowings		2		22
Long-term borrowings	Long-term borrowings	965		1,009		2,893		2,739		Long-term borrowings		839		943
TOTAL INTEREST EXPENSE	TOTAL INTEREST EXPENSE	3,542		4,181		11,336		11,865		TOTAL INTEREST EXPENSE		2,525		4,000
NET INTEREST INCOME	NET INTEREST INCOME	11,845		12,903		36,256		38,494		NET INTEREST INCOME		12,070		12,161
PROVISION FOR LOAN LOSSES	PROVISION FOR LOAN LOSSES	645		360		2,040		1,035		PROVISION FOR LOAN LOSSES		515		750
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	11,200		12,543		34,216		37,459		NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,555		11,411
NON-INTEREST INCOME:	NON-INTEREST INCOME:									NON-INTEREST INCOME:
Service charges	Service charges	388		622		1,249		1,776		Service charges		383		549
Net debt securities gains, available for sale	Net debt securities gains, available for sale	1,013		189		1,220		200		Net debt securities gains, available for sale		138		21
Net equity securities (losses) gains	Net equity securities (losses) gains	0		(21)		30		44		Net equity securities (losses) gains		(23)		20
Net securities (losses) gains, trading		(2)		2		(16)		15
Net securities gains (losses), trading										Net securities gains (losses), trading		4		(14)
Bank-owned life insurance	Bank-owned life insurance	156		143		492		434		Bank-owned life insurance		173		192
Gain on sale of loans	Gain on sale of loans	1,449		583		2,921		1,246		Gain on sale of loans		908		444
Insurance commissions	Insurance commissions	101		93		320		346		Insurance commissions		157		127
Brokerage commissions	Brokerage commissions	224		353		779		1,032		Brokerage commissions		219		369
Debit card income	Debit card income	352		333		936		1,032		Debit card income		380		274
Other	Other	354		525		1,162		1,420		Other		275		455
TOTAL NON-INTEREST INCOME	TOTAL NON-INTEREST INCOME	4,035		2,822		9,093		7,545		TOTAL NON-INTEREST INCOME		2,614		2,437
NON-INTEREST EXPENSE:	NON-INTEREST EXPENSE:									NON-INTEREST EXPENSE:
Salaries and employee benefits	Salaries and employee benefits	5,465		5,488		16,362		16,512		Salaries and employee benefits		5,598		5,667
Occupancy	Occupancy	599		638		1,927		2,085		Occupancy		976		702
Furniture and equipment	Furniture and equipment	837		885		2,525		2,421		Furniture and equipment		809		860
Software amortization	Software amortization	257		234		743		629		Software amortization		198		250
Pennsylvania shares tax	Pennsylvania shares tax	340		285		948		863		Pennsylvania shares tax		352		285
Professional fees	Professional fees	608		585		1,888		1,834		Professional fees		583		622
Federal Deposit Insurance Corporation deposit insurance	Federal Deposit Insurance Corporation deposit insurance	271		0		650		504		Federal Deposit Insurance Corporation deposit insurance		221		194

Marketing	Marketing	61		98		170		233		Marketing		63		53
Intangible amortization	Intangible amortization	53		62		174		202		Intangible amortization		53		62
Other	Other	1,216		1,266		4,041		4,131		Other		1,098		1,415
TOTAL NON-INTEREST EXPENSE	TOTAL NON-INTEREST EXPENSE	9,707		9,541		29,428		29,414		TOTAL NON-INTEREST EXPENSE		9,951		10,110
INCOME BEFORE INCOME TAX PROVISION	INCOME BEFORE INCOME TAX PROVISION	5,528		5,824		13,881		15,590		INCOME BEFORE INCOME TAX PROVISION		4,218		3,738
INCOME TAX PROVISION	INCOME TAX PROVISION	1,051		1,170		2,563		2,741		INCOME TAX PROVISION		771		661
CONSOLIDATED NET INCOME	CONSOLIDATED NET INCOME	$	4,477	$	4,654	$	11,318	$	12,849	CONSOLIDATED NET INCOME		$	3,447	$	3,077
Less: Net income attributable to noncontrolling interest	Less: Net income attributable to noncontrolling interest	5		4		13		10		Less: Net income attributable to noncontrolling interest		6		4
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.	NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.	$	4,472	$	4,650	$	11,305	$	12,839	NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.		$	3,441	$	3,073
EARNINGS PER SHARE - BASIC	EARNINGS PER SHARE - BASIC	$	0.63	$	0.66	$	1.61	$	1.82	EARNINGS PER SHARE - BASIC		$	0.49	$	0.44
EARNINGS PER SHARE - DILUTED	EARNINGS PER SHARE - DILUTED	$	0.63	$	0.66	$	1.61	$	1.82	EARNINGS PER SHARE - DILUTED		$	0.49	$	0.43
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	7,045,336		7,037,055		7,042,578		7,036,181		WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC		7,055,116		7,040,740
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	7,045,336		7,037,055		7,042,578		7,036,181		WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED		7,055,116		7,102,990
DIVIDENDS DECLARED PER SHARE	DIVIDENDS DECLARED PER SHARE	$	0.32	$	0.31	$	0.96	$	0.94	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 September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)		2021		2020
Net Income	Net Income	$	4,472	$	4,650	$	11,305	$	12,839	Net Income		$	3,441	$	3,073
Other comprehensive income:
Change in unrealized gain on available for sale securities		1,324		1,261		3,733		6,056
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	Tax effect	(278)		(265)		(784)		(1,272)		Tax effect		401		(146)
Net realized gain on available for sale securities included in net income	Net realized gain on available for sale securities included in net income	(1,013)		(189)		(1,220)		(200)		Net realized gain on available for sale securities included in net income		(138)		(21)
Tax effect	Tax effect	213		40		256		42		Tax effect		29		4
Amortization of unrecognized pension gain	Amortization of unrecognized pension gain	52		46		144		140		Amortization of unrecognized pension gain		46		41
Tax effect	Tax effect	(11)		(9)		(30)		(29)		Tax effect		(10)		(8)
Total other comprehensive income		287		884		2,099		4,737
Total other comprehensive (loss) income										Total other comprehensive (loss) income		(1,583)		564
Comprehensive income	Comprehensive income	$	4,759	$	5,534	$	13,404	$	17,576	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)	(In Thousands, Except Per Share Data)	SHARES	AMOUNT										(In Thousands, Except Per Share Data)				SHARES							AMOUNT
Balance, June 30, 2020		7,522,573	$	41,792			$	51,956					$	78,910				$	(965)		$	(12,115)			$	30		$	159,608
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	Net income								4,472										5			4,477		Net income												3,441												6				3,447

Other comprehensive income											287											287
Other comprehensive loss																								Other comprehensive loss																(1,583)												(1,583)
Stock-based compensation	Stock-based compensation				239																	239		Stock-based compensation								220																				220
Dividends declared ($0.32 per share)	Dividends declared ($0.32 per share)								(2,255)													(2,255)		Dividends declared ($0.32 per share)												(2,262)																(2,262)
Common shares issued for employee stock purchase plan	Common shares issued for employee stock purchase plan	1,055	6		15																	21		Common shares issued for employee stock purchase plan			939			5		15																				20
Director Compensation Plan	Director Compensation Plan	3,977	22		58																	80		Director Compensation Plan			3,727			21		60																				81
Distributions to noncontrolling interest	Distributions to noncontrolling interest																		(28)			(28)		Distributions to noncontrolling interest																								(6)				(6)
Balance, September 30, 2020		7,527,605	$	41,820	$	52,268			$	81,127	$	(678)			$	(12,115)			$	7		$	162,429
Balance, March 31, 2021																								Balance, March 31, 2021			7,537,242			$	41,873	$	52,818			$	83,948			$	(2,465)			$	(12,115)			$	4			$	164,063


		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)	(In Thousands, Except Per Share Data)	SHARES	AMOUNT														(In Thousands, Except Per Share Data)				SHARES					AMOUNT
Balance, June 30, 2019		7,519,344	$	41,773			$	51,067					$	73,565			$	(2,783)				$	(12,115)		$	14	$	151,521
Balance, December 31, 2019																										Balance, December 31, 2019	7,520,740		$	41,782			$	51,487			$	76,583			$	(2,777)			$	(12,115)			$	22			$	154,982
Net income	Net income								4,650										4				4,654			Net income									3,073												4				3,077

Other comprehensive income	Other comprehensive income										884												884			Other comprehensive income													564												564
Stock-based compensation	Stock-based compensation				185																		185			Stock-based compensation					198																				198
Dividends declared ($0.31 per share)									(2,206)														(2,206)
Dividends declared ($0.32 per share)																										Dividends declared ($0.32 per share)									(2,253)																(2,253)
Common shares issued for employee stock purchase plan	Common shares issued for employee stock purchase plan	782	4		38																		42			Common shares issued for employee stock purchase plan	751		4		16																				20
Stock split fractional shares		(2,330)	(19)																				(19)

Balance, September 30, 2019		7,517,796	$	41,758	$	51,290			$	76,009	$	(1,899)			$	(12,115)			$	18			$	155,061

Balance, March 31, 2020																										Balance, March 31, 2020	7,521,491		$	41,786	$	51,701			$	77,403			$	(2,213)			$	(12,115)			$	26			$	156,588

~~Table of Contents~~

~~PENNS WOODS BANCORP, INC.~~

~~CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY~~

~~(UNAUDITED)~~

~~Nine months ended:~~

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
Balance, December 31, 2019 7,520,740 $ 41,782 $ 51,487 $ 76,583 $ (2,777) $ (12,115) $ 22 $ 154,982
Net income 11,305 13 11,318
Other comprehensive income 2,099 2,099
Stock-based compensation 675 675
Dividends declared ($0.96 per share) (6,761) (6,761)
Common shares issued for employee stock purchase plan 2,888 16 48 64
Director Compensation Plan 3,977 22 58 80
Distributions to noncontrolling interest (28) (28)
Balance, September 30, 2020 7,527,605 $ 41,820 $ 52,268 $ 81,127 $ (678) $ (12,115) $ 7 $ 162,429

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
Balance, December 31, 2018 7,517,547 $ 41,763 $ 50,737 $ 69,787 $ (6,636) $ (12,115) $ 8 $ 143,544
Net income 12,839 10 12,849
Other comprehensive income 4,737 4,737
Stock-based compensation 498 498
Dividends declared ($0.94 per share) (6,617) (6,617)
Common shares issued for employee stock purchase plan 2,579 14 55 69
Stock split fractional shares (2,330) (19) (19)
Balance, September 30, 2019 7,517,796 $ 41,758 $ 51,290 $ 76,009 $ (1,899) $ (12,115) $ 18 $ 155,061

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


		Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands)	(In Thousands)	2020		2019		(In Thousands)	2021		2020
OPERATING ACTIVITIES:	OPERATING ACTIVITIES:					OPERATING ACTIVITIES:
Net Income	Net Income	$	11,318	$	12,849	Net Income	$	3,447	$	3,077
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	2,310		1,904		Depreciation and amortization	839		760
Gain on sale of premise and equipment	Gain on sale of premise and equipment	(14)		0		Gain on sale of premise and equipment	0		(14)
Amortization of intangible assets	Amortization of intangible assets	174		202		Amortization of intangible assets	53		62
Provision for loan losses	Provision for loan losses	2,040		1,035		Provision for loan losses	515		750
Stock based compensation	Stock based compensation	675		498		Stock based compensation	220		198
Accretion and amortization of investment security discounts and premiums	Accretion and amortization of investment security discounts and premiums	382		499		Accretion and amortization of investment security discounts and premiums	251		171
Net securities gains, available for sale	Net securities gains, available for sale	(1,220)		(200)		Net securities gains, available for sale	(138)		(21)
Originations of loans held for sale	Originations of loans held for sale	(95,661)		(41,601)		Originations of loans held for sale	(26,658)		(14,977)
Proceeds of loans held for sale	Proceeds of loans held for sale	96,167		43,908		Proceeds of loans held for sale	30,237		15,359
Gain on sale of loans	Gain on sale of loans	(2,921)		(1,246)		Gain on sale of loans	(908)		(444)
Net equity securities gains		(30)		(44)
Net securities losses (gains), trading		16		(15)
Proceeds from the sale of trading securities		0		78
Purchases of trading securities		0		(74)
Net equity securities losses (gains)						Net equity securities losses (gains)	23		(20)
Net securities (gains) losses, trading						Net securities (gains) losses, trading	(4)		14

Earnings on bank-owned life insurance	Earnings on bank-owned life insurance	(492)		(434)		Earnings on bank-owned life insurance	(173)		(192)
(Increase) decrease in deferred tax asset		(599)		180

Increase in deferred tax asset						Increase in deferred tax asset	(761)		(84)
Proceeds on sales of investment securities receivable						Proceeds on sales of investment securities receivable	0		6,627
Other, net	Other, net	2,756		(1,766)		Other, net	2,447		(2,658)
Net cash provided by operating activities	Net cash provided by operating activities	14,901		15,773		Net cash provided by operating activities	9,390		8,608
INVESTING ACTIVITIES:	INVESTING ACTIVITIES:					INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities	Proceeds from sales of available for sale securities	37,252		16,289		Proceeds from sales of available for sale securities	11,372		2,774
Proceeds from calls and maturities of available for sale securities	Proceeds from calls and maturities of available for sale securities	567		3,089		Proceeds from calls and maturities of available for sale securities	3,428		2,598
Purchases of available for sale securities	Purchases of available for sale securities	(35,524)		(28,611)		Purchases of available for sale securities	(21,955)		(11,753)
Net decrease in loans	Net decrease in loans	5,692		18,625		Net decrease in loans	8,312		5,861
Acquisition of premises and equipment	Acquisition of premises and equipment	(2,830)		(1,798)		Acquisition of premises and equipment	(197)		(1,547)
Proceeds from the sale of premises and equipment	Proceeds from the sale of premises and equipment	336		0		Proceeds from the sale of premises and equipment	0		336
Proceeds from the sale of foreclosed assets	Proceeds from the sale of foreclosed assets	226		502		Proceeds from the sale of foreclosed assets	246		226
Purchase of bank-owned life insurance	Purchase of bank-owned life insurance	(3,970)		(30)		Purchase of bank-owned life insurance	(26)		(26)
Proceeds from bank-owned life insurance death benefit	Proceeds from bank-owned life insurance death benefit	248		0		Proceeds from bank-owned life insurance death benefit	0		248
Investment in limited partnership	Investment in limited partnership	(628)		0		Investment in limited partnership	(711)		(370)
Proceeds from redemption of regulatory stock	Proceeds from redemption of regulatory stock	2,881		13,659		Proceeds from redemption of regulatory stock	1,082		1,139
Purchases of regulatory stock	Purchases of regulatory stock	(4,359)		(8,299)		Purchases of regulatory stock	(737)		(2,222)
Net cash (used for) provided by investing activities		(109)		13,426
Net cash used for investing activities						Net cash used for investing activities	814		(2,736)
FINANCING ACTIVITIES:	FINANCING ACTIVITIES:					FINANCING ACTIVITIES:
Net increase in interest-bearing deposits	Net increase in interest-bearing deposits	68,303		105,989		Net increase in interest-bearing deposits	40,362		4,716
Net increase in noninterest-bearing deposits		99,502		6,515
Net increase (decrease) in noninterest-bearing deposits						Net increase (decrease) in noninterest-bearing deposits	29,559		(1,987)
Proceeds from long-term borrowings	Proceeds from long-term borrowings	35,000		50,000		Proceeds from long-term borrowings	0		35,000
Repayment of long-term borrowings	Repayment of long-term borrowings	(43,333)		(32,608)		Repayment of long-term borrowings	(15,000)		(25,000)
Net increase (decrease) in short-term borrowings		10,089		(161,878)
Net increase in short-term borrowings						Net increase in short-term borrowings	1,406		12,821
Finance lease principal payments	Finance lease principal payments	(53)		(70)		Finance lease principal payments	(34)		(17)
Dividends paid	Dividends paid	(6,761)		(6,617)		Dividends paid	(2,262)		(2,253)
Distributions to non-controlling interest						Distributions to non-controlling interest	(6)		0
Issuance of common stock	Issuance of common stock	144		69		Issuance of common stock	101		20

Net cash provided by (used for) financing activities		162,891		(38,600)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		177,683		(9,401)
Net cash provided by financing activities						Net cash provided by financing activities	54,126		23,300
NET INCREASE IN CASH AND CASH EQUIVALENTS						NET INCREASE IN CASH AND CASH EQUIVALENTS	64,330		29,172
CASH AND CASH EQUIVALENTS, BEGINNING	CASH AND CASH EQUIVALENTS, BEGINNING	48,589		66,742		CASH AND CASH EQUIVALENTS, BEGINNING	213,358		48,589
CASH AND CASH EQUIVALENTS, ENDING	CASH AND CASH EQUIVALENTS, ENDING	$	226,272	$	57,341	CASH AND CASH EQUIVALENTS, ENDING	$	277,688	$	77,761


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:	SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:					SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	Interest paid	$	11,516	$	11,349	Interest paid	$	2,649	$	4,036
Income taxes paid	Income taxes paid	2,375		3,125		Income taxes paid	0		0
Non-cash investing and financing activities:	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	Right-of-use lease assets obtained in exchange for lessee finance lease liabilities	0		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		0		4,298

Transfer of loans to foreclosed real estate	Transfer of loans to foreclosed real estate	207		525		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 ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ were as follows:

Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
(In Thousands) Net Unrealized Gain on Available
for Sale Securities Defined
Benefit
Plan Total Net Unrealized
Gain on Available
for Sale Securities Defined
Benefit
Plan Total
Beginning balance $ 4,194 $ (5,159) $ (965) $ 2,419 $ (5,202) $ (2,783)
Other comprehensive gain before reclassifications 1,046 0 1,046 996 0 996
Amounts reclassified from accumulated other comprehensive (loss) gain (800) 41 (759) (149) 37 (112)
Net current-period other comprehensive income 246 41 287 847 37 884
Ending balance $ 4,440 $ (5,118) $ (678) $ 3,266 $ (5,165) $ (1,899)


		Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019							Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
(In Thousands)	(In Thousands)	Net Unrealized Gain on Available for Sale Securities		Defined Benefit Plan		Total		Net Unrealized Gain on Available for Sale Securities		Defined Benefit Plan		Total		(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	Beginning balance	$	2,455	$	(5,232)	$	(2,777)	$	(1,360)	$	(5,276)	$	(6,636)	Beginning balance	$	4,714	$	(5,596)	$	(882)	$	2,455	$	(5,232)	$	(2,777)
Other comprehensive gain before reclassifications		2,949		0		2,949		4,784		0		4,784
Other comprehensive (loss) gain before reclassifications														Other comprehensive (loss) gain before reclassifications	(1,510)		0		(1,510)		548		0		548
Amounts reclassified from accumulated other comprehensive (loss) gain	Amounts reclassified from accumulated other comprehensive (loss) gain	(964)		114		(850)		(158)		111		(47)		Amounts reclassified from accumulated other comprehensive (loss) gain	(109)		36		(73)		(17)		33		16
Net current-period other comprehensive income		1,985		114		2,099		4,626		111		4,737
Net current-period other comprehensive (loss) income														Net current-period other comprehensive (loss) income	(1,619)		36		(1,583)		531		33		564

Ending balance	Ending balance	$	4,440	$	(5,118)	$	(678)	$	3,266	$	(5,165)	$	(1,899)	Ending balance	$	3,095	$	(5,560)	$	(2,465)	$	2,986	$	(5,199)	$	(2,213)

~~Table of Contents~~

The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of ~~September 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 September 30, 2020 Three Months Ended September 30, 2019
Net unrealized gain on available for sale securities $ 1,013 $ 189 Net debt securities gains (losses), available for sale
Income tax effect (213) (40) Income tax provision
Total reclassifications for the period $ 800 $ 149
Net unrecognized pension costs $ (52) $ (46) Salaries and employee benefits
Income tax effect 11 9 Income tax provision
Total reclassifications for the period $ (41) $ (37)


Details about Accumulated Other Comprehensive Loss Components	Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss				Affected Line Item in the Consolidated Statement of Income	Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss				Affected Line Item in the Consolidated Statement of Income
		Nine months ended September 30, 2020		Nine months ended September 30, 2019				Three months ended March 31, 2021		Three months ended March 31, 2020
Net unrealized gain on available for sale securities	Net unrealized gain on available for sale securities	$	1,220	$	200	Net debt securities gains, available for sale	Net unrealized gain on available for sale securities	$	138	$	21	Net debt securities gains, available for sale
Income tax effect	Income tax effect	(256)		(42)		Income tax provision	Income tax effect	(29)		(4)		Income tax provision
Total reclassifications for the period	Total reclassifications for the period	$	964	$	158		Total reclassifications for the period	$	109	$	17

Net unrecognized pension costs	Net unrecognized pension costs	$	(144)	$	(140)	Salaries and employee benefits	Net unrecognized pension costs	$	(46)	$	(41)	Other non-interest expense
Income tax effect	Income tax effect	30		29		Income tax provision	Income tax effect	10		8		Income tax provision
Total reclassifications for the period	Total reclassifications for the period	$	(114)	$	(111)		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. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ~~In November 2019, the FASB issued ASU 2019-10,~~ ~~Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)~~. This Update ~~defers the~~is effective ~~date 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. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill ~~Impairment~~.Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ~~In November 2019, the FASB issued ASU 2019-10,~~ ~~Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the~~The Update is 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 is not expected to have a significant impact on the Company’s financial statements.

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~~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, Derivatives, and Hedging (Topic 815),; and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ~~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. Topic 815, Derivatives and Hedging~~,~~amendments are effective for public business~~dates in ASU 2016-13. For entities ~~for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities,~~that have adopted ASU 2016-13, the amendments related to ASU 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~~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 interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10,~~ ~~Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)~~. This Update defers the effective date 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. ~~Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging 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.

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

~~In November 2019, the FASB issued ASU 2019-09,~~ ~~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 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~~

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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.

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 the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those ~~applicable for ASU 2019-10.~~fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

~~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 was 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, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

~~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), February 2020, 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. 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

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interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of ~~operations~~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 ~~2020-6,~~ 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 ~~864,300~~841,275 stock options, with an average exercise price of ~~$28.20,~~$28.17, outstanding on ~~September 30, 2020.~~March 31, 2021. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the three ~~and nine month periods~~period due to the average market price of common shares of ~~$20.84 and $24.20,~~$20.21, respectively, exceeding the exercise price of the options issued. There were a total of ~~635,550~~864,300 stock options, ~~outstanding for the same period end in 2019 that had~~with an average exercise price of ~~$29.30 and~~$29.20, outstanding on March 31, 2020. A portion of these options were ~~excluded,~~included, on a weighted average basis, in the computation of diluted earnings per share ~~because~~for the ~~quarterly~~period due to the average ~~closing~~ market price of common shares ~~was $28.44~~ of $29.57 exceeding the exercise price of the options issuedfor ~~the period.~~

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Weighted average common shares issued 7,525,561 7,517,280 7,522,803 7,516,406
Weighted average treasury stock shares (480,225) (480,225) (480,225) (480,225)
Weighted average common shares outstanding - basic 7,045,336 7,037,055 7,042,578 7,036,181
Dilutive effect of outstanding stock options 0 0 0 0
Weighted average common shares outstanding - basic and diluted 7,045,336 7,037,055 7,042,578 7,036,181

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

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Note 5. Investment Securities

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


		September 30, 2020									March 31, 2021
				Gross		Gross							Gross		Gross
		Amortized		Unrealized		Unrealized		Fair			Amortized		Unrealized		Unrealized		Fair
(In Thousands)	(In Thousands)	Cost		Gains		Losses		Value		(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):	Available for sale (AFS):									Available for sale (AFS):

Mortgage-backed securities	Mortgage-backed securities	$	2,267	$	25	$	0	$	2,292	Mortgage-backed securities	$	1,792	$	4	$	0	$	1,796

State and political securities	State and political securities	84,873		5,136		(13)		89,996		State and political securities	109,662		4,132		(542)		113,252
Other debt securities	Other debt securities	56,915		969		(497)		57,387		Other debt securities	51,523		740		(416)		51,847
Total debt securities	Total debt securities	$	144,055	$	6,130	$	(510)	$	149,675	Total debt securities	$	162,977	$	4,876	$	(958)	$	166,895

Investment equity securities:	Investment equity securities:									Investment equity securities:

Other equity securities	Other equity securities	$	1,300	$	11	$	(20)	$	1,291	Other equity securities	$	1,300	$	1	$	(36)	$	1,265

Trading:	Trading:									Trading:

Other equity securities	Other equity securities	$	50	$	0	$	(15)	$	35	Other equity securities	$	50	$	0	$	(6)	$	44


		December 31, 2019									December 31, 2020
				Gross		Gross							Gross		Gross
		Amortized		Unrealized		Unrealized		Fair			Amortized		Unrealized		Unrealized		Fair
(In Thousands)	(In Thousands)	Cost		Gains		Losses		Value		(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):	Available for sale (AFS):									Available for sale (AFS):

Mortgage-backed securities	Mortgage-backed securities	$	4,956	$	56	$	(46)	$	4,966	Mortgage-backed securities	$	2,118	$	23	$	0	$	2,141

State and political securities	State and political securities	79,064		3,299��		(77)		82,286		State and political securities	102,690		5,382		(59)		108,013
Other debt securities	Other debt securities	61,492		401		(526)		61,367		Other debt securities	51,486		828		(207)		52,107
Total debt securities	Total debt securities	$	145,512	$	3,756	$	(649)	$	148,619	Total debt securities	$	156,294	$	6,233	$	(266)	$	162,261

Investment equity securities:	Investment equity securities:									Investment equity securities:

Other equity securities	Other equity securities	$	1,300	$	0	$	(39)	$	1,261	Other equity securities	$	1,300	$	10	$	(22)	$	1,288

Trading:	Trading:									Trading:

Other equity securities	Other equity securities	$	50	$	3	$	(2)	$	51	Other equity securities	$	50	$	0	$	(10)	$	40

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.


		September 30, 2020													March 31, 2021
		Less than Twelve Months				Twelve Months or Greater				Total					Less than Twelve Months				Twelve Months or Greater				Total
				Gross				Gross				Gross					Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	(In Thousands)	Value		Losses		Value		Losses		Value		Losses		(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):	Available for sale (AFS):													Available for sale (AFS):

Mortgage-backed securities		$	0	$	0	$	0	$	0	$	0	$	0

State and political securities	State and political securities	4,179		(6)		904		(7)		5,083		(13)		State and political securities	$	27,816	$	(532)	$	897	$	(10)	$	28,713	$	(542)
Other debt securities	Other debt securities	9,682		(260)		3,271		(237)		12,953		(497)		Other debt securities	19,500		(289)		3,953		(127)		23,453		(416)
Total debt securities	Total debt securities	$	13,861	$	(266)	$	4,175	$	(244)	$	18,036	$	(510)	Total debt securities	$	47,316	$	(821)	$	4,850	$	(137)	$	52,166	$	(958)

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		December 31, 2019													December 31, 2020
		Less than Twelve Months				Twelve Months or Greater				Total					Less than Twelve Months				Twelve Months or Greater				Total
				Gross				Gross				Gross					Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	(In Thousands)	Value		Losses		Value		Losses		Value		Losses		(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):	Available for sale (AFS):													Available for sale (AFS):

Mortgage-backed securities		$	0	$	0	$	2,115	$	(46)	$	2,115	$	(46)

State and political securities	State and political securities	7,958		(40)		224		(37)		8,182		(77)		State and political securities	$	12,311	$	(51)	$	900	$	(8)	$	13,211	$	(59)
Other debt securities	Other debt securities	13,373		(216)		14,258		(310)		27,631		(526)		Other debt securities	5,964		(74)		4,429		(133)		10,393		(207)
Total debt securities	Total debt securities	$	21,331	$	(256)	$	16,597	$	(393)	$	37,928	$	(649)	Total debt securities	$	18,275	$	(125)	$	5,329	$	(141)	$	23,604	$	(266)

At ~~September 30, 2020,~~March 31, 2021, there were a total of 1862 securities in a continuous unrealized loss position for less than twelve months and 47 individual securities that were in a continuous unrealized loss position for twelve months or greater.

The Company reviews its position quarterly and has determined that, at ~~September 30, 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 ~~September 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)	(In Thousands)	Amortized Cost		Fair Value		(In Thousands)	Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	10,744	$	10,812	Due in one year or less	$	11,176	$	11,158
Due after one year to five years	Due after one year to five years	66,984		68,131		Due after one year to five years	71,403		72,665
Due after five years to ten years	Due after five years to ten years	56,013		60,132		Due after five years to ten years	70,964		73,612
Due after ten years	Due after ten years	10,314		10,600		Due after ten years	9,434		9,460
Total	Total	$	144,055	$	149,675	Total	$	162,977	$	166,895

Total gross proceeds from sales of debt securities available for sale for the three ~~and nine~~ months ended ~~September 30, 2020 were $32,089,000 and $37,252,000 respectively,~~March 31, 2021 was $11,372,000, compared to ~~2019 totals of $8,157,000 and 16,289,000.~~$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 September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)		2021		2020
Available for sale (AFS):	Available for sale (AFS):									Available for sale (AFS):
Gross realized gains:	Gross realized gains:									Gross realized gains:

Mortgage-backed securities		$	0	$	0	$	83	$	0

State and political securities	State and political securities	839		190		943		204		State and political securities		$	0	$	1
Other debt securities	Other debt securities	174		0		194		4		Other debt securities		138		20
Total gross realized gains	Total gross realized gains	$	1,013	$	190	$	1,220	$	208	Total gross realized gains		$	138	$	21

Gross realized losses:	Gross realized losses:									Gross realized losses:

State and political securities	State and political securities	$	0	$	1	$	0	$	3	State and political securities		$	0	$	0
Other debt securities	Other debt securities	0		0		0		5		Other debt securities		0		0
Total gross realized losses	Total gross realized losses	$	0	$	1	$	0	$	8	Total gross realized losses		$	0	$	0

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

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Investment securities with a carrying value of approximately ~~$124,542,000~~$109,699,000 and ~~$74,163,000~~$111,247,000 at ~~September 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.

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At ~~September 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 nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)		2021		2020
Net gains (losses) recognized in equity securities during the period(		$	0	$	(21)	$	30	$	44
Net (losses) gains recognized in equity securities during the period										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	Less: Net gains realized on the sale of equity securities during the period	0		0		0		0		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	Unrealized gains recognized in equity securities held at reporting date	$	0	$	(21)	$	30	$	44	Unrealized gains recognized in equity securities held at reporting date		$	(23)	$	20

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)		2021		2020
Net gains on sale transactions	Net gains on sale transactions	$	0	$	0	$	0	$	8	Net gains on sale transactions		$	0	$	0
Net mark-to-market (losses) gains		(2)		2		(16)		7
Net (loss) gain on trading account securities		$	(2)	$	2	$	(16)	$	15
Net mark-to-market gains (losses)										Net mark-to-market gains (losses)		4		(14)
Net gain (loss) on trading account securities										Net gain (loss) on trading account securities		$	4	$	(14)

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


		September 30, 2020											March 31, 2021
				Past Due		Past Due 90									Past Due		Past Due 90
				30 To 89		Days Or More		Non-							30 To 89		Days Or More		Non-
(In Thousands)	(In Thousands)	Current		Days		& Still Accruing		Accrual		Total		(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	Commercial, financial, and agricultural	$	171,344	$	245	$	0	$	1,565	$	173,154	Commercial, financial, and agricultural	$	181,171	$	23	$	2	$	863	$	182,059
Real estate mortgage:	Real estate mortgage:											Real estate mortgage:
Residential	Residential	590,275		2,581		595		1,667		595,118		Residential	575,008		2,513		476		1,739		579,736
Commercial	Commercial	348,644		429		196		6,452		355,721		Commercial	357,225		584		57		5,859		363,725
Construction	Construction	43,142		0		0		58		43,200		Construction	39,604		128		0		53		39,785
Consumer automobile loans	Consumer automobile loans	159,810		374		0		17		160,201		Consumer automobile loans	149,917		316		72		151		150,456
Other consumer installment loans	Other consumer installment loans	20,294		373		0		3		20,670		Other consumer installment loans	19,241		417		0		0		19,658
		1,333,509		$	4,002	$	791	$	9,762	1,348,064			1,322,166		$	3,981	$	607	$	8,665	1,335,419
Net deferred loan fees and discounts	Net deferred loan fees and discounts	1,076								1,076		Net deferred loan fees and discounts	480								480
Allowance for loan losses	Allowance for loan losses	(13,429)								(13,429)		Allowance for loan losses	(14,202)								(14,202)
Loans, net	Loans, net	$	1,321,156							$	1,335,711	Loans, net	$	1,308,444							$	1,321,697

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		December 31, 2019											December 31, 2020
				Past Due		Past Due 90									Past Due		Past Due 90
				30 To 89		Days Or More		Non-							30 To 89		Days Or More		Non-
(In Thousands)	(In Thousands)	Current		Days		& Still Accruing		Accrual		Total		(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	Commercial, financial, and agricultural	$	153,737	$	249	$	30	$	2,197	$	156,213	Commercial, financial, and agricultural	$	163,583	$	247	$	48	$	865	$	164,743
Real estate mortgage:	Real estate mortgage:											Real estate mortgage:
Residential	Residential	615,580		4,881		1,529		1,266		623,256		Residential	580,292		6,386		983		2,060		589,721
Commercial	Commercial	355,597		775		164		6,725		363,261		Commercial	366,363		533		150		6,142		373,188
Construction	Construction	37,871		131		0		65		38,067		Construction	38,587		667		0		55		39,309
Consumer automobile loans	Consumer automobile loans	149,703		709		0		105		150,517		Consumer automobile loans	155,472		900		31		0		156,403
Other consumer installment loans	Other consumer installment loans	22,124		579		324		16		23,043		Other consumer installment loans	19,485		455		0		0		19,940
		1,334,612		$	7,324	$	2,047	$	10,374	1,354,357			1,323,782		$	9,188	$	1,212	$	9,122	1,343,304
Net deferred loan fees and discounts	Net deferred loan fees and discounts	1,187								1,187		Net deferred loan fees and discounts	1,023								1,023
Allowance for loan losses	Allowance for loan losses	(11,894)								(11,894)		Allowance for loan losses	(13,803)								(13,803)
Loans, net	Loans, net	$	1,323,905							$	1,343,650	Loans, net	$	1,311,002							$	1,330,524

The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Three Months Ended September 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 $ 2 $ 14 $ 51 $ 49
Real estate mortgage:
Residential 14 2 76 76
Commercial 52 0 68 30
Construction 0 0 1 1
Consumer automobile loans 0 0 0 0
Other consumer installment loans 0 0 1 1
$ 68 $ 16 $ 197 $ 157


		Nine Months Ended September 30,									Three Months Ended March 31,
		2020				2019					2021				2020
(In Thousands)	(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	Commercial, financial, and agricultural	$	37	$	14	$	108	$	132	Commercial, financial, and agricultural	$	28	$	0	$	9	$	0
Real estate mortgage:	Real estate mortgage:									Real estate mortgage:
Residential	Residential	27		2		142		118		Residential	9		0		9		0
Commercial	Commercial	116		0		233		104		Commercial	30		0		42		0
Construction	Construction	1		0		3		3		Construction	1		0		0		0
Consumer automobile loans	Consumer automobile loans	2		3		3		2		Consumer automobile loans	0		0		2		0
Other consumer installment loans	Other consumer installment loans	3		0		2		1		Other consumer installment loans	0		0		0		0
		$	186	$	19	$	491	$	360		$	68	$	0	$	62	$	0

~~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.

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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.

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of ~~September 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

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September 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 0 0 —
Installment loans to individuals 0 0 —
10,298 13,085 —
With an allowance recorded:
Commercial, financial, and agricultural 15 15 0
Real estate mortgage:
Residential 1,272 1,272 187
Commercial 3,092 3,092 920
Construction 0 0 0
Consumer automobile loans 0 0 0
Installment loans to individuals 0 0 0
4,379 4,379 1,107
Total:
Commercial, financial, and agricultural 1,835 4,622 0
Real estate mortgage:
Residential 5,577 5,577 187
Commercial 7,205 7,205 920
Construction 60 60 0
Consumer automobile loans 0 0 0
Installment loans to individuals 0 0 0
$ 14,677 $ 17,464 $ 1,107

~~Table of Contents~~


		December 31, 2019							December 31, 2020
		Recorded		Unpaid Principal		Related			Recorded		Unpaid Principal		Related
(In Thousands)	(In Thousands)	Investment		Balance		Allowance		(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:	With no related allowance recorded:							With no related allowance recorded:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	$	2,285	$	5,072	$	—	Commercial, financial, and agricultural	$	865	$	3,652	$	—
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	5,008		5,008		—		Residential	5,023		5,023		—
Commercial	Commercial	5,035		5,035		—		Commercial	6,354		6,354		—
Construction	Construction	65		65		—		Construction	124		124		—
Consumer automobile loans	Consumer automobile loans	0		0		—		Consumer automobile loans	0		0		—
Installment loans to individuals	Installment loans to individuals	0		0		—		Installment loans to individuals	0		0		—
		12,393		15,180		—			12,366		15,153		—
With an allowance recorded:	With an allowance recorded:							With an allowance recorded:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	0		0		0		Commercial, financial, and agricultural	0		0		0
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	1,168		1,200		211		Residential	1,294		1,294		224
Commercial	Commercial	3,540		3,590		1,104		Commercial	3,023		3,023		811
Construction	Construction	0		0		0		Construction	0		0		0
Consumer automobile loans	Consumer automobile loans	130		130		62		Consumer automobile loans	0		0		0
Installment loans to individuals	Installment loans to individuals	16		16		16		Installment loans to individuals	0		0		0
		4,854		4,936		1,393			4,317		4,317		1,035
Total:	Total:							Total:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	2,285		5,072		0		Commercial, financial, and agricultural	865		3,652		0
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	6,176		6,208		211		Residential	6,317		6,317		224
Commercial	Commercial	8,575		8,625		1,104		Commercial	9,377		9,377		811
Construction	Construction	65		65		0		Construction	124		124		0
Consumer automobile loans	Consumer automobile loans	130		130		62		Consumer automobile loans	0		0		0
Installment loans to individuals	Installment loans to individuals	16		16		16		Installment loans to individuals	0		0		0
		$	17,247	$	20,116	$	1,393		$	16,683	$	19,470	$	1,035

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Three Months Ended September 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 $ 1,543 $ 33 $ 14 $ 5,236 $ 1 $ 49
Real estate mortgage:
Residential 5,117 63 2 5,006 26 76
Commercial 6,587 71 0 9,037 30 31
Construction 54 1 0 70 0 1
Consumer automobile 147 0 0 37 0 0
Other consumer installment loans 0 0 0 5 0 0
$ 13,448 $ 168 $ 16 $ 19,391 $ 57 $ 157


	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

2017

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Nine Months Ended September 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 $ 1,849 $ 34 $ 14 $ 5,269 $ 3 $ 131
Real estate mortgage:
Residential 5,535 177 2 4,584 81 115
Commercial 7,577 118 0 10,053 91 100
Construction 60 1 0 72 0 3
Consumer automobile 111 1 3 45 0 1
Other consumer installment loans 4 0 0 11 0 0
$ 15,136 $ 331 $ 19 $ 20,034 $ 175 $ 350

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 nine~~ months ended ~~September 30, 2020.~~March 31, 2021. There were 50 loan modifications considered TDRs completed during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. Loan modifications that are considered TDRs completed during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2021 were as follows:

Three Months Ended September 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 0 $ 0 $ 0
Real estate mortgage:
Residential 1 2,059 2,059
Commercial 0 0 0
1 $ 2,059 $ 2,059


			Nine Months Ended September 30,								Three Months Ended March 31,
		2019					2021
(In Thousands, Except Number of Contracts)	(In Thousands, Except Number of Contracts)			Number of Contracts	Pre-Modification Outstanding Recorded Investment			Post-Modification Outstanding Recorded Investment		(In Thousands, Except Number of Contracts)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural	Commercial, financial, and agricultural			2	$	4,014		$	4,014	Commercial, financial, and agricultural	0	$	0	$	0
Real estate mortgage:	Real estate mortgage:									Real estate mortgage:
Residential	Residential			1	2,059			2,059		Residential	1	687		687
Commercial	Commercial			2	2,862			2,862		Commercial	1	125		125
Construction										Construction	0	0		0
											2	$	812	$	812
				5	$	8,935		$	8,935

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 ~~September 30,~~March 31, 2020 that defaulted during the ~~nine~~three months ended ~~September 30,~~March 31, 2020. The defaulted loan types and recorded investments at ~~September~~

~~Table of Contents~~

~~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 September 30, 2019 that defaulted during the nine months ended September 30, 2019.~~$1,112,000.

Troubled debt restructurings amounted to ~~$12,218,000~~$13,294,000 and ~~$13,282,000~~$12,359,000 as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

The amount of foreclosed residential real estate held at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, totaled ~~$376,000~~$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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, totaled ~~$446,000~~$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 ~~September 30, 2020,~~March 31, 2021, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on ~~1,530~~1,365 loans with ~~1,395~~70 loans remaining in their deferral period with an aggregate outstanding balance of ~~$230,326,000.~~$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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


		September 30, 2020																												March 31, 2021
		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)	(In Thousands)			Residential				Commercial				Construction								Totals			(In Thousands)				Residential					Commercial		Construction						Totals
Pass	Pass			$	167,073			$	592,131			$	341,309			$	43,041				$	160,184		$	20,667			$	1,324,405		Pass	$	180,038	$	574,785	$	343,898	$	39,595		$	150,456	$	19,658	$	1,308,430
Special Mention	Special Mention	4,516				1,320				7,960				40				0			0			13,836		Special Mention				180		2,474		9,253		0		0			0		11,907
Substandard	Substandard	1,565				1,667				6,452				119				17			3			9,823		Substandard				1,841		2,477		10,574		190		0			0		15,082
		$	173,154			$	595,118			$	355,721			$	43,200			$	160,201		$	20,670		$	1,348,064					$	182,059	$	579,736	$	363,725	$	39,785	$	150,456		$	19,658	$	1,335,419

~~Table of Contents~~


		December 31, 2019																												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)	(In Thousands)			Residential				Commercial				Construction								Totals			(In Thousands)				Residential					Commercial		Construction						Totals
Pass	Pass			$	149,349			$	618,350			$	348,864			$	37,931				$	150,517		$	23,039			$	1,328,050		Pass	$	162,694	$	584,599	$	355,616	$	39,192		$	156,403	$	19,938	$	1,318,442
Special Mention	Special Mention	3,174				2,436				5,080				0				0			0			10,690		Special Mention				180		556		7,973		0		0			0		8,709
Substandard	Substandard	3,690				2,470				9,317				136				0			4			15,617		Substandard				1,869		4,566		9,599		117		0			2		16,153
		$	156,213			$	623,256			$	363,261			$	38,067			$	150,517		$	23,043		$	1,354,357					$	164,743	$	589,721	$	373,188	$	39,309	$	156,403		$	19,940	$	1,343,304

Allowance for Loan Losses

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

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

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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 nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:

Three Months Ended September 30, 2020
Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment
(In Thousands) Residential Commercial Construction Unallocated Totals
Beginning Balance $ 1,953 $ 4,478 $ 3,335 $ 150 $ 2,214 $ 127 $ 720 $ 12,977
Charge-offs 0 (6) 0 0 (200) (33) 0 (239)
Recoveries 9 1 0 0 10 26 0 46
Provision 17 (24) (290) 20 (27) 135 814 645
Ending Balance $ 1,979 $ 4,449 $ 3,045 $ 170 $ 1,997 $ 255 $ 1,534 $ 13,429


		Three Months Ended September 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)	(In Thousands)			Residential				Commercial				Construction								Unallocated			Totals		(In Thousands)				Residential					Commercial		Construction						Unallocated			Totals
Beginning Balance	Beginning Balance			$	1,584			$	5,749			$	3,523			$	132				$	1,435	$	240		$	1,338			$	14,001		Beginning Balance	$	1,936	$	4,460	$	3,635	$	134		$	1,906	$	261	$	1,471	$	13,803
Charge-offs	Charge-offs	0				(114)				0				0				(34)			(73)		0			(221)		Charge-offs				(35)		(14)		0		0		(96)			(29)		0		(174)
Recoveries	Recoveries	43				2				0				2				14			48		0			109		Recoveries				5		3		0		5		17			28		0		58
Provision	Provision	159				4				(12)				22				(41)			27		201			360		Provision				700		(48)		541		3		(92)			(25)		(564)		515
Ending Balance	Ending Balance	$	1,786			$	5,641			$	3,511			$	156			$	1,374		$	242	$	1,539		$	14,249	Ending Balance				$	2,606	$	4,401	$	4,176	$	142	$	1,735		$	235	$	907	$	14,202

t Nine Months Ended September 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) (174) 0 0 (289) (215) 0 (700)
Recoveries 32 48 0 5 17 93 0 195
Provision 190 269 (165) 47 489 99 1,111 2,040
Ending Balance $ 1,979 $ 4,449 $ 3,045 $ 170 $ 1,997 $ 255 $ 1,534 $ 13,429


		Nine Months Ended September 30, 2019																														Three Months Ended March 31, 2020
		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)	(In Thousands)			Residential				Commercial				Construction								Unallocated			Totals		(In Thousands)				Residential					Commercial		Construction						Unallocated			Totals
Beginning Balance	Beginning Balance			$	1,680			$	5,616			$	4,047			$	143				$	1,328	$	259		$	764			$	13,837		Beginning Balance	$	1,779	$	4,306	$	3,210	$	118		$	1,780	$	278	$	423	$	11,894
Charge-offs	Charge-offs	(80)				(251)				(150)				0				(172)			(235)		0			(888)		Charge-offs				(14)		(41)		0		0		(75)			(100)		0		(230)
Recoveries	Recoveries	84				3				1				10				74			93		0			265		Recoveries				21		21		0		2		1			41		0		86
Provision	Provision	102				273				(387)				3				144			125		775			1,035		Provision				111		251		204		40		149			48		(53)		750
Ending Balance	Ending Balance	$	1,786			$	5,641			$	3,511			$	156			$	1,374		$	242	$	1,539		$	14,249	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~~pandemic which has caused an increase in the ~~loan~~ provision ~~within~~to the ~~unallocated~~commericial segment ~~is the result~~ of the ~~uncertainty that has been caused by the COVID-19 pandemic.~~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 ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		September 30,					March 31,
		2020		2019			2021		2020
Owners of residential rental properties	Owners of residential rental properties	16.29	%	15.41	%	Owners of residential rental properties	16.73	%	16.04	%
Owners of commercial rental properties	Owners of commercial rental properties	12.98	%	12.19	%	Owners of commercial rental properties	13.66	%	12.53	%

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


		September 30, 2020																							March 31, 2021
		Commercial, Financial, and Agricultural			Real Estate Mortgages								Consumer Automobile		Other consumer installment			Unallocated							Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile			Other consumer installment		Unallocated
(In Thousands)	(In Thousands)			Residential			Commercial			Construction							Totals			(In Thousands)				Residential			Commercial		Construction						Totals
Allowance for Loan Losses:	Allowance for Loan Losses:																									Allowance for Loan Losses:
Ending allowance balance attributable to loans:	Ending allowance balance attributable to loans:																						Ending allowance balance attributable to loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	0		$	187		$	920		$	0	$	0	$	0		$	0		$	1,107	Individually evaluated for impairment		$	1	$	330	$	1,638	$	1	$	73		$	0	$	0	$	2,043
Collectively evaluated for impairment	Collectively evaluated for impairment	1,979			4,262			2,125			170		1,997		255			1,534			12,322		Collectively evaluated for impairment		2,605		4,071		2,538		141		1,662			235		907		12,159
Total ending allowance balance	Total ending allowance balance	$	1,979		$	4,449		$	3,045		$	170	$	1,997	$	255		$	1,534		$	13,429	Total ending allowance balance		$	2,606	$	4,401	$	4,176	$	142	$	1,735		$	235	$	907	$	14,202

Loans:	Loans:																						Loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	1,835		$	5,577		$	7,205		$	60	$	0	$	0					$	14,677	Individually evaluated for impairment		$	863	$	6,169	$	11,727	$	128	$	201		$	0			$	19,088

Collectively evaluated for impairment	Collectively evaluated for impairment	171,319			589,541			348,516			43,140		160,201		20,670						1,333,387		Collectively evaluated for impairment		181,196		573,567		351,998		39,657		150,255			19,658				1,316,331
Total ending loans balance	Total ending loans balance	$	173,154		$	595,118		$	355,721		$	43,200	$	160,201	$	20,670					$	1,348,064	Total ending loans balance		$	182,059	$	579,736	$	363,725	$	39,785	$	150,456		$	19,658			$	1,335,419


		December 31, 2019																							December 31, 2020
		Commercial, Financial, and Agricultural			Real Estate Mortgages								Consumer Automobile		Other consumer installment			Unallocated							Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile			Other consumer installment		Unallocated
(In Thousands)	(In Thousands)			Residential			Commercial			Construction							Totals			(In Thousands)				Residential			Commercial		Construction						Totals
Allowance for Loan Losses:	Allowance for Loan Losses:																									Allowance for Loan Losses:
Ending allowance balance attributable to loans:	Ending allowance balance attributable to loans:																						Ending allowance balance attributable to loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	0		$	211		$	1,104		$	0	$	62	$	16		$	0		$	1,393	Individually evaluated for impairment		$	0	$	224	$	811	$	0	$	0		$	0	$	0	$	1,035
Collectively evaluated for impairment	Collectively evaluated for impairment	1,779			4,095			2,106			118		1,718		262			423			10,501		Collectively evaluated for impairment		1,936		4,236		2,824		134		1,906			261		1,471		12,768
Total ending allowance balance	Total ending allowance balance	$	1,779		$	4,306		$	3,210		$	118	$	1,780	$	278		$	423		$	11,894	Total ending allowance balance		$	1,936	$	4,460	$	3,635	$	134	$	1,906		$	261	$	1,471	$	13,803

Loans:	Loans:																						Loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	2,285		$	6,176		$	8,575		$	65	$	130	$	16					$	17,247	Individually evaluated for impairment		$	865	$	6,317	$	9,377	$	124	$	0		$	0			$	16,683

Collectively evaluated for impairment	Collectively evaluated for impairment	153,928			617,080			354,686			38,002		150,387		23,027						1,337,110		Collectively evaluated for impairment		163,878		583,404		363,811		39,185		156,403			19,940				1,326,621
Total ending loans balance	Total ending loans balance	$	156,213		$	623,256		$	363,261		$	38,067	$	150,517	$	23,043					$	1,354,357	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 nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)		2021		2020

Interest cost	Interest cost	$	161	$	191	$	481	$	573	Interest cost		$	127	$	160
Expected return on plan assets	Expected return on plan assets	(330)		(248)		(956)		(746)		Expected return on plan assets		(386)		(318)

Amortization of net loss	Amortization of net loss	52		46		144		140		Amortization of net loss		46		41
Net periodic benefit	Net periodic benefit	$	(117)	$	(11)	$	(331)	$	(33)	Net periodic benefit		$	(213)	$	(117)

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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 ~~September 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 ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ there were ~~2,888~~939 and ~~2,579~~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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	March 31, 2021		December 31, 2020
Commitments to extend credit	Commitments to extend credit	$	189,556	$	187,778	Commitments to extend credit	$	216,331	$	198,512
Standby letters of credit	Standby letters of credit	10,186		9,638		Standby letters of credit	10,091		10,120
Credit exposure from the sale of assets with recourse	Credit exposure from the sale of assets with recourse	8,495		6,826		Credit exposure from the sale of assets with recourse	9,634		9,182
		$	208,237	$	204,242		$	236,056	$	217,814

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

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. 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.

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Note 10. Fair Value Measurements

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

~~Table of Contents~~


Level I:						Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:						Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:						Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of ~~September 30, 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.


		September 30, 2020									March 31, 2021
(In Thousands)	(In Thousands)	Level I		Level II		Level III		Total		(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:	Assets measured on a recurring basis:									Assets measured on a recurring basis:
Investment securities, available for sale:	Investment securities, available for sale:									Investment securities, available for sale:

Mortgage-backed securities	Mortgage-backed securities	$	0	$	2,292	$	0	$	2,292	Mortgage-backed securities	$	0	$	1,796	$	0	$	1,796

State and political securities	State and political securities	0		89,996		0		89,996		State and political securities	0		113,252		0		113,252
Other debt securities	Other debt securities	0		57,387		0		57,387		Other debt securities	0		51,847		0		51,847
Investment equity securities:	Investment equity securities:									Investment equity securities:

Other equity securities	Other equity securities	1,291		0		0		1,291		Other equity securities	1,265		0		0		1,265
Investment securities, trading:	Investment securities, trading:									Investment securities, trading:

Other equity securities	Other equity securities	35		0		0		35		Other equity securities	44		0		0		44


		December 31, 2019									December 31, 2020
(In Thousands)	(In Thousands)	Level I		Level II		Level III		Total		(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:	Assets measured on a recurring basis:									Assets measured on a recurring basis:
Investment securities, available for sale:	Investment securities, available for sale:									Investment securities, available for sale:

Mortgage-backed securities	Mortgage-backed securities	$	0	$	4,966	$	0	$	4,966	Mortgage-backed securities	$	0	$	2,141	$	0	$	2,141

State and political securities	State and political securities	0		82,286		0		82,286		State and political securities	0		108,013		0		108,013
Other debt securities	Other debt securities	0		61,367		0		61,367		Other debt securities	0		52,107		0		52,107
Investment equity securities:	Investment equity securities:									Investment equity securities:

Other equity securities	Other equity securities	1,261		0		0		1,261		Other equity securities	1,288		0		0		1,288
Investment securities, trading:	Investment securities, trading:									Investment securities, trading:

Other equity securities	Other equity securities	51		0		0		51		Other equity securities	40		0		0		40

Table of Contents

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of ~~September 30, 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.


		September 30, 2020									March 31, 2021
(In Thousands)	(In Thousands)	Level I		Level II		Level III		Total		(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:	Assets measured on a non-recurring basis:									Assets measured on a non-recurring basis:
Impaired loans	Impaired loans	$	0	$	0	$	12,910	$	12,910	Impaired loans	$	0	$	0	$	14,856	$	14,856
Other real estate owned	Other real estate owned	0		0		376		376		Other real estate owned	0		0		68		68

~~Table of Contents~~


		December 31, 2019									December 31, 2020
(In Thousands)	(In Thousands)	Level I		Level II		Level III		Total		(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:	Assets measured on a non-recurring basis:									Assets measured on a non-recurring basis:
Impaired loans	Impaired loans	$	0	$	0	$	15,854	$	15,854	Impaired loans	$	0	$	0	$	15,648	$	15,648
Other real estate owned	Other real estate owned	0		0		413		413		Other real estate owned	0		0		401		401

The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

September 30, 2020

March 31, 2021

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

5,604

Discounted cash flow

Temporary reduction in payment amount

3% to (59)%

(19)%

Impaired loans

10,231

Discounted cash flow

Temporary reduction in payment amount

3% to (63)%

(15)%

7,306

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(8)%

4,625

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(4)%

Other real estate owned

376

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

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

December 31, 2019

December 31, 2020

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

6,950

Discounted cash flow

Temporary reduction in payment amount

17% to (59)%

(24)%

Impaired loans

8,624

Discounted cash flow

Temporary reduction in payment amount

17% to (63)%

(18)%

8,904

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(9)%

7,024

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(8)%

Other real estate owned

413

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

Other real estate owned

401

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

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

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

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

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

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Note 11. Fair Value of Financial Instruments

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

~~Table of Contents~~

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

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

The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


		Carrying		Fair		Fair Value Measurements at September 30, 2020							Carrying		Fair		Fair Value Measurements at March 31, 2021
(In Thousands)	(In Thousands)	Value		Value		Level I		Level II		Level III		(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents (1)	Cash and cash equivalents (1)	$	226,272	$	226,272	$	226,272	$	0	$	0	Cash and cash equivalents (1)	$	277,688	$	277,688	$	277,688	$	0	$	0

Restricted investment in bank stock (1)	Restricted investment in bank stock (1)	15,006		15,006		15,006		0		0		Restricted investment in bank stock (1)	15,032		15,032		15,032		0		0
Loans held for sale (1)	Loans held for sale (1)	6,647		6,647		6,647		0		0		Loans held for sale (1)	2,568		2,568		2,568		0		0
Loans, net	Loans, net	1,335,711		1,401,625		0		0		1,401,625		Loans, net	1,321,697		1,314,153		0		0		1,314,153
Bank-owned life insurance (1)	Bank-owned life insurance (1)	33,474		33,474		33,474		0		0		Bank-owned life insurance (1)	33,839		33,839		33,839		0		0
Accrued interest receivable (1)	Accrued interest receivable (1)	8,540		8,540		8,540		0		0		Accrued interest receivable (1)	8,583		8,583		8,583		0		0

Financial liabilities:	Financial liabilities:											Financial liabilities:
Interest-bearing deposits	Interest-bearing deposits	$	1,057,562	$	1,123,505	$	807,449	$	0	$	316,056	Interest-bearing deposits	$	1,085,448	$	1,088,714	$	839,452	$	0	$	249,262
Noninterest-bearing deposits (1)	Noninterest-bearing deposits (1)	434,248		434,248		434,248		0		0		Noninterest-bearing deposits (1)	478,916		478,916		478,916		0		0
Short-term borrowings (1)	Short-term borrowings (1)	15,009		15,009		15,009		0		0		Short-term borrowings (1)	6,650		6,650		6,650		0		0
Long-term borrowings	Long-term borrowings	153,534		159,534		0		0		159,534		Long-term borrowings	141,094		145,456		0		0		145,456
Accrued interest payable (1)	Accrued interest payable (1)	1,491		1,491		1,491		0		0		Accrued interest payable (1)	988		988		988		0		0

(1) The financial instrument is carried at cost at ~~September 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 $ 0 $ 0
Restricted investment in bank stock (1) 13,528 13,528 13,528 0 0
Loans held for sale (1) 4,232 4,232 4,232 0 0
Loans, net 1,343,650 1,346,395 0 0 1,346,395
Bank-owned life insurance (1) 29,253 29,253 29,253 0 0
Accrued interest receivable (1) 5,246 5,246 5,246 0 0
Financial liabilities:
Interest-bearing deposits $ 989,259 $ 990,747 $ 611,374 $ 0 $ 379,373
Noninterest-bearing deposits (1) 334,746 334,746 334,746 0 0
Short-term borrowings (1) 4,920 4,920 4,920 0 0
Long-term borrowings 161,920 163,931 0 0 163,931
Accrued interest payable (1) 1,671 1,671 1,671 0 0

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	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 ~~September 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.

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Note 12. Stock Options

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 September 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.


Stock Options Granted	Stock Options Granted								Stock Options Granted
Date	Date	Shares	Forfeited	Outstanding	Strike Price		Vesting Period	Expiration	Date	Shares	Forfeited	Outstanding	Strike Price		Vesting Period	Expiration
March 11, 2020	March 11, 2020	119,300	0	119,300	$	25.34	3 years	10 years	March 11, 2020	119,300	0	119,300	$	25.31	3 years	10 years
March 11, 2020	March 11, 2020	119,200	0	119,200	25.34		5 years	10 years	March 11, 2020	119,200	0	119,200	25.31		5 years	10 years
March 15, 2019	March 15, 2019	120,900	(1,950)	118,950	28.01		3 years	10 years	March 15, 2019	120,900	(5,700)	115,200	28.01		3 years	10 years
March 15, 2019	March 15, 2019	119,100	(1,800)	117,300	28.01		5 years	10 years	March 15, 2019	119,100	(5,550)	113,550	28.01		5 years	10 years
August 24, 2018	August 24, 2018	75,300	(1,950)	73,350	30.67		3 years	10 years	August 24, 2018	75,300	(5,250)	70,050	30.67		3 years	10 years
August 24, 2018	August 24, 2018	149,250	(4,050)	145,200	30.67		5 years	10 years	August 24, 2018	149,250	(10,650)	138,600	30.67		5 years	10 years
January 5, 2018	January 5, 2018	18,750	0	18,750	30.07		3 years	10 years	January 5, 2018	18,750	0	18,750	30.07		3 years	10 years
January 5, 2018	January 5, 2018	18,750	0	18,750	30.07		5 years	10 years	January 5, 2018	18,750	0	18,750	30.07		5 years	10 years
March 24, 2017	March 24, 2017	69,375	(6,750)	62,625	29.47		3 years	10 years	March 24, 2017	69,375	(9,000)	60,375	29.47		3 years	10 years
March 24, 2017	March 24, 2017	35,625	0	35,625	29.47		5 years	10 years	March 24, 2017	35,625	(2,250)	33,375	29.47		5 years	10 years
August 27, 2015	August 27, 2015	58,125	(22,875)	35,250	28.02		5 years	10 years	August 27, 2015	58,125	(24,000)	34,125	28.02		5 years	10 years

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A summary of stock option activity is presented below:


		September 30, 2020			September 30, 2019				March 31, 2021			March 31, 2020
		Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price			Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding, beginning of year	Outstanding, beginning of year	625,800	$	29.29	395,550	$	30.08	Outstanding, beginning of year	841,275	$	28.17	625,800	$	29.29
Granted	Granted	238,500	25.34		240,000	28.01		Granted	0	0		238,500	25.34
Exercised	Exercised	0	0		0	0		Exercised	0	0		0	0
Forfeited	Forfeited	0	0		0	0		Forfeited	0	0		0	0
Expired	Expired	0	0		0	0		Expired	0	0		0	0
Outstanding, end of period	Outstanding, end of period	864,300	$	28.20	635,550	$	29.30	Outstanding, end of period	841,275	$	28.17	864,300	$	29.20

Exercisable, end of period	Exercisable, end of period	97,875	$	28.95	0	$	0	Exercisable, end of period	113,250	$	29.13	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 ~~$239,000 and $675,000~~$220,000 for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to ~~$185,000 and $498,000~~ $198,000for the same period of ~~2019.~~2020. As of ~~September 30, 2020,~~March 31, 2021, a total of ~~97,875~~113,250 stock options were exercisable and the weighted average years to expiration was ~~8.17 years~~7.69 years. ~~The~~

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~~fair value of options granted during the nine months ended September 30, 2020 was $1,343,000 or $5.63 per award.~~ Total unrecognized compensation cost for non-vested options was ~~$2,165,000~~$1,671,000 and will be recognized over their weighted average remaining vesting period of ~~1.45 years~~1.27 years.

Note 13. Leases

The following table shows finance lease right of use assets and finance lease liabilities as of:

(In Thousands)

Statement of Financial Condition classification

September 30, 2020

December 31, 2019

(In Thousands)

Statement of Financial Condition classification

March 31, 2021

December 31, 2020

Finance lease right of use assets

Premises and equipment, net

5,307

5,456

Finance lease right of use assets

Premises and equipment, net

7,758

5,257

Finance lease liabilities

Long-term borrowings

5,534

5,587

Finance lease liabilities

Long-term borrowings

8,094

5,475

The following table shows the components of finance and operating lease expense for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)		2021		2020

Finance Lease Cost:	Finance Lease Cost:									Finance Lease Cost:
Amortization of right-of-use asset	Amortization of right-of-use asset	$	50	$	65	$	150	$	194	Amortization of right-of-use asset		$	152	$	50
Interest expense	Interest expense	53		56		159		168		Interest expense		71		53
Operating lease cost	Operating lease cost	76		99		243		271		Operating lease cost		76		91

Variable lease cost	Variable lease cost	0		1		0		3		Variable lease cost		0		0
Total Lease Cost	Total Lease Cost	$	179	$	221	$	552	$	636	Total Lease Cost		$	299	$	194

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A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:


(In Thousands)	(In Thousands)	Operating		Finance		(In Thousands)	Operating		Finance
2020		$	71	$	70
2021	2021	291		282		2021	$	219	$	314
2022	2022	298		283		2022	298		419
2023	2023	273		284		2023	273		421
2024	2024	263		290		2024	262		427
2025 and thereafter		3,176		8,004
2025						2025	265		929
2026 and thereafter						2026 and thereafter	2,911		9,664
Total undiscounted cash flows	Total undiscounted cash flows	4,372		9,213		Total undiscounted cash flows	4,228		12,174
Discount on cash flows	Discount on cash flows	(1,153)		(3,679)		Discount on cash flows	(1,098)		(4,080)
Total lease liability	Total lease liability	$	3,219	$	5,534	Total lease liability	$	3,130	$	8,094

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


		Operating		Finance			Operating		Finance
Weighted-average term (years)	Weighted-average term (years)	18.4		27.4		Weighted-average term (years)	18.1		25.1
Weighted-average discount rate	Weighted-average discount rate	3.51	%	3.77	%	Weighted-average discount rate	3.51	%	3.19	%

Note 14. Reclassification of Comparative Amounts

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

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Note 15. Subsequent Events

All events subsequent to the date of the consolidated financial statements through ~~November 9, 2020,~~May 10, 2021, and for which U.S. GAAP requires adjustment or disclosure, have been adjusted or disclosed, including that the 2019 novel coronavirus (or COVID-19) has adversely affected, and may continue to adversely affect, economic activity globally, nationally, and locally. In response to COVID-19, among other things, the Company has incurred loan rate modifications and payment deferrals of up to 180 days. For further discussion, see COVID-19 Impact section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Note 16. Risks and Uncertainties

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

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CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; (vi) the length and extent of the economic contraction as a result of the COVID-19 pandemic; or (vii) the effect of changes in the business cycle and downturns in the local, regional or national economies; and (viii) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, ~~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.

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

EARNINGS SUMMARY

Comparison of the Three and ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

Summary Results

Net income for the three ~~and nine~~ months ended ~~September 30, 2020 were $4,472,000 and $11,305,000~~March 31, 2021 was $3,441,000 compared to ~~$4,650,000 and $12,839,000~~$3,073,000 for the same ~~periods~~period of ~~2019,~~2020. Results for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to ~~2019~~2020 were impacted by an increase in after-tax securities gains of ~~$665,000~~$72,000 (from a gain of ~~$134,000~~$22,000 to a gain of ~~$799,000) for the three month period and $770,000 (from a gain of $205,000 to a gain of $975,000) for the nine month period.~~$94,000). Basic and diluted earnings per share for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 were ~~$0.63 and $1.61, respectively,~~$0.49 compared to ~~the corresponding periods of 2019~~ basic and diluted earnings per share of ~~$0.66~~$0.44 and ~~$1.82.~~$0.43, respectively, for the corresponding period of 2020. Return on average assets and return on average equity were ~~0.97%~~0.75% and ~~11.05%~~8.59% for the three months ended ~~September 30, 2020~~March 31, 2021 compared to ~~1.10%~~0.74% and ~~12.18%~~7.83% for the corresponding period of ~~2019. Return on average assets and return on average equity were 0.85% and 9.57% for the nine months ended September 30, 2020 compared to 1.02% and 11.69% for the corresponding period of 2019.~~2020. Net income from core operations (“core earnings”) was ~~$3,673,000 and $10,330,000 for~~$3,347,000 the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021 compared to ~~$4,516,000 and $12,634,000~~$3,051,000 for the corresponding ~~periods~~period of ~~2019.~~2020. Core basic and diluted earnings per share for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 were ~~$0.52 and $1.47, respectively,~~$0.47 compared to ~~$0.64~~$0.44 and ~~$1.80~~$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)	(Dollars in Thousands, Except Per Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,				(Dollars in Thousands, Except Per Share Data)	Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
GAAP net income	GAAP net income	$	4,472	$	4,650	$	11,305	$	12,839	GAAP net income	$	3,441	$	3,073
Less: net securities gains, net of tax	Less: net securities gains, net of tax	799		134		975		205		Less: net securities gains, net of tax	94		22
Non-GAAP core earnings	Non-GAAP core earnings	$	3,673	$	4,516	$	10,330	$	12,634	Non-GAAP core earnings	$	3,347	$	3,051


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Return on average assets (ROA)	Return on average assets (ROA)	0.97	%	1.10	%	0.85	%	1.02	%	Return on average assets (ROA)	0.75	%	0.74	%
Less: net securities gains, net of tax	Less: net securities gains, net of tax	0.18	%	0.03	%	0.07	%	0.01	%	Less: net securities gains, net of tax	0.02	%	0.01	%
Non-GAAP core ROA	Non-GAAP core ROA	0.79	%	1.07	%	0.78	%	1.01	%	Non-GAAP core ROA	0.73	%	0.73	%


			Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended March 31,
			2020		2019		2020		2019				2021		2020
Return on average equity (ROE)	Return on average equity (ROE)		11.05	%	12.18	%	9.57	%	11.69	%	Return on average equity (ROE)		8.59	%	7.83	%
Less: net securities gains, net of tax	Less: net securities gains, net of tax		1.97	%	0.36	%	0.82	%	0.20	%	Less: net securities gains, net of tax		0.24	%	0.06	%
Non-GAAP core ROE	Non-GAAP core ROE	.	9.08	%	11.82	%	8.75	%	11.49	%	Non-GAAP core ROE	.	8.35	%	7.77	%


	Three Months Ended March 31,
	2021		2020
Basic earnings per share (EPS)	$	0.49	$	0.44
Less: net securities gains, net of tax	0.02		—
Non-GAAP core operating EPS	$	0.47	$	0.44

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Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Basic earnings per share (EPS) $ 0.63 $ 0.66 $ 1.61 $ 1.82
Less: net securities gains, net of tax 0.11 0.02 0.14 0.02
Non-GAAP core operating EPS $ 0.52 $ 0.64 $ 1.47 $ 1.80


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Diluted EPS	Diluted EPS	$	0.63	$	0.66	$	1.61	$	1.82	Diluted EPS	$	0.49	$	0.43
Less: net securities gains, net of tax	Less: net securities gains, net of tax	0.11		0.02		0.14		0.02		Less: net securities gains, net of tax	0.02		—
Non-GAAP diluted core EPS	Non-GAAP diluted core EPS	$	0.52	$	0.64	$	1.47	$	1.80	Non-GAAP diluted core EPS	$	0.47	$	0.43

Interest and Dividend Income

Interest and dividend income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 decreased to ~~$15,387,000 and $47,592,000, respectively,~~$14,595,000 compared to ~~$17,084,000 and $50,359,000~~$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 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 nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ was as follows:

Three Months Ended
September 30, 2020 September 30, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Loans including fees $ 14,080 91.51 % $ 15,426 90.30 % $ (1,346) (8.73) %
Investment securities:
Taxable 925 6.01 998 5.84 (73) (7.31)
Tax-exempt 170 1.10 167 0.98 3 1.80
Dividend and other interest income 212 1.38 493 2.88 (281) (57.00)
Total interest and dividend income $ 15,387 100.00 % $ 17,084 100.00 % $ (1,697) (9.93) %


		Nine Months Ended													Three Months Ended
		September 30, 2020				September 30, 2019				Change					March 31, 2021				March 31, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	Loans including fees	$	43,403	91.20	%	$	45,595	90.54	%	$	(2,192)	(4.81)	%	Loans including fees	$	13,345	91.44	%	$	14,657	90.69	%	$	(1,312)	(8.95)	%
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	2,958		6.21		2,899		5.76		59		2.04		Taxable	819		5.61		1,010		6.25		(191)		(18.91)
Tax-exempt	Tax-exempt	484		1.02		520		1.03		(36)		(6.92)		Tax-exempt	171		1.17		145		0.90		26		17.93
Dividend and other interest income	Dividend and other interest income	747		1.57		1,345		2.67		(598)		(44.46)		Dividend and other interest income	260		1.78		349		2.16		(89)		(25.50)
Total interest and dividend income	Total interest and dividend income	$	47,592	100.00	%	$	50,359	100.00	%	$	(2,767)	(5.49)	%	Total interest and dividend income	$	14,595	100.00	%	$	16,161	100.00	%	$	(1,566)	(9.69)	%

Interest Expense

Interest expense for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 decreased ~~$639,000 and $529,000, respectively,~~$1,475,000 compared to the same ~~periods~~period of ~~2019. During the three and nine months ended September 30,~~2020. Since March 31, 2020, interest-bearing deposit rates ~~were~~have been significantly ~~reduced. However,~~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 ~~deposit.~~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.

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

Three Months Ended
September 30, 2020 September 30, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Deposits $ 2,569 72.53 % $ 3,165 75.70 % $ (596) (18.83) %
Short-term borrowings 8 0.23 7 0.17 1 14.29
Long-term borrowings 965 27.24 1,009 24.13 (44) (4.36)
Total interest expense $ 3,542 100.00 % $ 4,181 100.00 % $ (639) (15.28) %


		Nine Months Ended													Three Months Ended
		September 30, 2020				September 30, 2019				Change					March 31, 2021				March 31, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	Deposits	$	8,406	74.15	%	$	8,336	70.26	%	$	70	0.84	%	Deposits	$	1,684	66.69	%	$	3,035	75.88	%	$	(1,351)	(44.51)	%
Short-term borrowings	Short-term borrowings	37		0.33		790		6.66		(753)		(95.32)		Short-term borrowings	2		0.08		22		0.55		(20)		(90.91)
Long-term borrowings	Long-term borrowings	2,893		25.52		2,739		23.08		154		5.62		Long-term borrowings	839		33.23		943		23.58		(104)		(11.03)
Total interest expense	Total interest expense	$	11,336	100.00	%	$	11,865	100.00	%	$	(529)	(4.46)	%	Total interest expense	$	2,525	100.00	%	$	4,000	100.01	%	$	(1,475)	(36.88)	%

Net Interest Margin

The net interest margin (“NIM”) for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 was ~~2.76% and 2.97%, respectively,~~2.88% compared to ~~3.32% and 3.34%~~3.19% for the corresponding ~~periods~~period of ~~2019.~~2020. The decrease in the net interest margin was driven by a decrease in the yield of the loan portfolio of ~~34 and 11~~31 basis points ("bps"), while the the investment portfolio yield declined ~~56 and 60~~77 bps ~~respectively,~~ for the three ~~and nine~~ month ~~periods~~period during the current low interest rate environment. ~~Further compressing the net interest margin was the~~The significant increase of interest-bearing ~~deposits.~~deposits 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

Table of Contents

customers have received stimulus funding. Rates paid on interest-bearing liabilities were decreased ~~over the three and nine months ended September 30,~~significantly since March 31, 2020 resulting in a decline in rate paid of ~~26 and 7~~60 bps as compared to the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020. The rate paid on short-term borrowings decreased significantly as the balance consists primarily of securities sold under agreement to repurchase. These rate decreases ~~will~~ partially offset the decline in earning asset yield.

~~Table of Contents~~

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

AVERAGE BALANCES AND INTEREST RATES
Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
(In Thousands) Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate
Assets:
Tax-exempt loans (3)
$ 42,047 $ 386 3.65 % $ 66,617 $ 505 3.04 %
All other loans 1,313,474 13,775 4.17 % 1,317,964 15,027 4.57 %
Total loans (2)
1,355,521 14,161 4.16 % 1,384,581 15,532 4.50 %
Taxable securities 140,695 1,116 3.23 % 137,394 1,284 3.79 %
Tax-exempt securities (3)
30,587 216 2.87 % 25,769 211 3.32 %
Total securities 171,282 1,332 3.16 % 163,163 1,495 3.72 %
Interest-bearing deposits 203,817 21 0.04 % 36,853 207 2.25 %
Total interest-earning assets 1,730,620 15,514 3.57 % 1,584,597 17,234 4.37 %
Other assets 121,901 101,318
Total assets $ 1,852,521 $ 1,685,915
Liabilities and shareholders’ equity:
Savings $ 199,420 51 0.10 % $ 169,628 66 0.16 %
Super Now deposits 273,190 489 0.71 % 232,918 481 0.83 %
Money market deposits 263,926 330 0.50 % 237,362 581 0.98 %
Time deposits 329,190 1,699 2.05 % 370,229 2,037 2.21 %
Total interest-bearing deposits 1,065,726 2,569 0.96 % 1,010,137 3,165 1.26 %
Short-term borrowings 17,517 8 0.18 % 7,990 7 0.35 %
Long-term borrowings 165,064 965 2.33 % 169,017 1,009 2.26 %
Total borrowings 182,581 973 2.12 % 177,007 1,016 2.18 %
Total interest-bearing liabilities 1,248,307 3,542 1.13 % 1,187,144 4,181 1.39 %
Demand deposits 424,753 324,940
Other liabilities 17,644 21,151
Shareholders’ equity 161,817 152,680
Total liabilities and shareholders’ equity $ 1,852,521 $ 1,685,915
Interest rate spread 2.44 % 2.98 %
Net interest income/margin $ 11,972 2.76 % $ 13,053 3.32 %

~~Table of Contents~~


		AVERAGE BALANCES AND INTEREST RATES													AVERAGE BALANCES AND INTEREST RATES
		Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019							Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
(In Thousands)	(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate		(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:	Assets:													Assets:
Tax-exempt loans (3)	Tax-exempt loans (3)	$	46,476	$	1,138	3.27	%	$	69,973	$	1,592	3.04	%	Tax-exempt loans (3)	$	45,534	$	349	3.11	%	$	52,979	$	404	3.07	%
All other loans	All other loans	1,304,207		42,504		4.35	%	1,315,022		44,337		4.51	%	All other loans	1,293,395		13,069		4.10	%	1,303,838		14,338		4.42	%
Total loans (2)	Total loans (2)	1,350,683		43,642		4.32	%	1,384,995		45,929		4.43	%	Total loans (2)	1,338,929		13,418		4.06	%	1,356,817		14,742		4.37	%

Taxable securities	Taxable securities	143,601		3,582		3.38	%	131,451		3,934		4.05	%	Taxable securities	145,047		1,033		2.89	%	142,788		1,273		3.63	%
Tax-exempt securities	Tax-exempt securities	27,558		613		3.02	%	26,813		658		3.32	%	Tax-exempt securities	36,369		216		2.41	%	23,773		184		3.15	%
Total securities	Total securities	171,159		4,195		3.32	%	158,264		4,592		3.92	%	Total securities	181,416		1,249		2.79	%	166,561		1,457		3.56	%

Interest-bearing deposits	Interest-bearing deposits	125,447		123		0.13	%	18,050		310		2.30	%	Interest-bearing deposits	195,995		46		0.10	%	26,716		86		1.29	%

Total interest-earning assets	Total interest-earning assets	1,647,289		47,960		3.89	%	1,561,309		50,831		4.36	%	Total interest-earning assets	1,716,340		14,713		3.48	%	1,550,094		16,285		4.23	%

Other assets	Other assets	116,868						109,278						Other assets	124,074						112,219

Total assets	Total assets	$	1,764,157					$	1,670,587					Total assets	$	1,840,414					$	1,662,313

Liabilities and shareholders’ equity:	Liabilities and shareholders’ equity:													Liabilities and shareholders’ equity:
Savings	Savings	$	189,205	209		0.15	%	$	168,909	147		0.12	%	Savings	$	214,636	44		0.08	%	$	177,840	91		0.21	%
Super Now deposits	Super Now deposits	248,327		1,322		0.71	%	236,965		1,313		0.74	%	Super Now deposits	289,236		267		0.37	%	219,826		424		0.78	%
Money market deposits	Money market deposits	234,772		1,225		0.70	%	242,630		1,649		0.91	%	Money market deposits	306,000		267		0.35	%	210,708		477		0.91	%
Time deposits	Time deposits	356,897		5,650		2.11	%	335,456		5,227		2.08	%	Time deposits	254,460		1,106		1.76	%	379,259		2,043		2.17	%
Total interest-bearing deposits	Total interest-bearing deposits	1,029,201		8,406		1.09	%	983,960		8,336		1.13	%	Total interest-bearing deposits	1,064,332		1,684		0.64	%	987,633		3,035		1.24	%

Short-term borrowings	Short-term borrowings	13,195		37		0.37	%	45,046		790		2.34	%	Short-term borrowings	5,680		2		0.14	%	10,847		22		0.85	%
Long-term borrowings	Long-term borrowings	165,702		2,893		2.33	%	153,684		2,739		2.24	%	Long-term borrowings	141,483		839		2.40	%	159,920		943		2.37	%
Total borrowings	Total borrowings	178,897		2,930		2.19	%	198,730		3,529		2.26	%	Total borrowings	147,163		841		2.32	%	170,767		965		2.28	%

Total interest-bearing liabilities	Total interest-bearing liabilities	1,208,098		11,336		1.25	%	1,182,690		11,865		1.32	%	Total interest-bearing liabilities	1,211,495		2,525		0.85	%	1,158,400		4,000		1.39	%

Demand deposits	Demand deposits	378,889						318,602						Demand deposits	445,759						326,817
Other liabilities	Other liabilities	19,682						22,705						Other liabilities	22,872						19,991
Shareholders’ equity	Shareholders’ equity	157,488						146,590						Shareholders’ equity	160,288						157,105

Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	1,764,157					$	1,670,587					Total liabilities and shareholders’ equity	$	1,840,414					$	1,662,313
Interest rate spread	Interest rate spread					2.64	%					3.04	%	Interest rate spread					2.63	%					2.84	%
Net interest income/margin	Net interest income/margin			$	36,624	2.97	%			$	38,966	3.34	%	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 nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(In Thousands)	(In Thousands)	2020		2019		2020		2019		(In Thousands)		2021		2020
Total interest income	Total interest income	$	15,387	$	17,084	$	47,592	$	50,359	Total interest income		$	14,595	$	16,161
Total interest expense	Total interest expense	3,542		4,181		11,336		11,865		Total interest expense		2,525		4,000
Net interest income	Net interest income	11,845		12,903		36,256		38,494		Net interest income		12,070		12,161
Tax equivalent adjustment	Tax equivalent adjustment	127		150		368		472		Tax equivalent adjustment		118		124
Net interest income (fully taxable equivalent)	Net interest income (fully taxable equivalent)	$	11,972	$	13,053	$	36,624	$	38,966	Net interest income (fully taxable equivalent)		$	12,188	$	12,285

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The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2020 vs. 2019						2020 vs. 2019							2021 vs. 2020
		Increase (Decrease) Due to						Increase (Decrease) Due to							Increase (Decrease) Due to
(In Thousands)	(In Thousands)	Volume		Rate		Net		Volume		Rate		Net		(In Thousands)		Volume		Rate		Net
Interest income:	Interest income:													Interest income:
Tax-exempt loans	Tax-exempt loans	$	(209)	$	90	$	(119)	$	(501)	$	47	$	(454)	Tax-exempt loans		$	(60)	$	5	$	(55)
All other loans	All other loans	(47)		(1,205)		(1,252)		(345)		(1,488)		(1,833)		All other loans		(126)		(1,143)		(1,269)

Taxable investment securities	Taxable investment securities	30		(198)		(168)		187		(539)		(352)		Taxable investment securities		21		(261)		(240)
Tax-exempt investment securities	Tax-exempt investment securities	37		(32)		5		8		(53)		(45)		Tax-exempt investment securities		83		(51)		32
Interest bearing deposits	Interest bearing deposits	182		(368)		(186)		1,305		(1,492)		(187)		Interest bearing deposits		103		(143)		(40)
Total interest-earning assets	Total interest-earning assets	(7)		(1,713)		(1,720)		654		(3,525)		(2,871)		Total interest-earning assets		21		(1,593)		(1,572)

Interest expense:	Interest expense:													Interest expense:
Savings deposits	Savings deposits	11		(26)		(15)		20		42		62		Savings deposits		17		(64)		(47)
Super Now deposits	Super Now deposits	81		(73)		8		43		(34)		9		Super Now deposits		110		(267)		(157)
Money market deposits	Money market deposits	59		(310)		(251)		(52)		(372)		(424)		Money market deposits		161		(371)		(210)
Time deposits	Time deposits	(205)		(133)		(338)		345		78		423		Time deposits		(595)		(342)		(937)
Short-term borrowings	Short-term borrowings	5		(4)		1		(344)		(409)		(753)		Short-term borrowings		(7)		(13)		(20)
Long-term borrowings	Long-term borrowings	(44)		—		(44)		101		53		154		Long-term borrowings		(116)		12		(104)
Total interest-bearing liabilities	Total interest-bearing liabilities	(93)		(546)		(639)		113		(642)		(529)		Total interest-bearing liabilities		(430)		(1,045)		(1,475)
Change in net interest income	Change in net interest income	$	86	$	(1,167)	$	(1,081)	$	541	$	(2,883)	$	(2,342)	Change in net interest income		$	451	$	(548)	$	(97)

Provision for Loan Losses

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

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

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at ~~September 30, 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 ~~$13,429,000~~$14,202,000 at ~~September 30, 2020.~~March 31, 2021. The increase in the allowance for loan losses was primarily driven by the economic uncertainity caused by the COVID-19 pandemic. At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the allowance for loan losses to total loans was ~~1.00%~~1.06% and ~~0.88%~~1.03%, respectively.

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The provision for loan losses totaled ~~$645,000 and $2,040,000 for the~~$515,000 three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021 and the ~~amounts~~amount for the corresponding ~~2019 periods were $360,000 and $1,035,000.~~2020 period was $750,000. The ~~increase~~decrease in the provision for loan losses for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the corresponding ~~2019 periods were primarily~~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 ~~$10,553,000~~$9,272,000 at ~~September 30, 2020~~March 31, 2021 from ~~$17,208,000~~$11,300,000 at ~~September 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 ~~0.77%~~0.69% and ~~1.26%~~0.84% at ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, and the ratio of the allowance for loan losses to nonperforming loans was ~~129.17%~~153.17% and ~~82.80%~~110.62% at ~~September 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 ~~$2,040,000~~$515,000 for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021.

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


		Total Nonperforming Loans							Total Nonperforming Loans
(In Thousands)	(In Thousands)	90 Days Past Due		Non-accrual		Total		(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	September 30, 2020	791		9,762		10,553
June 30, 2020	June 30, 2020	1,279		9,818		11,097		June 30, 2020	1,279		9,818		11,097
March 31, 2020	March 31, 2020	1,503		9,797		11,300		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

Non-interest Income

Total non-interest income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same ~~periods~~period in ~~2019 increased $1,213,000~~2020 decreased $177,000 to ~~$4,035,000 and $1,548,000 to $9,093,000, respectively.~~$2,614,000. Excluding net securities gains, non-interest income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 increased ~~$372,000 and increased $573,000, 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 nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ was as follows:


		Three Months Ended													Three Months Ended
		September 30, 2020				September 30, 2019				Change					March 31, 2021				March 31, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	Service charges	$	388	9.62	%	$	622	22.04	%	$	(234)	(37.62)	%	Service charges	$	383	14.65	%	$	549	22.53	%	$	(166)	(30.24)	%
Net debt securities gains, available for sale	Net debt securities gains, available for sale	1,013		25.11		189		6.70		824		(435.98)		Net debt securities gains, available for sale	138		5.28		21		0.86		117		(557.14)
Net equity securities (losses) gains	Net equity securities (losses) gains	—		—		(21)		(0.74)		21		100.00		Net equity securities (losses) gains	(23)		(0.88)		20		0.82		(43)		215.00
Net securities (losses) gains, trading		(2)		(0.05)		2		0.07		(4)		(200.00)
Net securities gains (losses), trading														Net securities gains (losses), trading	4		0.15		(14)		(0.57)		18		(128.57)
Bank-owned life insurance	Bank-owned life insurance	156		3.87		143		5.07		13		9.09		Bank-owned life insurance	173		6.62		192		7.88		(19)		(9.90)
Gain on sale of loans	Gain on sale of loans	1,449		35.91		583		20.66		866		148.54		Gain on sale of loans	908		34.74		444		18.22		464		104.50
Insurance commissions	Insurance commissions	101		2.50		93		3.30		8		8.60		Insurance commissions	157		6.01		127		5.21		30		23.62
Brokerage commissions	Brokerage commissions	224		5.55		353		12.51		(129)		(36.54)		Brokerage commissions	219		8.38		369		15.14		(150)		(40.65)
Debit card income	Debit card income	352		8.72		333		11.80		19		5.71		Debit card income	380		14.54		274		11.24		106		38.69
Other	Other	354		8.77		525		18.59		(171)		(32.57)		Other	275		10.51		455		18.67		(180)		(39.56)
Total non-interest income	Total non-interest income	$	4,035	100.00	%	$	2,822	100.00	%	$	1,213	42.98	%	Total non-interest income	$	2,614	100.00	%	$	2,437	100.00	%	$	177	7.26	%

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Nine Months Ended
September 30, 2020 September 30, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Service charges $ 1,249 13.74 % $ 1,776 23.54 % $ (527) (29.67) %
Net debt securities gains, available for sale 1,220 13.42 200 2.65 1,020 (510.00)
Net equity securities gains 30 0.33 44 0.58 (14) 31.82
Net securities (losses) gains, trading (16) (0.18) 15 0.20 (31) (206.67)
Bank-owned life insurance 492 5.41 434 5.75 58 13.36
Gain on sale of loans 2,921 32.12 1,246 16.51 1,675 134.43
Insurance commissions 320 3.52 346 4.59 (26) (7.51)
Brokerage commissions 779 8.57 1,032 13.68 (253) (24.52)
Debit card income 936 10.29 1,032 13.68 (96) (9.30)
Other 1,162 12.78 1,420 18.82 (258) (18.17)
Total non-interest income $ 9,093 100.00 % $ 7,545 100.00 % $ 1,548 20.52 %

Non-interest Expense

Total non-interest expense ~~increased $166,000 and $14,000 for the~~decreased $159,000 three ~~and nine~~ months ended ~~September 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 second and third quarters of 2020 due to~~ the COVID-19 pandemic. Furniture and equipment expenses ~~for the nine month period have increased~~decreased as maintenance costs have ~~increased~~decreased and ~~older equipment was 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 as targeted direct mail marketing has replaced mass marketing.~~structures at a lower cost. The fluctuation in professional fees consists primarily of an ~~increase~~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 increase~~a decrease in ~~deposit insurance reflects~~ the ~~assessment credits issued by~~amortization of the ~~FDIC during 2019.~~low income housing partnerships.

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

Three Months Ended
September 30, 2020 September 30, 2019 Change
(In Thousands) Amount % Total Amount % Total Amount %
Salaries and employee benefits $ 5,465 56.30 % $ 5,488 57.52 % $ (23) (0.42) %
Occupancy 599 6.17 638 6.69 (39) (6.11)
Furniture and equipment 837 8.62 885 9.28 (48) (5.42)
Software amortization 257 2.65 234 2.45 23 9.83
Pennsylvania shares tax 340 3.50 285 2.99 55 19.30
Professional fees 608 6.26 585 6.13 23 3.93
Federal Deposit Insurance Corporation deposit insurance 271 2.79 — — 271 #DIV/0!
Marketing 61 0.63 98 1.03 (37) (37.76)
Intangible amortization 53 0.55 62 0.65 (9) (14.52)
Other 1,216 12.53 1,266 13.26 (50) (3.95)
Total non-interest expense $ 9,707 100.00 % $ 9,541 100.00 % $ 166 1.74 %

~~Table of Contents~~


		Nine Months Ended													Three Months Ended
		September 30, 2020				September 30, 2019				Change					March 31, 2021				March 31, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	Salaries and employee benefits	$	16,362	55.60	%	$	16,512	56.14	%	$	(150)	(0.91)	%	Salaries and employee benefits	$	5,598	56.26	%	$	5,667	56.05	%	$	(69)	(1.22)	%
Occupancy	Occupancy	1,927		6.55		2,085		7.09		(158)		(7.58)		Occupancy	976		9.81		702		6.94		274		39.03
Furniture and equipment	Furniture and equipment	2,525		8.58		2,421		8.23		104		4.30		Furniture and equipment	809		8.13		860		8.51		(51)		(5.93)
Software amortization	Software amortization	743		2.52		629		2.14		114		18.12		Software amortization	198		1.99		250		2.47		(52)		(20.80)
Pennsylvania shares tax	Pennsylvania shares tax	948		3.22		863		2.93		85		9.85		Pennsylvania shares tax	352		3.54		285		2.82		67		23.51
Professional fees	Professional fees	1,888		6.42		1,834		6.24		54		2.94		Professional fees	583		5.86		622		6.15		(39)		(6.27)
Federal Deposit Insurance Corporation deposit insurance	Federal Deposit Insurance Corporation deposit insurance	650		2.21		504		1.71		146		28.97		Federal Deposit Insurance Corporation deposit insurance	221		2.22		194		1.92		27		13.92

Marketing	Marketing	170		0.58		233		0.79		(63)		(27.04)		Marketing	63		0.63		53		0.52		10		18.87
Intangible amortization	Intangible amortization	174		0.59		202		0.69		(28)		(13.86)		Intangible amortization	53		0.53		62		0.61		(9)		(14.52)
Other	Other	4,041		13.73		4,131		14.04		(90)		(2.18)		Other	1,098		11.03		1,415		14.01		(317)		(22.40)
Total non-interest expense	Total non-interest expense	$	29,428	100.00	%	$	29,414	100.00	%	$	14	0.05	%	Total non-interest expense	$	9,951	100.00	%	$	10,110	100.00	%	$	(159)	(1.57)	%

Provision for Income Taxes

Income taxes ~~decreased $119,000 and $178,000~~increased $110,000 for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same ~~periods~~period of ~~2019.~~2020. The effective tax rate for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 was ~~19.01% and 18.46%~~18.28% compared to ~~20.01% and 17.58%~~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.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents increased ~~$177,683,000~~$64,330,000 from ~~$48,589,000~~$213,358,000 at December 31, ~~2019~~2020 to ~~$226,272,000~~$277,688,000 at ~~September 30, 2020,~~March 31, 2021, primarily as a result of the following activities during the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds ~~trailing~~being greater than loan originations, less ~~$2,921,000~~$908,000 in realized gains, by ~~$2,415,000~~$2,671,000 for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021.

Loans

Gross loans decreased ~~$6,404,000~~$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.

4235

Table of Contents

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


		September 30, 2020				December 31, 2019				Change					March 31, 2021				December 31, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Commercial, financial, and agricultural	Commercial, financial, and agricultural	$	173,154	12.83	%	$	156,213	11.52	%	$	16,941	10.84	%	Commercial, financial, and agricultural	$	182,059	13.63	%	$	164,743	12.25	%	$	17,316	10.51	%
Real estate mortgage:	Real estate mortgage:													Real estate mortgage:
Residential	Residential	595,118		44.11		623,256		45.98		(28,138)		(4.51)	%	Residential	579,736		43.40		589,721		43.87		(9,985)		(1.69)	%
Commercial	Commercial	355,721		26.37		363,261		26.80		(7,540)		(2.08)	%	Commercial	363,725		27.23		373,188		27.76		(9,463)		(2.54)	%
Construction	Construction	43,200		3.20		38,067		2.81		5,133		13.48	%	Construction	39,785		2.98		39,309		2.92		476		1.21	%
Consumer automobile loans	Consumer automobile loans	160,201		11.87		150,517		11.10		9,684		6.43	%	Consumer automobile loans	150,456		11.26		156,403		11.63		(5,947)		(3.80)	%
Other consumer installment loans	Other consumer installment loans	20,670		1.53		23,043		1.70		(2,373)		(10.30)	%	Other consumer installment loans	19,658		1.47		19,940		1.48		(282)		(1.41)	%
Net deferred loan fees and discounts	Net deferred loan fees and discounts	1,076		0.09		1,187		0.09		(111)		(9.35)	%	Net deferred loan fees and discounts	480		0.03		1,023		0.09		(543)		(53.08)	%
Gross loans	Gross loans	$	1,349,140	100.00	%	$	1,355,544	100.00	%	$	(6,404)	(0.47)	%	Gross loans	$	1,335,899	100.00	%	$	1,344,327	100.00	%	$	(8,428)	(0.63)	%

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


		September 30, 2020						December 31, 2019							March 31, 2021						December 31, 2020
(In Thousands)	(In Thousands)	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total		(In Thousands)	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
Commercial, financial, and agricultural	Commercial, financial, and agricultural	$	1,493	$	69	$	1,562	$	—	$	2,190	$	2,190	Commercial, financial, and agricultural	$	926	$	860	$	1,786	$	988	$	862	$	1,850
Real estate mortgage:	Real estate mortgage:													Real estate mortgage:
Residential	Residential	4,020		—		4,020		4,089		144		4,233		Residential	4,241		758		4,999		3,889		90		3,979
Commercial	Commercial	5,904		732		6,636		2,127		4,732		6,859		Commercial	2,258		4,251		6,509		2,107		4,423		6,530

		$	11,417	$	801	$	12,218	$	6,216	$	7,066	$	13,282		$	7,425	$	5,869	$	13,294	$	6,984	$	5,375	$	12,359

Investments

The fair value of the investment debt securities portfolio at ~~September 30, 2020~~March 31, 2021 increased ~~$1,056,000~~$4,634,000 since December 31, ~~2019~~2020, while the amortized cost of the portfolio ~~decreased $1,457,000.~~increased $6,683,000. The ~~decrease~~increase in the investment portfolio amortized value occurred within the ~~mortgage-backed~~state and ~~other debt segments~~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 ~~reduced due to the negative economic impact of the COVID-19 pandemic.~~held constant. The municipal segment was increased as bonds with a final maturity of one to five years have been purchased. The portfolio continues to be actively managed in order to reduce interest rate and market risk. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately ~~71.03%~~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.

~~Table of Contents~~

The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at $1,300,000 for ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 while the fair value ~~increased $30,000~~decreased $23,000 over the same time period.

Table of Contents

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


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

Mortgage-backed securities	Mortgage-backed securities	$	2,267	7	$	2,292	$	—	$	—	$	—	$	—	$	2,267	$	2,292	Mortgage-backed securities	$	1,792	7	$	1,796	$	—	$	—	$	—	$	—	$	1,792	$	1,796

State and political securities	State and political securities	82,515			87,520		1,179		1,238		1,179		1,238		84,873		89,996		State and political securities	107,656			111,126		1,320		1,435		686		691		109,662		113,252
Other debt securities	Other debt securities	17,537			16,301		19,689		21,162		19,689		19,924		56,915		57,387		Other debt securities	25,473			25,543		12,101		12,301		13,949		14,003		51,523		51,847
Total debt securities AFS	Total debt securities AFS	$	102,319		$	106,113	$	20,868	$	22,400	$	20,868	$	21,162	$	144,055	$	149,675	Total debt securities AFS	$	134,921		$	138,465	$	13,421	$	13,736	$	14,635	$	14,694	$	162,977	$	166,895

Financing Activities

Deposits

Total deposits increased ~~$167,805,000~~$69,921,000 from December 31, ~~2019~~2020 to ~~September 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:


		September 30, 2020				December 31, 2019				Change					March 31, 2021				December 31, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Demand deposits	Demand deposits	$	434,248	29.11	%	$	334,746	25.28	%	$	99,502	29.72	%	Demand deposits	$	478,916	30.61	%	$	449,357	30.07	%	$	29,559	6.58	%
NOW accounts	NOW accounts	268,463		18.00		218,605		16.51		49,858		22.81		NOW accounts	290,355		18.56		287,775		19.26		2,580		0.90
Money market deposits	Money market deposits	274,480		18.40		216,038		16.32		58,442		27.05		Money market deposits	324,207		20.72		283,742		18.99		40,465		14.26
Savings deposits	Savings deposits	202,781		13.59		176,732		13.35		26,049		14.74		Savings deposits	224,890		14.38		209,924		14.05		14,966		7.13
Time deposits	Time deposits	311,838		20.90		377,884		28.54		(66,046)		(17.48)		Time deposits	245,996		15.73		263,645		17.63		(17,649)		(6.69)
Total deposits	Total deposits	$	1,491,810	100.00	%	$	1,324,005	100.00	%	$	167,805	12.67	%	Total deposits	$	1,564,364	100.00	%	$	1,494,443	100.00	%	$	69,921	4.68	%

Borrowed Funds

Total borrowed funds ~~increased 1.02%~~decreased 6.91%, or ~~$1,703,000,~~$10,975,000, to ~~$168,543,000~~$147,744,000 at ~~September 30, 2020~~March 31, 2021 compared to ~~$166,840,000~~$158,719,000 at December 31, ~~2019.~~2020. The decrease in long term borrowings occurred as a fixed rate ~~borrowings~~borrowing matured. Securities sold under agreement to repurchase have increased as customers balances have ~~increased..~~increased.


		September 30, 2020				December 31, 2019				Change					March 31, 2021				December 31, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Short-term borrowings:	Short-term borrowings:													Short-term borrowings:
FHLB repurchase agreements		$	—	—	%	$	—	—	%	$	—	n/a

Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	15,009		8.91		4,920		2.95		10,089		205.06		Securities sold under agreement to repurchase	$	6,650	4.50	%	$	5,244	3.30	%	$	1,406	26.81	%
Total short-term borrowings	Total short-term borrowings	15,009		8.91		4,920		2.95		10,089		205.06		Total short-term borrowings	6,650		4.50		5,244		3.30		1,406		26.81
Long-term borrowings:	Long-term borrowings:													Long-term borrowings:
Long-term FHLB borrowings	Long-term FHLB borrowings	148,000		87.80		156,333		93.70		(8,333)		(5.33)		Long-term FHLB borrowings	133,000		90.01		148,000		93.25		(15,000)		(10.14)
Long-term finance lease	Long-term finance lease	5,534		3.28		5,587		3.35		(53)		(0.95)		Long-term finance lease	8,094		5.48		5,475		3.45		2,619		47.84

Total long-term borrowings	Total long-term borrowings	153,534		91.09		161,920		97.05		(8,386)		(5.18)		Total long-term borrowings	141,094		95.50		153,475		96.70		(12,381)		(8.07)
Total borrowed funds	Total borrowed funds	$	168,543	100.00	%	$	166,840	100.00	%	$	1,703	1.02	%	Total borrowed funds	$	147,744	100.00	%	$	158,719	100.00	%	$	(10,975)	(6.91)	%

4437

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					Remaining Contractual Maturity Overnight and Continuous
(In Thousands)	(In Thousands)	September 30, 2020		December 31, 2019		(In Thousands)	March 31, 2021		December 31, 2020
Investment debt securities pledged, fair value	Investment debt securities pledged, fair value	$	22,797	$	6,752	Investment debt securities pledged, fair value	$	10,256	$	11,672
Repurchase agreements	Repurchase agreements	15,009		4,920		Repurchase agreements	6,650		5,244

Capital

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

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

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

Table of Contents

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


		September 30, 2020				December 31, 2019					March 31, 2021				December 31, 2020
(In Thousands)	(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)									Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	Actual	$	145,909	10.803	%	$	140,372	10.674	%	Actual	$	149,476	11.447	%	$	147,887	11.267	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	60,779		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	Minimum To Maintain Capital Conservation Buffer At Reporting Date	94,544		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	To Be Well Capitalized	87,791		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)									Total Capital (to Risk-weighted Assets)
Actual	Actual	$	156,697	11.992	%	$	149,748	11.387	%	Actual	$	158,038	12.102	%	$	159,490	12.151	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	104,534		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	Minimum To Maintain Capital Conservation Buffer At Reporting Date	137,201		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	To Be Well Capitalized	130,668		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)									Tier I Capital (to Risk-weighted Assets)
Actual	Actual	$	145,909	11.166	%	$	140,372	10.674	%	Actual	$	149,476	11.447	%	$	147,887	11.267	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	78,404		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	Minimum To Maintain Capital Conservation Buffer At Reporting Date	111,072		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	To Be Well Capitalized	104,538		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)									Tier I Capital (to Average Assets)
Actual	Actual	$	145,909	8.400	%	$	140,372	8.514	%	Actual	$	149,476	8.224	%	$	147,887	8.436	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	69,480		4.000		65,949		4.000		For Capital Adequacy Purposes	72,702		4.000		70,122		4.000
To Be Well Capitalized	To Be Well Capitalized	86,851		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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:


		September 30, 2020				December 31, 2019					March 31, 2021				December 31, 2020
(In Thousands)	(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)									Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	Actual	$	102,099	10.964	%	$	99,317	10.381	%	Actual	$	104,864	11.135	%	$	103,812	10.906	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	41,905		4.500		43,052		4.500		For Capital Adequacy Purposes	42,379		4.500		42,835		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	65,185		7.000		66,970		7.000		Minimum To Maintain Capital Conservation Buffer At Reporting Date	65,923		7.000		66,632		7.000
To Be Well Capitalized	To Be Well Capitalized	60,529		6.500		62,187		6.500		To Be Well Capitalized	61,214		6.500		61,872		6.500
Total Capital (to Risk-weighted Assets)	Total Capital (to Risk-weighted Assets)									Total Capital (to Risk-weighted Assets)
Actual	Actual	$	110,264	11.841	%	$	106,093	11.089	%	Actual	$	110,875	11.773	%	$	112,862	11.857	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	74,496		8.000		76,539		8.000		For Capital Adequacy Purposes	75,342		8.000		76,149		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	97,777		10.500		100,458		10.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	98,886		10.500		99,945		10.500
To Be Well Capitalized	To Be Well Capitalized	93,121		10.000		95,674		10.000		To Be Well Capitalized	94,177		10.000		95,186		10.000
Tier I Capital (to Risk-weighted Assets)	Tier I Capital (to Risk-weighted Assets)	-				-				Tier I Capital (to Risk-weighted Assets)	-				-
Actual	Actual	$	102,099	10.964	%	$	99,317	10.381	%	Actual	$	104,864	10.964	%	$	103,812	10.906	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	55,873		6.000		57,403		6.000		For Capital Adequacy Purposes	57,386		6.000		57,113		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	79,154		8.500		81,321		8.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	81,297		8.500		80,910		8.500
To Be Well Capitalized	To Be Well Capitalized	74,498		8.000		76,538		8.000		To Be Well Capitalized	76,515		8.000		76,150		8.000
Tier I Capital (to Average Assets)	Tier I Capital (to Average Assets)									Tier I Capital (to Average Assets)
Actual	Actual	$	102,099	7.724	%	$	99,317	8.191	%	Actual	$	104,864	8.156	%	$	103,812	8.062	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	52,874		4.000		48,501		4.000		For Capital Adequacy Purposes	51,429		4.000		51,507		4.000
To Be Well Capitalized	To Be Well Capitalized	66,092		5.000		60,626		5.000		To Be Well Capitalized	64,286		5.000		64,384		5.000

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


		September 30, 2020				December 31, 2019					March 31, 2021				December 31, 2020
(In Thousands)	(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)									Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	Actual	$	39,887	10.623	%	$	38,340	10.577	%	Actual	$	40,761	11.195	%	$	40,206	11.156	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	16,896		4.500		16,312		4.500		For Capital Adequacy Purposes	16,385		4.500		16,218		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	26,283		7.000		25,374		7.000		Minimum To Maintain Capital Conservation Buffer At Reporting Date	25,487		7.000		25,228		7.000
To Be Well Capitalized	To Be Well Capitalized	24,406		6.500		23,562		6.500		To Be Well Capitalized	23,667		6.500		23,426		6.500
Total Capital (to Risk-weighted Assets)	Total Capital (to Risk-weighted Assets)									Total Capital (to Risk-weighted Assets)
Actual	Actual	$	42,359	11.281	%	$	40,940	11.295	%	Actual	$	45,312	12.445	%	$	42,759	11.865	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	30,039		8.000		28,997		8.000		For Capital Adequacy Purposes	29,128		8.000		28,830		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	39,426		10.500		38,058		10.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	38,230		10.500		37,840		10.500
To Be Well Capitalized	To Be Well Capitalized	37,549		10.000		36,246		10.000		To Be Well Capitalized	36,410		10.000		36,038		10.000
Tier I Capital (to Risk-weighted Assets)	Tier I Capital (to Risk-weighted Assets)									Tier I Capital (to Risk-weighted Assets)
Actual	Actual	$	39,887	10.623	%	$	38,340	10.577	%	Actual	$	40,761	11.195	%	$	40,206	11.156	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	22,529		6.000		21,749		6.000		For Capital Adequacy Purposes	21,846		6.000		21,624		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	31,916		8.500		30,811		8.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	30,949		8.500		30,634		8.500
To Be Well Capitalized	To Be Well Capitalized	30,038		8.000		28,999		8.000		To Be Well Capitalized	29,128		8.000		28,832		8.000
Tier I Capital (to Average Assets)	Tier I Capital (to Average Assets)									Tier I Capital (to Average Assets)
Actual	Actual	$	39,887	7.946	%	$	38,340	8.653	%	Actual	$	40,761	7.739	%	$	40,206	7.860	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	20,079		4.000		17,723		4.000		For Capital Adequacy Purposes	21,068		4.000		20,461		4.000
To Be Well Capitalized	To Be Well Capitalized	25,099		5.000		22,154		5.000		To Be Well Capitalized	26,335		5.000		25,576		5.000

Liquidity; Interest Rate Sensitivity and Market Risk

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

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

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maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating

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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 ~~$590,455,000.~~$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 ~~$148,000,000~~$133,000,000 as of ~~September 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.

Interest Rate Sensitivity

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

The following is a rate shock forecast for the twelve month period ending ~~September 30, 2021~~March 31, 2022 assuming a static balance sheet as of ~~September 30, 2020.~~March 31, 2021.


		Parallel Rate Shock in Basis Points																					Parallel Rate Shock in Basis Points
(In Thousands)	(In Thousands)	-200			-100			Static		+100			+200			+300			+400			(In Thousands)	-200			-100			Static		+100			+200			+300			+400
Net interest income	Net interest income	$	43,127		$	46,332		$	49,517	$	51,642		$	53,759		$	55,648		$	57,484		Net interest income	$	44,892		$	47,706		$	50,894	$	54,615		$	58,324		$	61,773		$	65,193
Change from static	Change from static	(6,390)			(3,185)			—		2,125			4,242			6,131			7,967			Change from static	(6,002)			(3,188)			—		3,721			7,430			10,879			14,299
Percent change from static	Percent change from static	-12.90		%	-6.43		%	—		4.29		%	8.57		%	12.38		%	16.09		%	Percent change from static	-11.79		%	-6.26		%	—		7.31		%	14.60		%	21.38		%	28.10		%

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

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Inflation

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

~~COVID-19 Impact~~Paycheck Protection Program

~~Employees~~

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.

~~Liquidity~~

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 $499,455,000 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.

~~Loans~~

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; however loan demand during the third quarter has rebounded. Indirect auto lending was completely closed for several weeks beginning in late March 2020, and reopened on a full scale during the later part of the second quarter. Secondary mortgage market activity continues to flourish as individuals seek to refinance at historically low interest rates. As businesses continue 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.

The Company participated in the Paycheck Protection Program ~~(“PPP”~~('PPP"). ~~The Company booked $12.3 million~~Loans retained by the bank through this program total $29,200,000 in loans ~~directly into the PPP and also utilized a third party to match customer needs~~ with a lending outlet. This method did not result in the Company earning any processing fees under the PPP for loans extended by others, but was the quickest manner to service the greatest number of customers resulting in 586 customers obtaining $57.4 million in funding. The goal was to have as many customers as possible receive requested funding before PPP funding expired, even if the Company did not recognize fee income from making the loans.

~~Table of Contents~~

Loan modifications and payment deferrals have been at historical high levels as the impact of the pandemic continues. As of September 30, 2020 rate modifications or payment deferrals up to 180 days have been granted on loans with an aggregate balance of $230.3 million. Loan modifications met applicable requirements to not be considered troubled debt restructurings. The number of customers seekingover 400 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 nine months ended September 30, 2020 was increased to $645,000 and $2.0 million (from $360,000 and $1.0 million 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 nine months ended September 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.

~~Investments~~

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.

~~Deposits~~

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 becoming more risk averse and seeking 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 nine months ended September 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 nine months ended September 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 third quarter to continue into the fourth quarter in this business line due to the number of individuals expected to refinance existing mortgages.

~~Table of Contents~~

~~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.

applications processed.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at both the level of the Company and the Banks. The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party. There have been no substantial changes in the Company’s gap analysis or simulation analysis compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, ~~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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 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 ~~September 30, 2020~~March 31, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, as supplemented by the risk factor included in the Company's Form 10-Q for the quarter ended June 30,~~ 2020. ~~Please refer to such filings for disclosures regarding the risks and uncertainties related to the Company’s business.~~

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

The following table provides certain information with respect to the Company's repurchase of common stock during the quarter ended ~~September 30, 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 ~~(July~~(January 1 - ~~July~~January 31, ~~2020)~~2021)	—	—	—	513,669
Month #2 ~~(August~~(February 1 - ~~August 31, 2020)~~February 28, 2021)	—	—	—	513,669
Month #3 ~~(September~~(March 1 - ~~September 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 September 30, 2020 there have been 209,331 shares repurchased under this plan.~~2022.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019;~~2020; (ii) the Consolidated Statement of Income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iii) Consolidated Statement of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (v) the Consolidated Statement of Cash Flows for the ~~nine~~three months ended ~~September 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.

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SIGNATURES

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


		PENNS WOODS BANCORP, INC.
		(Registrant)

Date:	~~November 9, 2020~~May 10, 2021	/s/ Richard A. Grafmyre
		Richard A. Grafmyre, Chief Executive Officer
		(Principal Executive Officer)


Date:	~~November 9, 2020~~May 10, 2021	/s/ Brian L. Knepp
		Brian L. Knepp, President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting
		Officer)

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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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019;~~2020; (ii) the Consolidated Statement of Income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iii) Consolidated Statement of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (v) the Consolidated Statement of Cash Flows for the ~~nine~~three months ended ~~September 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.

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	Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
(In Thousands)	Net Unrealized Gain on Available for Sale Securities		Defined Benefit Plan		Total		Net Unrealized Gain on Available for Sale Securities		Defined Benefit Plan		Total
Beginning balance	$	4,194	$	(5,159)	$	(965)	$	2,419	$	(5,202)	$	(2,783)
Other comprehensive gain before reclassifications	1,046		0		1,046		996		0		996
Amounts reclassified from accumulated other comprehensive (loss) gain	(800)		41		(759)		(149)		37		(112)
Net current-period other comprehensive income	246		41		287		847		37		884

Ending balance	$	4,440	$	(5,118)	$	(678)	$	3,266	$	(5,165)	$	(1,899)