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 ~~March 31,~~September 30, 2021.


☐			Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from to .

No. 0-17077

(Commission File Number)

PENNS WOODS BANCORP INC.

(Exact name of Registrant as specified in its charter)


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 ~~May~~November 1, ~~2020~~2021 there were ~~7,060,829~~7,069,518 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 ~~March 31,~~September 30, 2021 and December 31, 2020		3

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

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

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

Consolidated Statement of Cash Flows (Unaudited) for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2021 and 2020		78

Notes to Consolidated Financial Statements (Unaudited)		89

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3034

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4249

Item 4.	Controls and Procedures	4249

Part II	Other Information

Item 1.	Legal Proceedings	4350

Item 1A.	Risk Factors	4350

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4350

Item 3.	Defaults Upon Senior Securities	4350

Item 4.	Mine Safety Disclosures	4350

Item 5.	Other Information	4350

Item 6.	Exhibits	4451

Signatures		4552

Exhibit Index and Exhibits		4653

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

March 31, December 31,
(In Thousands, Except Share Data) 2021 2020
ASSETS:
Noninterest-bearing balances $ 28,539 $ 31,821
Interest-bearing balances in other financial institutions 249,149 181,537
Total cash and cash equivalents 277,688 213,358
Investment debt securities, available for sale, at fair value 166,895 162,261
Investment equity securities, at fair value 1,265 1,288
Investment securities, trading 44 40
Restricted investment in bank stock, at fair value 15,032 15,377
Loans held for sale 2,568 5,239
Loans 1,335,899 1,344,327
Allowance for loan losses (14,202) (13,803)
Loans, net 1,321,697 1,330,524
Premises and equipment, net 34,910 32,702
Accrued interest receivable 8,583 8,394
Bank-owned life insurance 33,839 33,638
Goodwill 17,104 17,104
Intangibles 618 671
Operating lease right-of-use asset 3,088 3,136
Deferred tax asset 3,717 2,526
Other assets 9,144 8,385
TOTAL ASSETS $ 1,896,192 $ 1,834,643
LIABILITIES:
Interest-bearing deposits $ 1,085,448 $ 1,045,086
Noninterest-bearing deposits 478,916 449,357
Total deposits 1,564,364 1,494,443
Short-term borrowings 6,650 5,244
Long-term borrowings 141,094 153,475
Accrued interest payable 988 1,112
Operating lease liability 3,130 3,175
Other liabilities 15,903 13,048
TOTAL LIABILITIES 1,732,129 1,670,497
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; 0 shares issued 0 0
Common stock, par value 5.55, 22,500,000 shares authorized; 7,537,242 and 7,532,576 shares issued; 7,057,017 and 7,052,351 outstanding 41,873 41,847
Additional paid-in capital 52,818 52,523
Retained earnings 83,948 82,769
Accumulated other comprehensive loss:
Net unrealized gain on available for sale securities 3,095 4,714
Defined benefit plan (5,560) (5,596)
Treasury stock at cost, 480,225 (12,115) (12,115)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY 164,059 164,142
Non-controlling interest 4 4
TOTAL SHAREHOLDERS' EQUITY 164,063 164,146
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,896,192 $ 1,834,643


	September 30,		December 31,
(In Thousands, Except Share Data)	2021		2020
ASSETS:
Noninterest-bearing balances	$	35,523	$	31,821
Interest-bearing balances in other financial institutions	206,124		181,537
Federal funds sold	40,000		—
Total cash and cash equivalents	281,647		213,358

Investment debt securities, available for sale, at fair value	166,760		162,261
Investment equity securities, at fair value	1,263		1,288
Investment securities, trading	40		40
Restricted investment in bank stock, at fair value	14,649		15,377
Loans held for sale	3,246		5,239
Loans	1,347,225		1,344,327
Allowance for loan losses	(14,557)		(13,803)
Loans, net	1,332,668		1,330,524
Premises and equipment, net	34,434		32,702
Accrued interest receivable	8,529		8,394
Bank-owned life insurance	33,836		33,638
Investment in limited partnerships	5,014		3,944
Goodwill	17,104		17,104
Intangibles	524		671
Operating lease right-of-use asset	2,899		3,136
Deferred tax asset	4,049		2,526
Other assets	4,129		4,441
TOTAL ASSETS	$	1,910,791	$	1,834,643

LIABILITIES:
Interest-bearing deposits	$	1,111,144	$	1,045,086
Noninterest-bearing deposits	481,875		449,357
Total deposits	1,593,019		1,494,443

Short-term borrowings	9,404		5,244
Long-term borrowings	126,007		153,475
Accrued interest payable	828		1,112
Operating lease liability	2,947		3,175
Other liabilities	10,105		13,048
TOTAL LIABILITIES	1,742,310		1,670,497

SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued	—		—
Common stock, par value 5.55, 22,500,000 shares authorized; 7,545,922 and 7,532,576 shares issued; 7,065,697 and 7,052,351 outstanding	41,921		41,847
Additional paid-in capital	53,508		52,523
Retained earnings	87,146		82,769
Accumulated other comprehensive loss:
Net unrealized gain on available for sale securities	3,504		4,714
Defined benefit plan	(5,486)		(5,596)
Treasury stock at cost, 480,225	(12,115)		(12,115)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY	168,478		164,142
Non-controlling interest	3		4
TOTAL SHAREHOLDERS' EQUITY	168,481		164,146
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,910,791	$	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 March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Per Share Data)	(In Thousands, Except Per Share Data)		2021		2020			(In Thousands, Except Per Share Data)	2021		2020		2021		2020
INTEREST AND DIVIDEND INCOME:	INTEREST AND DIVIDEND INCOME:							INTEREST AND DIVIDEND INCOME:
Loans, including fees	Loans, including fees		$	13,345	$	14,657		Loans, including fees	$	13,382	$	14,080	$	39,826	$	43,403
Investment securities:	Investment securities:							Investment securities:
Taxable	Taxable		819		1,010			Taxable	834		925		2,491		2,958
Tax-exempt	Tax-exempt		171		145			Tax-exempt	160		170		495		484
Dividend and other interest income	Dividend and other interest income		260		349			Dividend and other interest income	338		212		903		747
TOTAL INTEREST AND DIVIDEND INCOME	TOTAL INTEREST AND DIVIDEND INCOME		14,595		16,161			TOTAL INTEREST AND DIVIDEND INCOME	14,714		15,387		43,715		47,592
INTEREST EXPENSE:	INTEREST EXPENSE:							INTEREST EXPENSE:
Deposits	Deposits		1,684		3,035			Deposits	1,308		2,569		4,481		8,406
Short-term borrowings	Short-term borrowings		2		22			Short-term borrowings	3		8		7		37
Long-term borrowings	Long-term borrowings		839		943			Long-term borrowings	771		965		2,430		2,893
TOTAL INTEREST EXPENSE	TOTAL INTEREST EXPENSE		2,525		4,000			TOTAL INTEREST EXPENSE	2,082		3,542		6,918		11,336
NET INTEREST INCOME	NET INTEREST INCOME		12,070		12,161			NET INTEREST INCOME	12,632		11,845		36,797		36,256
PROVISION FOR LOAN LOSSES	PROVISION FOR LOAN LOSSES		515		750			PROVISION FOR LOAN LOSSES	75		645		940		2,040
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,555		11,411			NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	12,557		11,200		35,857		34,216
NON-INTEREST INCOME:	NON-INTEREST INCOME:							NON-INTEREST INCOME:
Service charges	Service charges		383		549			Service charges	456		388		1,218		1,249
Net debt securities gains, available for sale	Net debt securities gains, available for sale		138		21			Net debt securities gains, available for sale	48		1,013		323		1,220
Net equity securities (losses) gains	Net equity securities (losses) gains		(23)		20			Net equity securities (losses) gains	(6)		—		(25)		30
Net securities gains (losses), trading			4		(14)
Net securities (losses) gains, trading								Net securities (losses) gains, trading	(2)		(2)		1		(16)
Bank-owned life insurance	Bank-owned life insurance		173		192			Bank-owned life insurance	279		156		614		492
Gain on sale of loans	Gain on sale of loans		908		444			Gain on sale of loans	456		1,449		2,034		2,921
Insurance commissions	Insurance commissions		157		127			Insurance commissions	129		101		436		320
Brokerage commissions	Brokerage commissions		219		369			Brokerage commissions	237		224		663		779
Debit card income	Debit card income		380		274			Debit card income	388		352		1,166		936
Other	Other		275		455			Other	966		354		2,044		1,162
TOTAL NON-INTEREST INCOME	TOTAL NON-INTEREST INCOME		2,614		2,437			TOTAL NON-INTEREST INCOME	2,951		4,035		8,474		9,093
NON-INTEREST EXPENSE:	NON-INTEREST EXPENSE:							NON-INTEREST EXPENSE:
Salaries and employee benefits	Salaries and employee benefits		5,598		5,667			Salaries and employee benefits	5,837		5,465		17,107		16,362
Occupancy	Occupancy		976		702			Occupancy	745		599		2,438		1,927
Furniture and equipment	Furniture and equipment		809		860			Furniture and equipment	883		837		2,663		2,525
Software amortization	Software amortization		198		250			Software amortization	226		257		632		743
Pennsylvania shares tax	Pennsylvania shares tax		352		285			Pennsylvania shares tax	373		340		1,097		948
Professional fees	Professional fees		583		622			Professional fees	615		608		1,882		1,888
Federal Deposit Insurance Corporation deposit insurance	Federal Deposit Insurance Corporation deposit insurance		221		194			Federal Deposit Insurance Corporation deposit insurance	220		271		705		650

Marketing	Marketing		63		53			Marketing	231		61		434		170
Intangible amortization	Intangible amortization		53		62			Intangible amortization	44		53		147		174
Other	Other		1,098		1,415			Other	1,273		1,216		3,541		4,041
TOTAL NON-INTEREST EXPENSE	TOTAL NON-INTEREST EXPENSE		9,951		10,110			TOTAL NON-INTEREST EXPENSE	10,447		9,707		30,646		29,428
INCOME BEFORE INCOME TAX PROVISION	INCOME BEFORE INCOME TAX PROVISION		4,218		3,738			INCOME BEFORE INCOME TAX PROVISION	5,061		5,528		13,685		13,881
INCOME TAX PROVISION	INCOME TAX PROVISION		771		661			INCOME TAX PROVISION	932		1,051		2,516		2,563
CONSOLIDATED NET INCOME	CONSOLIDATED NET INCOME		$	3,447	$	3,077		CONSOLIDATED NET INCOME	$	4,129	$	4,477	$	11,169	$	11,318
Less: Net income attributable to noncontrolling interest	Less: Net income attributable to noncontrolling interest		6		4			Less: Net income attributable to noncontrolling interest	4		5		15		13
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.	NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.		$	3,441	$	3,073		NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.	$	4,125	$	4,472	$	11,154	$	11,305
EARNINGS PER SHARE - BASIC	EARNINGS PER SHARE - BASIC		$	0.49	$	0.44		EARNINGS PER SHARE - BASIC	$	0.58	$	0.63	$	1.58	$	1.61
EARNINGS PER SHARE - DILUTED	EARNINGS PER SHARE - DILUTED		$	0.49	$	0.43		EARNINGS PER SHARE - DILUTED	$	0.58	$	0.63	$	1.58	$	1.61
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC		7,055,116		7,040,740			WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	7,063,994		7,045,336		7,059,625		7,042,578
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED		7,055,116		7,102,990			WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	7,063,994		7,045,336		7,059,625		7,042,578
DIVIDENDS DECLARED PER SHARE	DIVIDENDS DECLARED PER SHARE		$	0.32	$	0.32		DIVIDENDS DECLARED PER SHARE	$	0.32	$	0.32	$	0.96	$	0.96

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 March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)		2021		2020			(In Thousands)	2021		2020		2021		2020
Net Income	Net Income		$	3,441	$	3,073		Net Income	$	4,125	$	4,472	$	11,154	$	11,305
Other comprehensive (loss) income:
Other comprehensive income (loss):								Other comprehensive income (loss):
Change in unrealized (loss) gain on available for sale securities	Change in unrealized (loss) gain on available for sale securities		(1,911)		694			Change in unrealized (loss) gain on available for sale securities	(687)		1,324		(1,208)		3,733
Tax effect	Tax effect		401		(146)			Tax effect	145		(278)		254		(784)
Net realized gain on available for sale securities included in net income	Net realized gain on available for sale securities included in net income		(138)		(21)			Net realized gain on available for sale securities included in net income	(48)		(1,013)		(323)		(1,220)
Tax effect	Tax effect		29		4			Tax effect	9		213		67		256
Amortization of unrecognized pension gain	Amortization of unrecognized pension gain		46		41			Amortization of unrecognized pension gain	45		52		138		144
Tax effect	Tax effect		(10)		(8)			Tax effect	(8)		(11)		(28)		(30)
Total other comprehensive (loss) income	Total other comprehensive (loss) income		(1,583)		564			Total other comprehensive (loss) income	(544)		287		(1,100)		2,099
Comprehensive income	Comprehensive income		$	1,858	$	3,637		Comprehensive income	$	3,581	$	4,759	$	10,054	$	13,404

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, December 31, 2020		7,532,576	$	41,847			$	52,523					$	82,769				$	(882)		$	(12,115)			$	4		$	164,146
Balance, June 30, 2021																								Balance, June 30, 2021			7,541,627			$	41,897			$	53,205			$	85,281			$	(1,438)			$	(12,115)			$	5			$	166,835
Net income	Net income								3,441										6			3,447		Net income												4,125												4				4,129

Other comprehensive loss	Other comprehensive loss										(1,583)											(1,583)		Other comprehensive loss																(544)												(544)
Stock-based compensation	Stock-based compensation				220																	220		Stock-based compensation								227																				227
Dividends declared ($0.32 per share)	Dividends declared ($0.32 per share)								(2,262)													(2,262)		Dividends declared ($0.32 per share)												(2,260)																(2,260)
Common shares issued for employee stock purchase plan	Common shares issued for employee stock purchase plan	939	5		15																	20		Common shares issued for employee stock purchase plan			889			5		15																				20
Director Compensation Plan	Director Compensation Plan	3,727	21		60																	81		Director Compensation Plan			3,406			19		61																				80
Distributions to noncontrolling interest	Distributions to noncontrolling interest																		(6)			(6)		Distributions to noncontrolling interest																								(6)				(6)
Balance, March 31, 2021		7,537,242	$	41,873	$	52,818			$	83,948	$	(2,465)			$	(12,115)			$	4		$	164,063
Balance, September 30, 2021																								Balance, September 30, 2021			7,545,922			$	41,921	$	53,508			$	87,146			$	(1,982)			$	(12,115)			$	3			$	168,481

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 3,073 4 3,077
Other comprehensive income 564 564
Stock-based compensation 198 198
Dividends declared ($0.32 per share) (2,253) (2,253)
Common shares issued for employee stock purchase plan 751 4 16 20
Balance, March 31, 2020 7,521,491 $ 41,786 $ 51,701 $ 77,403 $ (2,213) $ (12,115) $ 26 $ 156,588


	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, June 30, 2020	7,522,573	$	41,792	$	51,956	$	78,910	$	(965)	$	(12,115)	$	30	$	159,608
Net income						4,472						5		4,477

Other comprehensive income								287						287
Stock-based compensation				239										239
Dividends declared ($0.32 per share)						(2,255)								(2,255)
Common shares issued for employee stock purchase plan	1,055	6		15										21
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

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, 2020	7,532,576	$	41,847	$	52,523	$	82,769	$	(882)	$	(12,115)	$	4	$	164,146
Net income						11,154						15		11,169

Other comprehensive loss								(1,100)						(1,100)
Stock-based compensation				754										754
Dividends declared ($0.96 per share)						(6,777)								(6,777)
Common shares issued for employee stock purchase plan	2,873	16		49										65
Director Compensation Plan	10,473	58		182										240
Distributions to noncontrolling interest												(16)		(16)
Balance, September 30, 2021	7,545,922	$	41,921	$	53,508	$	87,146	$	(1,982)	$	(12,115)	$	3	$	168,481


	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

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


		Three Months Ended March 31,					Nine Months Ended September 30,
(In Thousands)	(In Thousands)	2021		2020		(In Thousands)	2021		2020
OPERATING ACTIVITIES:	OPERATING ACTIVITIES:					OPERATING ACTIVITIES:
Net Income	Net Income	$	3,447	$	3,077	Net Income	$	11,169	$	11,318
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	839		760		Depreciation and amortization	2,235		2,310
Gain on sale of premise and equipment	Gain on sale of premise and equipment	0		(14)		Gain on sale of premise and equipment	(18)		(14)
Amortization of intangible assets	Amortization of intangible assets	53		62		Amortization of intangible assets	147		174
Provision for loan losses	Provision for loan losses	515		750		Provision for loan losses	940		2,040
Stock based compensation	Stock based compensation	220		198		Stock based compensation	754		675
Accretion and amortization of investment security discounts and premiums	Accretion and amortization of investment security discounts and premiums	251		171		Accretion and amortization of investment security discounts and premiums	829		382
Net securities gains, available for sale	Net securities gains, available for sale	(138)		(21)		Net securities gains, available for sale	(323)		(1,220)
Originations of loans held for sale	Originations of loans held for sale	(26,658)		(14,977)		Originations of loans held for sale	(68,328)		(95,661)
Proceeds of loans held for sale	Proceeds of loans held for sale	30,237		15,359		Proceeds of loans held for sale	72,355		96,167
Gain on sale of loans	Gain on sale of loans	(908)		(444)		Gain on sale of loans	(2,034)		(2,921)
Net equity securities losses (gains)	Net equity securities losses (gains)	23		(20)		Net equity securities losses (gains)	25		(30)
Net securities (gains) losses, trading	Net securities (gains) losses, trading	(4)		14		Net securities (gains) losses, trading	(1)		16

Earnings on bank-owned life insurance	Earnings on bank-owned life insurance	(173)		(192)		Earnings on bank-owned life insurance	(614)		(492)
Increase in deferred tax asset	Increase in deferred tax asset	(761)		(84)		Increase in deferred tax asset	(1,201)		(599)
Proceeds on sales of investment securities receivable		0		6,627

Other, net	Other, net	2,447		(2,658)		Other, net	(3,548)		2,756
Net cash provided by operating activities	Net cash provided by operating activities	9,390		8,608		Net cash provided by operating activities	12,387		14,901
INVESTING ACTIVITIES:	INVESTING ACTIVITIES:					INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities	Proceeds from sales of available for sale securities	11,372		2,774		Proceeds from sales of available for sale securities	13,689		37,252
Proceeds from calls and maturities of available for sale securities	Proceeds from calls and maturities of available for sale securities	3,428		2,598		Proceeds from calls and maturities of available for sale securities	15,898		567
Purchases of available for sale securities	Purchases of available for sale securities	(21,955)		(11,753)		Purchases of available for sale securities	(36,124)		(35,524)
Net decrease in loans		8,312		5,861
Net (increase) decrease in loans						Net (increase) decrease in loans	(3,167)		5,692
Acquisition of premises and equipment	Acquisition of premises and equipment	(197)		(1,547)		Acquisition of premises and equipment	(939)		(2,830)
Proceeds from the sale of premises and equipment	Proceeds from the sale of premises and equipment	0		336		Proceeds from the sale of premises and equipment	2		336
Proceeds from the sale of foreclosed assets	Proceeds from the sale of foreclosed assets	246		226		Proceeds from the sale of foreclosed assets	335		226
Purchase of bank-owned life insurance	Purchase of bank-owned life insurance	(26)		(26)		Purchase of bank-owned life insurance	(30)		(3,970)
Proceeds from bank-owned life insurance death benefit	Proceeds from bank-owned life insurance death benefit	0		248		Proceeds from bank-owned life insurance death benefit	453		248
Investment in limited partnership	Investment in limited partnership	(711)		(370)		Investment in limited partnership	(1,070)		(628)
Proceeds from redemption of regulatory stock	Proceeds from redemption of regulatory stock	1,082		1,139		Proceeds from redemption of regulatory stock	2,167		2,881
Purchases of regulatory stock	Purchases of regulatory stock	(737)		(2,222)		Purchases of regulatory stock	(1,439)		(4,359)
Net cash used for investing activities	Net cash used for investing activities	814		(2,736)		Net cash used for investing activities	(10,225)		(109)
FINANCING ACTIVITIES:	FINANCING ACTIVITIES:					FINANCING ACTIVITIES:
Net increase in interest-bearing deposits	Net increase in interest-bearing deposits	40,362		4,716		Net increase in interest-bearing deposits	66,058		68,303
Net increase (decrease) in noninterest-bearing deposits		29,559		(1,987)
Net increase in noninterest-bearing deposits						Net increase in noninterest-bearing deposits	32,518		99,502
Proceeds from long-term borrowings	Proceeds from long-term borrowings	0		35,000		Proceeds from long-term borrowings	—		35,000
Repayment of long-term borrowings	Repayment of long-term borrowings	(15,000)		(25,000)		Repayment of long-term borrowings	(30,000)		(43,333)
Net increase in short-term borrowings	Net increase in short-term borrowings	1,406		12,821		Net increase in short-term borrowings	4,160		10,089
Finance lease principal payments	Finance lease principal payments	(34)		(17)		Finance lease principal payments	(121)		(53)
Dividends paid	Dividends paid	(2,262)		(2,253)		Dividends paid	(6,777)		(6,761)
Distributions to non-controlling interest	Distributions to non-controlling interest	(6)		0		Distributions to non-controlling interest	(16)		—
Issuance of common stock	Issuance of common stock	101		20		Issuance of common stock	305		144

Net cash provided by financing activities	Net cash provided by financing activities	54,126		23,300		Net cash provided by financing activities	66,127		162,891
NET INCREASE IN CASH AND CASH EQUIVALENTS	NET INCREASE IN CASH AND CASH EQUIVALENTS	64,330		29,172		NET INCREASE IN CASH AND CASH EQUIVALENTS	68,289		177,683
CASH AND CASH EQUIVALENTS, BEGINNING	CASH AND CASH EQUIVALENTS, BEGINNING	213,358		48,589		CASH AND CASH EQUIVALENTS, BEGINNING	213,358		48,589
CASH AND CASH EQUIVALENTS, ENDING	CASH AND CASH EQUIVALENTS, ENDING	$	277,688	$	77,761	CASH AND CASH EQUIVALENTS, ENDING	$	281,647	$	226,272


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:	SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:					SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	Interest paid	$	2,649	$	4,036	Interest paid	$	7,202	$	11,516
Income taxes paid	Income taxes paid	0		0		Income taxes paid	3,175		2,375
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	2,653		0		Right-of-use lease assets obtained in exchange for lessee finance lease liabilities	2,653		—

Transfer of loans to foreclosed real estate	Transfer of loans to foreclosed real estate	0		139		Transfer of loans to foreclosed real estate	83		207

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~~owned a controlling interest in United Insurance Solutions, ~~LLC.~~LLC, which on October 15, 2021 became a wholly owned subsidiary of the Company. All significant inter-company balances and transactions have been eliminated in the consolidation.

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

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

Note 2. Accumulated Other Comprehensive Gain ~~(loss)~~(Loss)

The changes in accumulated other comprehensive gain (loss) ~~gain~~ by component shown net of tax and parenthesis indicating debits, as of ~~March 31,~~September 30, 2021 and 2020 were as follows:


	Three Months Ended September 30, 2021						Three Months Ended September 30, 2020
(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	$	4,085	$	(5,523)	$	(1,438)	$	4,194	$	(5,159)	$	(965)
Other comprehensive (loss) gain before reclassifications	(542)		—		(542)		1,046		—		1,046
Amounts reclassified from accumulated other comprehensive (loss) gain	(39)		37		(2)		(800)		41		(759)
Net current-period other comprehensive (loss) income	(581)		37		(544)		246		41		287

Ending balance	$	3,504	$	(5,486)	$	(1,982)	$	4,440	$	(5,118)	$	(678)


		Three Months Ended March 31, 2021						Three Months Ended March 31, 2020							Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
(In Thousands)	(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		(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	$	4,714	$	(5,596)	$	(882)	$	2,455	$	(5,232)	$	(2,777)	Beginning balance	$	4,714	$	(5,596)	$	(882)	$	2,455	$	(5,232)	$	(2,777)
Other comprehensive (loss) gain before reclassifications		(1,510)		0		(1,510)		548		0		548
Other comprehensive gain (loss) before reclassifications														Other comprehensive gain (loss) before reclassifications	(954)		—		(954)		2,949		—		2,949
Amounts reclassified from accumulated other comprehensive (loss) gain	Amounts reclassified from accumulated other comprehensive (loss) gain	(109)		36		(73)		(17)		33		16		Amounts reclassified from accumulated other comprehensive (loss) gain	(256)		110		(146)		(964)		114		(850)
Net current-period other comprehensive (loss) income	Net current-period other comprehensive (loss) income	(1,619)		36		(1,583)		531		33		564		Net current-period other comprehensive (loss) income	(1,210)		110		(1,100)		1,985		114		2,099

Ending balance	Ending balance	$	3,095	$	(5,560)	$	(2,465)	$	2,986	$	(5,199)	$	(2,213)	Ending balance	$	3,504	$	(5,486)	$	(1,982)	$	4,440	$	(5,118)	$	(678)

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The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of ~~March 31,~~September 30, 2021 and 2020 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, 2021		Three Months Ended September 30, 2020
Net unrealized gain on available for sale securities	$	48	$	1,013	Net debt securities gains, available for sale
Income tax effect	(9)		(213)		Income tax provision
Total reclassifications for the period	$	39	$	800

Net unrecognized pension costs	$	(46)	$	(52)	Other non-interest expense
Income tax effect	9		11		Income tax provision
Total reclassifications for the period	$	(37)	$	(41)


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
		Three months ended March 31, 2021		Three months ended March 31, 2020				Nine months ended September 30, 2021		Nine months ended September 30, 2020
Net unrealized gain on available for sale securities	Net unrealized gain on available for sale securities	$	138	$	21	Net debt securities gains, available for sale	Net unrealized gain on available for sale securities	$	323	$	1,220	Net debt securities gains, available for sale
Income tax effect	Income tax effect	(29)		(4)		Income tax provision	Income tax effect	(67)		(256)		Income tax provision
Total reclassifications for the period	Total reclassifications for the period	$	109	$	17		Total reclassifications for the period	$	256	$	964

Net unrecognized pension costs	Net unrecognized pension costs	$	(46)	$	(41)	Other non-interest expense	Net unrecognized pension costs	$	(139)	$	(144)	Other non-interest expense
Income tax effect	Income tax effect	10		8		Income tax provision	Income tax effect	29		30		Income tax provision
Total reclassifications for the period	Total reclassifications for the period	$	(36)	$	(33)		Total reclassifications for the period	$	(110)	$	(114)

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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 affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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

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

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

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

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these

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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. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

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

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

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

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

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

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all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

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

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

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

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

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

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

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

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

Note 4. Per Share Data

There are 0no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of ~~841,275~~1,045,475 stock options, with an average exercise price of ~~$28.17,~~$27.25, outstanding on ~~March 31,~~September 30, 2021. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the three period due to the average market price of common shares of $20.21, respectively, exceeding the exercise price of the options issued. There were a total of 864,300 stock options, with an average exercise price of $29.20, outstanding on March 31, 2020. A portion of these options were included, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of ~~$29.57 exceeding~~$23.70 being less than the exercise price of the options ~~issued~~issued. There were a total of 864,300 stock options, with an average exercise price of $28.20 that were excluded, on a weighted average basis, in the computation of diluted earnings per share for ~~all years except~~the period due to the average market price of common shares of $24.20 being less than the strike price for ~~2017.~~the period ending September 30, 2020.


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Weighted average common shares issued	7,544,219	7,525,561	7,539,850	7,522,803
Weighted average treasury stock shares	(480,225)	(480,225)	(480,225)	(480,225)


Weighted average common shares outstanding - basic and diluted	7,063,994	7,045,336	7,059,625	7,042,578

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 ~~March 31,~~September 30, 2021 and December 31, 2020 are as follows:


		March 31, 2021									September 30, 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	$	1,792	$	4	$	0	$	1,796	Mortgage-backed securities	$	1,765	$	10	$	—	$	1,775

State and political securities	State and political securities	109,662		4,132		(542)		113,252		State and political securities	112,308		4,610		(444)		116,474
Other debt securities	Other debt securities	51,523		740		(416)		51,847		Other debt securities	48,251		727		(467)		48,511
Total debt securities	Total debt securities	$	162,977	$	4,876	$	(958)	$	166,895	Total debt securities	$	162,324	$	5,347	$	(911)	$	166,760

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

Other equity securities	Other equity securities	$	1,300	$	1	$	(36)	$	1,265	Other equity securities	$	1,300	$	—	$	(37)	$	1,263

Trading:	Trading:									Trading:

Other equity securities	Other equity securities	$	50	$	0	$	(6)	$	44	Other equity securities	$	50	$	—	$	(10)	$	40


		December 31, 2020									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	$	2,118	$	23	$	0	$	2,141	Mortgage-backed securities	$	2,118	$	23	$	—	$	2,141

State and political securities	State and political securities	102,690		5,382		(59)		108,013		State and political securities	102,690		5,382		(59)		108,013
Other debt securities	Other debt securities	51,486		828		(207)		52,107		Other debt securities	51,486		828		(207)		52,107
Total debt securities	Total debt securities	$	156,294	$	6,233	$	(266)	$	162,261	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	$	10	$	(22)	$	1,288	Other equity securities	$	1,300	$	10	$	(22)	$	1,288

Trading:	Trading:									Trading:

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

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


		March 31, 2021													September 30, 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):

State and political securities	State and political securities	$	27,816	$	(532)	$	897	$	(10)	$	28,713	$	(542)	State and political securities	$	29,367	$	(431)	$	888	$	(13)	$	30,255	$	(444)
Other debt securities	Other debt securities	19,500		(289)		3,953		(127)		23,453		(416)		Other debt securities	10,107		(172)		2,766		(295)		12,873		(467)
Total debt securities	Total debt securities	$	47,316	$	(821)	$	4,850	$	(137)	$	52,166	$	(958)	Total debt securities	$	39,474	$	(603)	$	3,654	$	(308)	$	43,128	$	(911)

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



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

At ~~March 31,~~September 30, 2021, there were a total of 6271 securities in a continuous unrealized loss position for less than twelve months and 7 individual securities that were in a continuous unrealized loss position for twelve months or greater.

The Company reviews its position quarterly and has determined that, at ~~March 31,~~September 30, 2021, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at ~~March 31,~~September 30, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)	(In Thousands)	Amortized Cost		Fair Value		(In Thousands)	Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	11,176	$	11,158	Due in one year or less	$	11,076	$	10,828
Due after one year to five years	Due after one year to five years	71,403		72,665		Due after one year to five years	76,785		78,108
Due after five years to ten years	Due after five years to ten years	70,964		73,612		Due after five years to ten years	69,469		72,703
Due after ten years	Due after ten years	9,434		9,460		Due after ten years	4,994		5,121
Total	Total	$	162,977	$	166,895	Total	$	162,324	$	166,760

Total gross proceeds from sales of debt securities available for sale for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 was ~~$11,372,000,~~$13,689,000, compared to ~~$2,774,000~~$37,252,000 for the corresponding 2020 ~~periods.~~period.

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


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)		2021		2020			(In Thousands)	2021		2020		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								Mortgage-backed securities	$	—	$	—	$	—	$	83

State and political securities	State and political securities		$	0	$	1		State and political securities	1		839		1		943
Other debt securities	Other debt securities		138		20			Other debt securities	48		174		323		194
Total gross realized gains	Total gross realized gains		$	138	$	21		Total gross realized gains	$	49	$	1,013	$	324	$	1,220

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

State and political securities	State and political securities		$	0	$	0		State and political securities	$	1	$	—	$	1	$	—
Other debt securities	Other debt securities		0		0			Other debt securities	—		—		—		—
Total gross realized losses	Total gross realized losses		$	0	$	0		Total gross realized losses	$	1	$	—	$	1	$	—

There were 0no impairment charges included in gross realized losses for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively.

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Investment securities with a carrying value of approximately ~~$109,699,000~~$121,299,000 and $111,247,000 at ~~March 31,~~September 30, 2021 and December 31, 2020, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

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At ~~March 31,~~September 30, 2021 and December 31, 2020, we had ~~$1,265,000~~$1,263,000 and $1,288,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended ~~March 31,~~September 30, 2021 and 2020:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)		2021		2020			(In Thousands)	2021		2020		2021		2020
Net (losses) gains recognized in equity securities during the period	Net (losses) gains recognized in equity securities during the period		$	(23)	$	20		Net (losses) gains recognized in equity securities during the period	$	(6)	$	—	$	(25)	$	30
Less: Net gains realized on the sale of equity securities during the period	Less: Net gains realized on the sale of equity securities during the period		0		0			Less: Net gains realized on the sale of equity securities during the period	—		—		—		—
Unrealized gains recognized in equity securities held at reporting date			$	(23)	$	20
Unrealized (losses) gains recognized in equity securities held at reporting date								Unrealized (losses) gains recognized in equity securities held at reporting date	$	(6)	$	—	$	(25)	$	30

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


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)		2021		2020			(In Thousands)	2021		2020		2021		2020
Net gains on sale transactions	Net gains on sale transactions		$	0	$	0		Net gains on sale transactions	$	—	$	—	$	—	$	—
Net mark-to-market gains (losses)			4		(14)
Net gain (loss) on trading account securities			$	4	$	(14)
Net mark-to-market (losses) gains								Net mark-to-market (losses) gains	(2)		(2)		1		(16)
Net (loss) gain on trading account securities								Net (loss) gain on trading account securities	$	(2)	$	(2)	$	1	$	(16)

Note 6. Loans

Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial, financial, and agricultural, real estate, and installment loans. Real estate loans are further segmented into 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 ~~March 31,~~September 30, 2021 and December 31, 2020:


		March 31, 2021											September 30, 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	$	181,171	$	23	$	2	$	863	$	182,059	Commercial, financial, and agricultural	$	179,079	$	147	$	—	$	422	$	179,648
Real estate mortgage:	Real estate mortgage:											Real estate mortgage:
Residential	Residential	575,008		2,513		476		1,739		579,736		Residential	584,765		1,709		511		940		587,925
Commercial	Commercial	357,225		584		57		5,859		363,725		Commercial	371,197		315		—		5,498		377,010
Construction	Construction	39,604		128		0		53		39,785		Construction	45,899		—		—		49		45,948
Consumer automobile loans	Consumer automobile loans	149,917		316		72		151		150,456		Consumer automobile loans	146,094		552		17		—		146,663
Other consumer installment loans	Other consumer installment loans	19,241		417		0		0		19,658		Other consumer installment loans	9,363		48		326		—		9,737
		1,322,166		$	3,981	$	607	$	8,665	1,335,419			1,336,397		$	2,771	$	854	$	6,909	1,346,931
Net deferred loan fees and discounts	Net deferred loan fees and discounts	480								480		Net deferred loan fees and discounts	294								294
Allowance for loan losses	Allowance for loan losses	(14,202)								(14,202)		Allowance for loan losses	(14,557)								(14,557)
Loans, net	Loans, net	$	1,308,444							$	1,321,697	Loans, net	$	1,322,134							$	1,332,668

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		December 31, 2020											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	$	163,583	$	247	$	48	$	865	$	164,743	Commercial, financial, and agricultural	$	163,583	$	247	$	48	$	865	$	164,743
Real estate mortgage:	Real estate mortgage:											Real estate mortgage:
Residential	Residential	580,292		6,386		983		2,060		589,721		Residential	580,292		6,386		983		2,060		589,721
Commercial	Commercial	366,363		533		150		6,142		373,188		Commercial	366,363		533		150		6,142		373,188
Construction	Construction	38,587		667		0		55		39,309		Construction	38,587		667		—		55		39,309
Consumer automobile loans	Consumer automobile loans	155,472		900		31		0		156,403		Consumer automobile loans	155,472		900		31		—		156,403
Other consumer installment loans	Other consumer installment loans	19,485		455		0		0		19,940		Other consumer installment loans	19,485		455		—		—		19,940
		1,323,782		$	9,188	$	1,212	$	9,122	1,343,304			1,323,782		$	9,188	$	1,212	$	9,122	1,343,304
Net deferred loan fees and discounts	Net deferred loan fees and discounts	1,023								1,023		Net deferred loan fees and discounts	1,023								1,023
Allowance for loan losses	Allowance for loan losses	(13,803)								(13,803)		Allowance for loan losses	(13,803)								(13,803)
Loans, net	Loans, net	$	1,311,002							$	1,330,524	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 ~~March 31,~~September 30, 2021 and 2020:


	Three Months Ended September 30,
	2021				2020
(In Thousands)	Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis		Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis
Commercial, financial, and agricultural	$	28	$	—	$	2	$	14
Real estate mortgage:
Residential	6		—		14		2
Commercial	89		—		52		—
Construction	—		—		—		—
Consumer automobile loans	—		—		—		—
Other consumer installment loans	—		—		—		—
	$	123	$	—	$	68	$	16


		Three Months Ended March 31,									Nine Months Ended September 30,
		2021				2020					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	$	28	$	0	$	9	$	0	Commercial, financial, and agricultural	$	84	$	—	$	37	$	14
Real estate mortgage:	Real estate mortgage:									Real estate mortgage:
Residential	Residential	9		0		9		0		Residential	22		—		27		2
Commercial	Commercial	30		0		42		0		Commercial	144		—		116		—
Construction	Construction	1		0		0		0		Construction	2		—		1		—
Consumer automobile loans	Consumer automobile loans	0		0		2		0		Consumer automobile loans	—		—		2		3
Other consumer installment loans	Other consumer installment loans	0		0		0		0		Other consumer installment loans	—		—		3		—
		$	68	$	0	$	62	$	0		$	252	$	—	$	186	$	19

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Impaired Loans

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

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

~~Table of Contents~~

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

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


		March 31, 2021							September 30, 2021
		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	$	803	$	3,590	$	—	Commercial, financial, and agricultural	$	1,265	$	1,265	$	—
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	4,626		4,626		—		Residential	4,003		4,003		—
Commercial	Commercial	5,886		5,886		—		Commercial	3,919		3,919		—
Construction	Construction	120		120		—		Construction	114		114		—
Consumer automobile loans	Consumer automobile loans	0		0		—		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	0		0		—		Installment loans to individuals	—		—		—
		11,435		14,222		—			9,301		9,301		—
With an allowance recorded:	With an allowance recorded:							With an allowance recorded:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	60		60		1		Commercial, financial, and agricultural	420		3,207		2
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	1,543		1,543		330		Residential	1,273		1,273		246
Commercial	Commercial	5,841		5,841		1,638		Commercial	6,366		6,366		902
Construction	Construction	8		8		1		Construction	—		—		—
Consumer automobile loans	Consumer automobile loans	201		201		73		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	0		0		0		Installment loans to individuals	20		20		20
		7,653		7,653		2,043			8,079		10,866		1,170
Total:	Total:							Total:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	863		3,650		1		Commercial, financial, and agricultural	1,685		4,472		2
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	6,169		6,169		330		Residential	5,276		5,276		246
Commercial	Commercial	11,727		11,727		1,638		Commercial	10,285		10,285		902
Construction	Construction	128		128		1		Construction	114		114		—
Consumer automobile loans	Consumer automobile loans	201		201		73		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	0		0		0		Installment loans to individuals	20		20		20
		$	19,088	$	21,875	$	2,043		$	17,380	$	20,167	$	1,170

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		December 31, 2020							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	$	865	$	3,652	$	—	Commercial, financial, and agricultural	$	865	$	3,652	$	—
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	5,023		5,023		—		Residential	5,023		5,023		—
Commercial	Commercial	6,354		6,354		—		Commercial	6,354		6,354		—
Construction	Construction	124		124		—		Construction	124		124		—
Consumer automobile loans	Consumer automobile loans	0		0		—		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	0		0		—		Installment loans to individuals	—		—		—
		12,366		15,153		—			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	—		—		—
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	1,294		1,294		224		Residential	1,294		1,294		224
Commercial	Commercial	3,023		3,023		811		Commercial	3,023		3,023		811
Construction	Construction	0		0		0		Construction	—		—		—
Consumer automobile loans	Consumer automobile loans	0		0		0		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	0		0		0		Installment loans to individuals	—		—		—
		4,317		4,317		1,035			4,317		4,317		1,035
Total:	Total:							Total:
Commercial, financial, and agricultural	Commercial, financial, and agricultural	865		3,652		0		Commercial, financial, and agricultural	865		3,652		—
Real estate mortgage:	Real estate mortgage:							Real estate mortgage:
Residential	Residential	6,317		6,317		224		Residential	6,317		6,317		224
Commercial	Commercial	9,377		9,377		811		Commercial	9,377		9,377		811
Construction	Construction	124		124		0		Construction	124		124		—
Consumer automobile loans	Consumer automobile loans	0		0		0		Consumer automobile loans	—		—		—
Installment loans to individuals	Installment loans to individuals	0		0		0		Installment loans to individuals	—		—		—
		$	16,683	$	19,470	$	1,035		$	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 ~~March 31,~~September 30, 2021 and 2020:

Three Months Ended March 31,
2021 2020
(In Thousands) Average
Investment in
Impaired Loans Interest Income
Recognized on an
Accrual Basis on
Impaired Loans Interest Income
Recognized on a
Cash Basis on
Impaired Loans Average
Investment in
Impaired Loans Interest Income
Recognized on an
Accrual Basis on
Impaired Loans Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural $ 864 $ 0 $ 0 $ 2,155 $ 1 $ 0
Real estate mortgage:
Residential 6,081 51 0 5,953 57 0
Commercial 9,167 28 0 8,568 26 0
Construction 122 0 0 65 0 0
Consumer automobile 76 0 0 76 0 0
Other consumer installment loans 0 0 0 8 0 0
$ 16,310 $ 79 $ 0 $ 16,825 $ 84 $ 0


	Three Months Ended September 30,
	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	$	2,052	$	13	$	—	$	1,543	$	33	$	14
Real estate mortgage:
Residential	5,218		53		—		5,117		63		2
Commercial	10,530		61		—		6,587		71		—
Construction	115		1		—		54		1		—
Consumer automobile	—		—		—		147		—		—
Other consumer installment loans	20		—		—		—		—		—
	$	17,935	$	128	$	—	$	13,448	$	168	$	16

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	Nine Months Ended September 30,
	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	$	1,458	$	43	$	—	$	1,849	$	34	$	14
Real estate mortgage:
Residential	5,650		151		—		5,535		177		2
Commercial	9,848		126		—		7,577		118		—
Construction	119		4		—		60		1		—
Consumer automobile	38		—		—		111		1		3
Other consumer installment loans	10		9		—		4		—		—
	$	17,123	$	333	$	—	$	15,136	$	331	$	19

Troubled Debt Restructurings

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

There were 25 loan modifications considered to be TDRs completed during the ~~three~~nine months ended ~~March 31, 2021.~~September 30, 2021, respectively. There were 0no loan modifications considered TDRs completed during the three and nine months ended ~~March 31,~~September 30, 2020. Loan modifications that are considered TDRs completed during the three and nine months ended ~~March 31,~~September 30, 2021 were as follows:

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


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

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	Nine Months Ended September 30,
	2021
(In Thousands, Except Number of Contracts)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural	1	$	949	$	949
Real estate mortgage:
Residential	2	865		865
Commercial	2	855		855
Construction	—	—		—
	5	$	2,669	$	2,669

There ~~was 1~~were 2 loan modifications considered to be ~~a TDR~~TDRs made during the twelve months ~~previous~~prior to ~~March 31,~~September 30, 2021 that defaulted during the ~~three~~nine months ended ~~March 31,~~September 30, 2021. The defaulted loan type and recorded investment at ~~March 31,~~September 30, 2021 are as follows: 12 residential real estate loan with a recorded investment of ~~$687,000.~~$706,000. There were 32 loan modifications considered to be TDRs made during the twelve months previous to ~~March 31,~~September 30, 2020 that defaulted during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. The defaulted loan types and recorded investments at ~~March 31,~~September 30, 2020 are as follows: 1 commercial real estate loan with a recorded investment of $1,040,000, and 21 commercial and agricultural loans with a recorded investment of ~~$1,112,000.~~$640,000.

Troubled debt restructurings amounted to ~~$13,294,000~~$12,612,000 and $12,359,000 as of ~~March 31,~~September 30, 2021 and December 31, 2020, respectively.

The amount of foreclosed residential real estate held at ~~March 31,~~September 30, 2021 and December 31, 2020, totaled ~~$68,000~~$83,000 and $401,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at ~~March 31,~~September 30, 2021 and December 31, 2020, totaled ~~$421,000~~$193,000 and $629,154, respectively.

The Company began offering short-term loan modifications to provide relief to borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made in a good faith basis in response to COVID-19 who were current at the time the modification program is implemented do not need to be accounted for as TDRs. Loan modifications and payment deferrals have been at historical high levels as the impact of the pandemic continues. As of ~~March 31,~~September 30, 2021, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on ~~1,365~~1,371 loans with 7014 loans remaining in their deferral period with an aggregate outstanding balance of ~~$12,345,000.~~$1,346,000. These loan modifications met applicable requirements to not be considered troubled debt restructurings. The Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act (the “Economic Aid Act”) passed in December 2020 extended the CARES Act provisions permitting financial institutions to suspend TDR assessment and reporting requirements under generally accepted accounting principles until the earlier of 60 days after the date that the President terminates the COVID-19 national emergency or January 1, 2022. The number of customers seeking loan modifications or payment deferrals may increase as the effects of the pandemic continue.

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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

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

The following table presents the credit quality categories identified above as of ~~March 31,~~September 30, 2021 and December 31, 2020:


		March 31, 2021																												September 30, 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			$	180,038			$	574,785			$	343,898			$	39,595				$	150,456		$	19,658			$	1,308,430		Pass	$	176,189	$	584,538	$	360,033	$	45,144		$	146,663	$	9,718	$	1,322,285
Special Mention	Special Mention	180				2,474				9,253				0				0			0			11,907		Special Mention				442		240		6,160		686		—			—		7,528
Substandard	Substandard	1,841				2,477				10,574				190				0			0			15,082		Substandard				3,017		3,147		10,817		118		—			19		17,118
		$	182,059			$	579,736			$	363,725			$	39,785			$	150,456		$	19,658		$	1,335,419					$	179,648	$	587,925	$	377,010	$	45,948	$	146,663		$	9,737	$	1,346,931


		December 31, 2020																												December 31, 2020
		Commercial, Financial, and Agricultural				Real Estate Mortgages												Consumer automobile			Other consumer installment loans									Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile			Other consumer installment loans
(In Thousands)	(In Thousands)			Residential				Commercial				Construction								Totals			(In Thousands)				Residential					Commercial		Construction						Totals
Pass	Pass			$	162,694			$	584,599			$	355,616			$	39,192				$	156,403		$	19,938			$	1,318,442		Pass	$	162,694	$	584,599	$	355,616	$	39,192		$	156,403	$	19,938	$	1,318,442
Special Mention	Special Mention	180				556				7,973				0				0			0			8,709		Special Mention				180		556		7,973		—		—			—		8,709
Substandard	Substandard	1,869				4,566				9,599				117				0			2			16,153		Substandard				1,869		4,566		9,599		117		—			2		16,153
		$	164,743			$	589,721			$	373,188			$	39,309			$	156,403		$	19,940		$	1,343,304					$	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.

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

Activity in the allowance is presented for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020:


	Three Months Ended September 30, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,846	$	4,619	$	4,436	$	212	$	1,824	$	44	$	1,457	$	14,438
Charge-offs	(10)		(29)		—		—		(12)		(116)		—		(167)
Recoveries	8		—		84		5		107		7		—		211
Provision	277		175		(500)		11		(226)		194		144		75
Ending Balance	$	2,121	$	4,765	$	4,020	$	228	$	1,693	$	129	$	1,601	$	14,557


	Three Months Ended September 30, 2020
	Commercial, Financial, and 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	—		(6)		—		—		(200)		(33)		—		(239)
Recoveries	9		1		—		—		10		26		—		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


t	t	Three Months Ended March 31, 2021																										t				Nine Months Ended September 30, 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			$	1,936			$	4,460			$	3,635			$	134				$	1,906	$	261		$	1,471			$	13,803		Beginning Balance	$	1,936	$	4,460	$	3,635	$	134		$	1,906	$	261	$	1,471	$	13,803
Charge-offs	Charge-offs	(35)				(14)				0				0				(96)			(29)		0			(174)		Charge-offs				(45)		(172)		—		—		(235)			(173)		—		(625)
Recoveries	Recoveries	5				3				0				5				17			28		0			58		Recoveries				22		112		109		10		139			47		—		439
Provision	Provision	700				(48)				541				3				(92)			(25)		(564)			515		Provision				208		365		276		84		(117)			(6)		130		940
Ending Balance	Ending Balance	$	2,606			$	4,401			$	4,176			$	142			$	1,735		$	235	$	907		$	14,202	Ending Balance				$	2,121	$	4,765	$	4,020	$	228	$	1,693		$	129	$	1,601	$	14,557


		Three Months Ended March 31, 2020																														Nine Months Ended September 30, 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			$	1,779			$	4,306			$	3,210			$	118				$	1,780	$	278		$	423			$	11,894		Beginning Balance	$	1,779	$	4,306	$	3,210	$	118		$	1,780	$	278	$	423	$	11,894
Charge-offs	Charge-offs	(14)				(41)				0				0				(75)			(100)		0			(230)		Charge-offs				(22)		(174)		—		—		(289)			(215)		—		(700)
Recoveries	Recoveries	21				21				0				2				1			41		0			86		Recoveries				32		48		—		5		17			93		—		195
Provision	Provision	111				251				204				40				149			48		(53)			750		Provision				190		269		(165)		47		489			99		1,111		2,040
Ending Balance	Ending Balance	$	1,897			$	4,537			$	3,414			$	160			$	1,855		$	267	$	370		$	12,500	Ending Balance				$	1,979	$	4,449	$	3,045	$	170	$	1,997		$	255	$	1,534	$	13,429

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

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

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

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

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	September 30,
	2021		2020
Owners of residential rental properties	18.84	%	16.29	%
Owners of commercial rental properties	14.03	%	12.98	%

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


		March 31, 2021																							September 30, 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	$	1		$	330		$	1,638		$	1	$	73	$	0		$	0		$	2,043	Individually evaluated for impairment		$	2	$	246	$	902	$	—	$	—		$	20	$	—	$	1,170
Collectively evaluated for impairment	Collectively evaluated for impairment	2,605			4,071			2,538			141		1,662		235			907			12,159		Collectively evaluated for impairment		2,119		4,519		3,118		228		1,693			109		1,601		13,387
Total ending allowance balance	Total ending allowance balance	$	2,606		$	4,401		$	4,176		$	142	$	1,735	$	235		$	907		$	14,202	Total ending allowance balance		$	2,121	$	4,765	$	4,020	$	228	$	1,693		$	129	$	1,601	$	14,557

Loans:	Loans:																						Loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	863		$	6,169		$	11,727		$	128	$	201	$	0					$	19,088	Individually evaluated for impairment		$	1,685	$	5,276	$	10,285	$	114	$	—		$	20			$	17,380

Collectively evaluated for impairment	Collectively evaluated for impairment	181,196			573,567			351,998			39,657		150,255		19,658						1,316,331		Collectively evaluated for impairment		177,963		582,649		366,725		45,834		146,663			9,717				1,329,551
Total ending loans balance	Total ending loans balance	$	182,059		$	579,736		$	363,725		$	39,785	$	150,456	$	19,658					$	1,335,419	Total ending loans balance		$	179,648	$	587,925	$	377,010	$	45,948	$	146,663		$	9,737			$	1,346,931


		December 31, 2020																							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		$	224		$	811		$	0	$	0	$	0		$	0		$	1,035	Individually evaluated for impairment		$	—	$	224	$	811	$	—	$	—		$	—	$	—	$	1,035
Collectively evaluated for impairment	Collectively evaluated for impairment	1,936			4,236			2,824			134		1,906		261			1,471			12,768		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	$	1,936		$	4,460		$	3,635		$	134	$	1,906	$	261		$	1,471		$	13,803	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	$	865		$	6,317		$	9,377		$	124	$	0	$	0					$	16,683	Individually evaluated for impairment		$	865	$	6,317	$	9,377	$	124	$	—		$	—			$	16,683

Collectively evaluated for impairment	Collectively evaluated for impairment	163,878			583,404			363,811			39,185		156,403		19,940						1,326,621		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	$	164,743		$	589,721		$	373,188		$	39,309	$	156,403	$	19,940					$	1,343,304	Total ending loans balance		$	164,743	$	589,721	$	373,188	$	39,309	$	156,403		$	19,940			$	1,343,304

Note 7. Net Periodic Benefit Cost-Defined Benefit Plans

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

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


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

Interest cost	Interest cost		$	127	$	160		Interest cost	$	127	$	161	$	381	$	481
Expected return on plan assets	Expected return on plan assets		(386)		(318)			Expected return on plan assets	(386)		(330)		(1,158)		(956)

Amortization of net loss	Amortization of net loss		46		41			Amortization of net loss	45		52		138		144
Net periodic benefit	Net periodic benefit		$	(213)	$	(117)		Net periodic benefit	$	(214)	$	(117)	$	(639)	$	(331)

~~Table of Contents~~

Employer Contributions

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2020, that it expected to contribute a minimum of $500,000 to its defined benefit plan in 2021. As of ~~March 31,~~September 30, 2021, there were contributions of ~~$200,000~~$600,000 made to the plan with additional contributions of at least ~~$300,000~~$100,000 anticipated during the remainder of 2021.

Note 8. Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to ~~1,000,000~~1,500,000 shares to be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. During the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, there were ~~939~~2,873 and ~~751~~2,888 shares issued under the Plan, respectively.

Note 9. Off-Balance Sheet Risk

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

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

Financial instruments whose contract amounts represent credit risk are as follows at ~~March 31,~~September 30, 2021 and December 31, 2020:


(In Thousands)	(In Thousands)	March 31, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Commitments to extend credit	Commitments to extend credit	$	216,331	$	198,512	Commitments to extend credit	$	236,397	$	198,512
Standby letters of credit	Standby letters of credit	10,091		10,120		Standby letters of credit	9,949		10,120
Credit exposure from the sale of assets with recourse	Credit exposure from the sale of assets with recourse	9,634		9,182		Credit exposure from the sale of assets with recourse	10,031		9,182
		$	236,056	$	217,814		$	256,377	$	217,814

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

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

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Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

~~Table of Contents~~

Note 10. Fair Value Measurements

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


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

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

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

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

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of ~~March 31,~~September 30, 2021 and December 31, 2020, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


		March 31, 2021									September 30, 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	$	1,796	$	0	$	1,796	Mortgage-backed securities	$	—	$	1,775	$	—	$	1,775

State and political securities	State and political securities	0		113,252		0		113,252		State and political securities	—		116,474		—		116,474
Other debt securities	Other debt securities	0		51,847		0		51,847		Other debt securities	—		48,511		—		48,511
Investment equity securities:	Investment equity securities:									Investment equity securities:

Other equity securities	Other equity securities	1,265		0		0		1,265		Other equity securities	1,263		—		—		1,263
Investment securities, trading:	Investment securities, trading:									Investment securities, trading:

Other equity securities	Other equity securities	44		0		0		44		Other equity securities	40		—		—		40


		December 31, 2020									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	$	2,141	$	0	$	2,141	Mortgage-backed securities	$	—	$	2,141	$	—	$	2,141

State and political securities	State and political securities	0		108,013		0		108,013		State and political securities	—		108,013		—		108,013
Other debt securities	Other debt securities	0		52,107		0		52,107		Other debt securities	—		52,107		—		52,107
Investment equity securities:	Investment equity securities:									Investment equity securities:

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

Other equity securities	Other equity securities	40		0		0		40		Other equity securities	40		—		—		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 ~~March 31,~~September 30, 2021 and December 31, 2020, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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

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


	September 30, 2021
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	—	$	—	$	16,210	$	16,210
Other real estate owned	—		—		83		83


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

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

March 31, 2021

September 30, 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

10,231

Discounted cash flow

Temporary reduction in payment amount

3% to (63)%

(15)%

Impaired loans

13,826

Discounted cash flow

Temporary reduction in payment amount

3% to (63)%

(7)%

4,625

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(4)%

2,384

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(15)%

Other real estate owned

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, 2020

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

8,624

Discounted cash flow

Temporary reduction in payment amount

17% to (63)%

(18)%

7,024

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(8)%

Other real estate owned

401

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

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

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

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

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

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Note 11. Fair Value of Financial Instruments

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

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

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

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


		Carrying		Fair		Fair Value Measurements at March 31, 2021							Carrying		Fair		Fair Value Measurements at September 30, 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)	$	277,688	$	277,688	$	277,688	$	0	$	0	Cash and cash equivalents (1)	$	281,647	$	281,647	$	281,647	$	—	$	—

Restricted investment in bank stock (1)	Restricted investment in bank stock (1)	15,032		15,032		15,032		0		0		Restricted investment in bank stock (1)	14,649		14,649		14,649		—		—
Loans held for sale (1)	Loans held for sale (1)	2,568		2,568		2,568		0		0		Loans held for sale (1)	3,246		3,246		3,246		—		—
Loans, net	Loans, net	1,321,697		1,314,153		0		0		1,314,153		Loans, net	1,332,668		1,340,252		—		—		1,340,252
Bank-owned life insurance (1)	Bank-owned life insurance (1)	33,839		33,839		33,839		0		0		Bank-owned life insurance (1)	33,836		33,836		33,836		—		—
Accrued interest receivable (1)	Accrued interest receivable (1)	8,583		8,583		8,583		0		0		Accrued interest receivable (1)	8,529		8,529		8,529		—		—

Financial liabilities:	Financial liabilities:											Financial liabilities:
Interest-bearing deposits	Interest-bearing deposits	$	1,085,448	$	1,088,714	$	839,452	$	0	$	249,262	Interest-bearing deposits	$	1,111,144	$	1,114,193	$	876,786	$	—	$	237,407
Noninterest-bearing deposits (1)	Noninterest-bearing deposits (1)	478,916		478,916		478,916		0		0		Noninterest-bearing deposits (1)	481,875		481,875		481,875		—		—
Short-term borrowings (1)	Short-term borrowings (1)	6,650		6,650		6,650		0		0		Short-term borrowings (1)	9,404		9,404		9,404		—		—
Long-term borrowings	Long-term borrowings	141,094		145,456		0		0		145,456		Long-term borrowings	126,007		129,392		—		—		129,392
Accrued interest payable (1)	Accrued interest payable (1)	988		988		988		0		0		Accrued interest payable (1)	828		828		828		—		—

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

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		Carrying		Fair		Fair Value Measurements at December 31, 2020							Carrying		Fair		Fair Value Measurements at December 31, 2020
(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)	$	213,358	$	213,358	$	213,358	$	0	$	0	Cash and cash equivalents (1)	$	213,358	$	213,358	$	213,358	$	—	$	—

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

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

(1) The financial instrument is carried at cost at December 31, 2020, which approximate the fair value of the instruments

The methods and assumptions used by the Company in estimating fair values of financial instruments at ~~March 31,~~September 30, 2021 is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables.

Note 12. Stock Options

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

As of January 1, 2021, the Company had a total of 841,275 stock options outstanding. ~~The Company did not issue any stock options during~~During the period ended ~~March 31, 2021.~~September 30, 2021, the Company issued 234,500 stock options with a strike price of $24.23 to a group of employees. The options granted in 2021 all expire ten years from the grant date. Of the 234,500 grants awarded in 2021, 156,500 of the options vest in three years while the 78,000 remaining options vest in five years.

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


Stock Options Granted
Date	Shares	Forfeited	Outstanding	Strike Price		Vesting Period	Expiration
April 9, 2021	156,500	—	156,500	$	24.23	3 years	10 years
April 9, 2021	78,000	—	78,000	24.23		5 years	10 years
March 11, 2020	119,300	—	119,300	25.31		3 years	10 years
March 11, 2020	119,200	—	119,200	25.31		5 years	10 years
March 15, 2019	120,900	(12,900)	108,000	28.01		3 years	10 years
March 15, 2019	119,100	(12,600)	106,500	28.01		5 years	10 years
August 24, 2018	75,300	(9,900)	65,400	30.67		3 years	10 years
August 24, 2018	149,250	(19,800)	129,450	30.67		5 years	10 years
January 5, 2018	18,750	—	18,750	30.07		3 years	10 years
January 5, 2018	18,750	—	18,750	30.07		5 years	10 years
March 24, 2017	69,375	(11,250)	58,125	29.47		3 years	10 years
March 24, 2017	35,625	(2,250)	33,375	29.47		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:


		March 31, 2021			March 31, 2020				September 30, 2021			September 30, 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	841,275	$	28.17	625,800	$	29.29	Outstanding, beginning of year	841,275	$	28.17	625,800	$	29.29
Granted	Granted	0	0		238,500	25.34		Granted	234,500	24.23		238,500	25.34
Exercised	Exercised	0	0		0	0		Exercised	—	—		—	—
Forfeited	Forfeited	0	0		0	0		Forfeited	(30,300)	29.33		—	—
Expired	Expired	0	0		0	0		Expired	—	—		—	—
Outstanding, end of period	Outstanding, end of period	841,275	$	28.17	864,300	$	29.20	Outstanding, end of period	1,045,475	$	27.25	864,300	$	28.20

Exercisable, end of period	Exercisable, end of period	113,250	$	29.13	62,625	$	29.47	Exercisable, end of period	176,400	$	29.70	97,875	$	28.95

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

Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense related to stock options was ~~$220,000~~$227,000 and $754,000 for the three and nine months ended ~~March 31,~~September 30, 2021 compared to ~~$198,000~~$239,000 and $675,000 for the same ~~period~~periods of 2020. As of ~~March 31,~~September 30, 2021, a total of ~~113,250~~176,400 stock options were exercisable and the weighted average years to expiration of all options was ~~7.69~~7.19 years. Total unrecognized compensation cost for non-vested options was ~~$1,671,000~~$2,142,000 and will be recognized over their weighted average remaining vesting period of ~~1.27~~1.17 years.

Note 13. Leases

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

(In Thousands)

Statement of Financial Condition classification

March 31, 2021

December 31, 2020

(In Thousands)

Statement of Financial Condition classification

September 30, 2021

December 31, 2020

Finance lease right of use assets

Premises and equipment, net

7,758

5,257

Finance lease right of use assets

Premises and equipment, net

7,543

5,257

Finance lease liabilities

Long-term borrowings

8,094

5,475

Finance lease liabilities

Long-term borrowings

8,007

5,475

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


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

Finance Lease Cost:	Finance Lease Cost:							Finance Lease Cost:
Amortization of right-of-use asset	Amortization of right-of-use asset		$	152	$	50		Amortization of right-of-use asset	$	108	$	50	$	367	$	150
Interest expense	Interest expense		71		53			Interest expense	62		53		195		159
Operating lease cost	Operating lease cost		76		91			Operating lease cost	73		76		223		243

Variable lease cost	Variable lease cost		0		0			Variable lease cost	—		—		—		—
Total Lease Cost	Total Lease Cost		$	299	$	194		Total Lease Cost	$	243	$	179	$	785	$	552

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


(In Thousands)	(In Thousands)	Operating		Finance		(In Thousands)	Operating		Finance
2021	2021	$	219	$	314	2021	$	71	$	104
2022	2022	298		419		2022	290		420
2023	2023	273		421		2023	265		421
2024	2024	262		427		2024	255		427
2025	2025	265		929		2025	257		929
2026 and thereafter	2026 and thereafter	2,911		9,664		2026 and thereafter	2,829		9,664
Total undiscounted cash flows	Total undiscounted cash flows	4,228		12,174		Total undiscounted cash flows	3,967		11,965
Discount on cash flows	Discount on cash flows	(1,098)		(4,080)		Discount on cash flows	(1,020)		(3,958)
Total lease liability	Total lease liability	$	3,130	$	8,094	Total lease liability	$	2,947	$	8,007

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


		Operating		Finance			Operating		Finance
Weighted-average term (years)	Weighted-average term (years)	18.1		25.1		Weighted-average term (years)	17.8		24.6
Weighted-average discount rate	Weighted-average discount rate	3.51	%	3.19	%	Weighted-average discount rate	3.52	%	3.19	%

Note 14. Reclassification of Comparative Amounts

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had 0no effect on net income or shareholders’ equity.

Note 15. Subsequent Events

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

Note 16. Risks and Uncertainties

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

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

This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; (vi) the length and extent of the economic contraction as a result of the COVID-19 pandemic; or (vii) the effect of changes in the business cycle and downturns in the local, regional or national economies; and (viii) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 and in other filings made by the Company under the Securities Exchange Act of 1934.

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

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

EARNINGS SUMMARY

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

Summary Results

Net income for the three and nine months ended ~~March 31,~~September 30, 2021 was ~~$3,441,000~~$4,125,000 and $11,154,000 compared to ~~$3,073,000~~$4,472,000 and $11,305,000 for the same ~~period~~periods of 2020. Results for the three and nine months ended ~~March 31,~~September 30, 2021 compared to 2020 were impacted by ~~an increase~~a decrease in after-tax securities gains of ~~$72,000~~$767,000 (from a gain of ~~$22,000~~$799,000 to a gain of ~~$94,000).~~$32,000) for the three month period and a decrease in after-tax securities gains of $739,000 (from a gain of $975,000 to a gain of $236,000) for the nine month period. Basic and diluted earnings per share for the three and nine months ended ~~March 31,~~September 30, 2021 were ~~$0.49~~$0.58 and $1.58 compared to basic and diluted earnings per share of ~~$0.44~~$0.63 and ~~$0.43,~~$1.61, respectively, for the corresponding periods of 2020. Return on average assets and return on average equity were 0.86% and 9.85% for the three months ended September 30, 2021 compared to 0.97% and 11.05% for the corresponding period of 2020. Return on average assets and return on average equity were ~~0.75%~~0.79% and ~~8.59%~~9.17% for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 compared to ~~0.74%~~0.85% and ~~7.83%~~9.57% for the corresponding period of 2020. Net income from core operations (“core earnings”) was ~~$3,347,000~~$4,093,000 and $10,918,000 for the three and nine months ended ~~March 31,~~September 30, 2021 compared to ~~$3,051,000~~$3,673,000 and $10,330,000 for the corresponding ~~period~~periods of 2020. Core basic and diluted earnings per share for the three and nine months ended ~~March 31,~~September 30, 2021 were ~~$0.47~~$0.58 and $1.55 compared to ~~$0.44~~$0.52 and ~~$0.43~~$1.47 basic and diluted for the corresponding ~~period~~periods of 2020.

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

Reconciliation of GAAP and Non-GAAP Financial Measures


(Dollars in Thousands, Except Per Share Data)	(Dollars in Thousands, Except Per Share Data)	Three Months Ended March 31,				(Dollars in Thousands, Except Per Share Data)	Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020					2021		2020		2021		2020
GAAP net income	GAAP net income	$	3,441	$	3,073			GAAP net income	$	4,125	$	4,472	$	11,154	$	11,305
Less: net securities gains, net of tax	Less: net securities gains, net of tax	94		22				Less: net securities gains, net of tax	32		799		236		975
Non-GAAP core earnings	Non-GAAP core earnings	$	3,347	$	3,051			Non-GAAP core earnings	$	4,093	$	3,673	$	10,918	$	10,330


		Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020				2021		2020		2021		2020
Return on average assets (ROA)	Return on average assets (ROA)	0.75	%	0.74	%		Return on average assets (ROA)	0.86	%	0.97	%	0.79	%	0.85	%
Less: net securities gains, net of tax	Less: net securities gains, net of tax	0.02	%	0.01	%		Less: net securities gains, net of tax	—	%	0.18	%	0.02	%	0.07	%
Non-GAAP core ROA	Non-GAAP core ROA	0.73	%	0.73	%		Non-GAAP core ROA	0.86	%	0.79	%	0.77	%	0.78	%

Three Months Ended March 31,
2021 2020
Return on average equity (ROE) 8.59 % 7.83 %
Less: net securities gains, net of tax 0.24 % 0.06 %
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


		Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020
Return on average equity (ROE)		9.85	%	11.05	%	9.17	%	9.57	%
Less: net securities gains, net of tax		0.07	%	1.97	%	0.19	%	0.82	%
Non-GAAP core ROE	.	9.78	%	9.08	%	8.98	%	8.75	%

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Basic earnings per share (EPS)	$	0.58	$	0.63	$	1.58	$	1.61
Less: net securities gains, net of tax	—		0.11		0.03		0.14
Non-GAAP core operating EPS	$	0.58	$	0.52	$	1.55	$	1.47


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Diluted EPS	$	0.58	$	0.63	$	1.58	$	1.61
Less: net securities gains, net of tax	—		0.11		0.03		0.14
Non-GAAP diluted core EPS	$	0.58	$	0.52	$	1.55	$	1.47

Interest and Dividend Income

Interest and dividend income for the three and nine months ended ~~March 31,~~September 30, 2021 decreased to ~~$14,595,000~~$14,714,000 and $43,715,000, respectively, compared to ~~$16,161,000~~$15,387,000 and $47,592,000 for the same ~~period~~periods of 2020 as the interest rate environment remains at a level below historical levels. Loan portfolio income decreased due to a decrease in average rate paid on loans and a decrease in the average loan portfolio balance. Investment securities ~~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~~increase in dividend and other interest income is due to ~~a decrease~~an increase in the amount of dividends received on restricted investment in bank stock held.

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


	Three Months Ended
	September 30, 2021				September 30, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	$	13,382	90.95	%	$	14,080	91.51	%	$	(698)	(4.96)	%
Investment securities:
Taxable	834		5.67		925		6.01		(91)		(9.84)
Tax-exempt	160		1.09		170		1.10		(10)		(5.88)
Dividend and other interest income	338		2.29		212		1.38		126		59.43
Total interest and dividend income	$	14,714	100.00	%	$	15,387	100.00	%	$	(673)	(4.37)	%


		Three Months Ended													Nine Months Ended
		March 31, 2021				March 31, 2020				Change					September 30, 2021				September 30, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	Loans including fees	$	13,345	91.44	%	$	14,657	90.69	%	$	(1,312)	(8.95)	%	Loans including fees	$	39,826	91.10	%	$	43,403	91.20	%	$	(3,577)	(8.24)	%
Investment securities:	Investment securities:													Investment securities:
Taxable	Taxable	819		5.61		1,010		6.25		(191)		(18.91)		Taxable	2,491		5.70		2,958		6.22		(467)		(15.79)
Tax-exempt	Tax-exempt	171		1.17		145		0.90		26		17.93		Tax-exempt	495		1.13		484		1.02		11		2.27
Dividend and other interest income	Dividend and other interest income	260		1.78		349		2.16		(89)		(25.50)		Dividend and other interest income	903		2.07		747		1.57		156		20.88
Total interest and dividend income	Total interest and dividend income	$	14,595	100.00	%	$	16,161	100.00	%	$	(1,566)	(9.69)	%	Total interest and dividend income	$	43,715	100.00	%	$	47,592	100.01	%	$	(3,877)	(8.15)	%

Interest Expense

Interest expense for the three and nine months ended ~~March 31,~~September 30, 2021 decreased ~~$1,475,000~~$1,460,000 and $4,418,000, respectively, compared to the same ~~period~~periods of 2020. Since March 31, 2020, interest-bearing deposit rates have been significantly reduced due to the economic impact of COVID-19 and an increased level of excess balance sheet liquidity. The decrease in deposit rates was offset in part by a significant increase in average interest-bearing demand deposits. ~~Long-term~~Growth in the deposit portfolio has allowed for a decrease in average short and long-term borrowings ~~have been utilized to lock~~resulting in ~~funding at historically low interest rates~~decreased expense levels for the three and ~~to assist with the funding~~nine month periods.

Table of ~~the loan and investment portfolios.~~Contents

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


	Three Months Ended
	September 30, 2021				September 30, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	$	1,308	62.83	%	$	2,569	72.53	%	$	(1,261)	(49.09)	%
Short-term borrowings	3		0.14		8		0.23		(5)		(62.50)
Long-term borrowings	771		37.03		965		27.24		(194)		(20.10)
Total interest expense	$	2,082	100.00	%	$	3,542	100.00	%	$	(1,460)	(41.22)	%


		Three Months Ended													Nine Months Ended
		March 31, 2021				March 31, 2020				Change					September 30, 2021				September 30, 2020				Change
(In Thousands)	(In Thousands)	Amount		% Total		Amount		% Total		Amount		%		(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	Deposits	$	1,684	66.69	%	$	3,035	75.88	%	$	(1,351)	(44.51)	%	Deposits	$	4,481	64.77	%	$	8,406	74.15	%	$	(3,925)	(46.69)	%
Short-term borrowings	Short-term borrowings	2		0.08		22		0.55		(20)		(90.91)		Short-term borrowings	7		0.10		37		0.33		(30)		(81.08)
Long-term borrowings	Long-term borrowings	839		33.23		943		23.58		(104)		(11.03)		Long-term borrowings	2,430		35.13		2,893		25.52		(463)		(16.00)
Total interest expense	Total interest expense	$	2,525	100.00	%	$	4,000	100.01	%	$	(1,475)	(36.88)	%	Total interest expense	$	6,918	100.00	%	$	11,336	100.00	%	$	(4,418)	(38.97)	%

Net Interest Margin

The net interest margin ~~(“NIM”)~~ for the three and nine months ended ~~March 31,~~September 30, 2021 was ~~2.88%~~2.85% and 2.84%, compared to ~~3.19%~~2.76% and 2.97% for the corresponding ~~period~~periods of 2020. The decrease in the net interest margin for the nine month period was driven by a decrease in the yield of the loan portfolio of 3119 and 32 basis points ("bps"), while the ~~the~~ investment portfolio yield declined 7751 and 59 bps, ~~for the three month period~~respectively, during the current low interest rate environment. ~~The~~Further compressing the net interest margin was the significant increase of interest-bearing ~~deposits further compressed the net interest margin.~~deposits. These deposits carry a current yield of a few basis points as commercial customers have received PPP funding and retail customers have received stimulus funding. Rates paid on interest-bearing deposit liabilities decreased 48 and 53 bps as rates paid on interest-bearing deposits were decreased significantly during 2020 and 2021 due to the economic impact of COVID-19 prolonging the low interest rate environment. These deposit rate decreases have partially offset the decline in earning asset yield.

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customers have received stimulus funding. Rates paid on interest-bearing liabilities were decreased significantly since March 31, 2020 resulting in a decline in rate paid of 60 bps as compared to the three months ended 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 partially offset the decline in earning asset yield.

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


	AVERAGE BALANCES AND INTEREST RATES
	Three Months Ended September 30, 2021						Three Months Ended September 30, 2020
(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:
Tax-exempt loans (3)	$	46,193	$	307	2.64	%	$	42,047	$	386	3.65	%
All other loans	1,296,790		13,139		4.02	%	1,313,474		13,775		4.17	%
Total loans (2)	1,342,983		13,446		3.97	%	1,355,521		14,161		4.16	%

Federal funds sold	40,000		72		0.71	%	—		—		—	%

Taxable securities	150,308		1,022		2.76	%	140,695		1,116		3.23	%
Tax-exempt securities (3)	37,069		203		2.22	%	30,587		216		2.87	%
Total securities	187,377		1,225		2.65	%	171,282		1,332		3.16	%

Interest-bearing deposits	205,715		78		0.15	%	203,817		21		0.04	%

Total interest-earning assets	1,776,075		14,821		3.32	%	1,730,620		15,514		3.57	%

Other assets	132,820						121,901

Total assets	$	1,908,895					$	1,852,521

Liabilities and shareholders’ equity:
Savings	$	228,255	22		0.04	%	$	199,420	51		0.10	%
Super Now deposits	308,591		219		0.28	%	273,190		489		0.71	%
Money market deposits	306,177		238		0.31	%	263,926		330		0.50	%
Time deposits	248,649		829		1.32	%	329,190		1,699		2.05	%
Total interest-bearing deposits	1,091,672		1,308		0.48	%	1,065,726		2,569		0.96	%

Short-term borrowings	8,696		3		0.14	%	17,517		8		0.18	%
Long-term borrowings	133,536		771		2.29	%	165,064		965		2.33	%
Total borrowings	142,232		774		2.16	%	182,581		973		2.12	%

Total interest-bearing liabilities	1,233,904		2,082		0.67	%	1,248,307		3,542		1.13	%

Demand deposits	490,500						424,753
Other liabilities	17,027						17,644
Shareholders’ equity	167,464						161,817

Total liabilities and shareholders’ equity	$	1,908,895					$	1,852,521
Interest rate spread					2.65	%					2.44	%
Net interest income/margin			$	12,739	2.85	%			$	11,972	2.76	%

AVERAGE BALANCES AND INTEREST RATES
Three Months Ended March 31, 2021 Three Months Ended March 31, 2020
(In Thousands) Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate
Assets:
Tax-exempt loans (3) $ 45,534 $ 349 3.11 % $ 52,979 $ 404 3.07 %
All other loans 1,293,395 13,069 4.10 % 1,303,838 14,338 4.42 %
Total loans (2) 1,338,929 13,418 4.06 % 1,356,817 14,742 4.37 %
Taxable securities 145,047 1,033 2.89 % 142,788 1,273 3.63 %
Tax-exempt securities 36,369 216 2.41 % 23,773 184 3.15 %
Total securities 181,416 1,249 2.79 % 166,561 1,457 3.56 %
Interest-bearing deposits 195,995 46 0.10 % 26,716 86 1.29 %
Total interest-earning assets 1,716,340 14,713 3.48 % 1,550,094 16,285 4.23 %
Other assets 124,074 112,219
Total assets $ 1,840,414 $ 1,662,313
Liabilities and shareholders’ equity:
Savings $ 214,636 44 0.08 % $ 177,840 91 0.21 %
Super Now deposits 289,236 267 0.37 % 219,826 424 0.78 %
Money market deposits 306,000 267 0.35 % 210,708 477 0.91 %
Time deposits 254,460 1,106 1.76 % 379,259 2,043 2.17 %
Total interest-bearing deposits 1,064,332 1,684 0.64 % 987,633 3,035 1.24 %
Short-term borrowings 5,680 2 0.14 % 10,847 22 0.85 %
Long-term borrowings 141,483 839 2.40 % 159,920 943 2.37 %
Total borrowings 147,163 841 2.32 % 170,767 965 2.28 %
Total interest-bearing liabilities 1,211,495 2,525 0.85 % 1,158,400 4,000 1.39 %
Demand deposits 445,759 326,817
Other liabilities 22,872 19,991
Shareholders’ equity 160,288 157,105
Total liabilities and shareholders’ equity $ 1,840,414 $ 1,662,313
Interest rate spread 2.63 % 2.84 %
Net interest income/margin $ 12,188 2.88 % $ 12,285 3.19 %

Table of Contents


	AVERAGE BALANCES AND INTEREST RATES
	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:
Tax-exempt loans (3)	$	46,217	$	991	2.87	%	$	46,476	$	1,138	3.27	%
All other loans	1,292,028		39,043		4.04	%	1,304,207		42,504		4.35	%
Total loans (2)	1,338,245		40,034		4.00	%	1,350,683		43,642		4.32	%

Federal funds sold	21,993		117		0.71	%	—		—		—	%

Taxable securities	147,942		3,105		2.84	%	143,601		3,582		3.38	%
Tax-exempt securities	36,638		627		2.31	%	27,558		613		3.02	%
Total securities	184,580		3,732		2.73	%	171,159		4,195		3.32	%

Interest-bearing deposits	206,895		172		0.11	%	125,447		123		0.13	%

Total interest-earning assets	1,751,713		44,055		3.37	%	1,647,289		47,960		3.89	%

Other assets	128,567						116,868

Total assets	$	1,880,280					$	1,764,157

Liabilities and shareholders’ equity:
Savings	$	222,889	94		0.06	%	$	189,205	209		0.15	%
Super Now deposits	294,570		694		0.31	%	248,327		1,322		0.71	%
Money market deposits	307,309		761		0.33	%	234,772		1,225		0.70	%
Time deposits	253,130		2,932		1.55	%	356,897		5,650		2.11	%
Total interest-bearing deposits	1,077,898		4,481		0.56	%	1,029,201		8,406		1.09	%

Short-term borrowings	7,152		7		0.13	%	13,195		37		0.37	%
Long-term borrowings	138,669		2,430		2.34	%	165,702		2,893		2.33	%
Total borrowings	145,821		2,437		2.23	%	178,897		2,930		2.19	%

Total interest-bearing liabilities	1,223,719		6,918		0.76	%	1,208,098		11,336		1.25	%

Demand deposits	473,088						378,889
Other liabilities	21,327						19,682
Shareholders’ equity	162,146						157,488

Total liabilities and shareholders’ equity	$	1,880,280					$	1,764,157
Interest rate spread					2.61	%					2.64	%
Net interest income/margin			$	37,137	2.84	%			$	36,624	2.97	%

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	(In Thousands)		2021		2020			(In Thousands)	2021		2020		2021		2020
Total interest income	Total interest income		$	14,595	$	16,161		Total interest income	$	14,714	$	15,387	$	43,715	$	47,592
Total interest expense	Total interest expense		2,525		4,000			Total interest expense	2,082		3,542		6,918		11,336
Net interest income	Net interest income		12,070		12,161			Net interest income	12,632		11,845		36,797		36,256
Tax equivalent adjustment	Tax equivalent adjustment		118		124			Tax equivalent adjustment	107		127		340		368
Net interest income (fully taxable equivalent)	Net interest income (fully taxable equivalent)		$	12,188	$	12,285		Net interest income (fully taxable equivalent)	$	12,739	$	11,972	$	37,137	$	36,624

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


		Three Months Ended March 31,					Three Months Ended September 30,						Nine Months Ended September 30,
		2021 vs. 2020					2021 vs. 2020						2021 vs. 2020
		Increase (Decrease) Due to					Increase (Decrease) Due to						Increase (Decrease) Due to
(In Thousands)	(In Thousands)		Volume		Rate			Net		(In Thousands)	Volume		Rate		Net		Volume			Rate		Net
Interest income:	Interest income:									Interest income:
Tax-exempt loans	Tax-exempt loans		$	(60)	$	5		$	(55)	Tax-exempt loans	$	35	$	(114)	$	(79)	$	(6)		$	(141)	$	(147)
All other loans	All other loans		(126)		(1,143)			(1,269)		All other loans	(166)		(470)		(636)		(401)			(3,060)		(3,461)

Federal funds sold										Federal funds sold	72		—		72		117			—		117
Taxable investment securities	Taxable investment securities		21		(261)			(240)		Taxable investment securities	76		(170)		(94)		47			(524)		(477)
Tax-exempt investment securities	Tax-exempt investment securities		83		(51)			32		Tax-exempt investment securities	42		(55)		(13)		121			(107)		14
Interest bearing deposits	Interest bearing deposits		103		(143)			(40)		Interest bearing deposits	—		57		57		53			(4)		49
Total interest-earning assets	Total interest-earning assets		21		(1,593)			(1,572)		Total interest-earning assets	59		(752)		(693)		(69)			(3,836)		(3,905)

Interest expense:	Interest expense:									Interest expense:
Savings deposits	Savings deposits		17		(64)			(47)		Savings deposits	6		(35)		(29)		12			(127)		(115)
Super Now deposits	Super Now deposits		110		(267)			(157)		Super Now deposits	56		(326)		(270)		89			(717)		(628)
Money market deposits	Money market deposits		161		(371)			(210)		Money market deposits	47		(139)		(92)		147			(611)		(464)
Time deposits	Time deposits		(595)		(342)			(937)		Time deposits	(354)		(516)		(870)		(1,421)			(1,297)		(2,718)
Short-term borrowings	Short-term borrowings		(7)		(13)			(20)		Short-term borrowings	(3)		(2)		(5)		(12)		0	(18)		(30)
Long-term borrowings	Long-term borrowings		(116)		12			(104)		Long-term borrowings	(178)		(16)		(194)		(467)		0	4		(463)
Total interest-bearing liabilities	Total interest-bearing liabilities		(430)		(1,045)			(1,475)		Total interest-bearing liabilities	(426)		(1,034)		(1,460)		(1,652)			(2,766)		(4,418)
Change in net interest income	Change in net interest income		$	451	$	(548)		$	(97)	Change in net interest income	$	485	$	282	$	767	$	1,583		$	(1,070)	$	513

Provision for Loan Losses

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

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

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at ~~March 31,~~September 30, 2021, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

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

The allowance for loan losses increased from $13,803,000 at December 31, 2020 to ~~$14,202,000~~$14,557,000 at ~~March 31,~~September 30, 2021. The increase in the allowance for loan losses was primarily driven by the economic uncertainity caused by the COVID-19 pandemic. At ~~March 31,~~September 30, 2021 and December 31, 2020, the allowance for loan losses to total loans was ~~1.06%~~1.08% and 1.03%, respectively.

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The provision for loan losses totaled ~~$515,000~~$75,000 and $940,000 for the three and nine months ended ~~March 31,~~September 30, 2021 and the amount for the corresponding 2020 ~~period~~periods was ~~$750,000.~~$645,000 and $2,040,000, respectively. The decrease in the provision for loan losses for the three and nine months ended ~~March 31,~~September 30, 2021 compared to the corresponding 2020 ~~period~~periods was the result of ~~limited~~ economic improvement and a decrease in the loan ~~portfolio. The provision remained above historical levels, however, due to the~~portfolio, offset by continued economic uncertainty caused by ~~COVID-19.~~COVID-19 and supply chain shortages.

Nonperforming loans decreased to ~~$9,272,000~~$7,763,000 at ~~March 31,~~September 30, 2021 from ~~$11,300,000~~$10,553,000 at ~~March 31,~~September 30, 2020 primarily due to a commercial loan relationship that was paid-off during the fourth quarter of 2020. The majority of nonperforming loans involve loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses. The ratio of nonperforming loans to total loans was ~~0.69%~~0.58% and ~~0.84%~~0.78% at ~~March 31,~~September 30, 2021 and 2020, respectively, and the ratio of the allowance for loan losses to nonperforming loans was ~~153.17%~~187.52% and ~~110.62%~~127.25% at ~~March 31,~~September 30, 2021 and 2020, respectively. Internal loan review and analysis coupled with changes in the loan portfolio composition and the impact of the COVID-19 pandemic resulted in a provision for loan losses of ~~$515,000~~$940,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 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
September 30, 2021								September 30, 2021	$	854	$	6,909	$	7,763
June 30, 2021								June 30, 2021	529		7,402		7,931
March 31, 2021	March 31, 2021	$	607	$	8,665	$	9,272	March 31, 2021	607		8,665		9,272
December 31, 2020	December 31, 2020	1,212		9,122		10,334		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		1,279		9,818		11,097
March 31, 2020		1,503		9,797		11,300

Non-interest Income

Total non-interest income for the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same ~~period~~periods in 2020 decreased ~~$177,000 to $2,614,000.~~$1,084,000 and $619,000, respectively. Excluding net securities gains, non-interest income for the three and nine months ended ~~March 31,~~September 30, 2021 decreased $113,000 and increased ~~$85,000~~$315,000, respectively, compared to the same ~~period~~periods in 2020. Gain on sale of loans ~~increased~~decreased for the three and nine month periods as the ~~low rate environment~~product mix has ~~led~~caused the Company to ~~an increase~~increasingly act in ~~refinancing activity.~~a broker capacity with the fee income from broker activity included in other income. Service charges increased for the three month period as the economy continued to reopen during the three months ended September 30, 2021. Service charges declined for the nine month period as ~~the~~ overdraft fee income has declined as a result of the impact of the COVID-19 pandemic. ~~The decrease in brokerage~~Brokerage commissions ishave fluctuated due to ~~a change~~changes in the product mix and reduced consumer activity during the COVID-19 ~~pandemic.~~pandemic, while the further reopening of the economy during the three months ended September 30, 2021 has led to increased activity. The increase in debit card fees is a result of an increase in debit card usage. The fluctuation in other income results primarily from other fees associated with loans sold on the secondary ~~market.~~market as the Company acted in a broker capacity. Insurance commissions continue to increase as the insurance company continues to build a customer base.

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

Three Months Ended
March 31, 2021 March 31, 2020 Change
(In Thousands) Amount % Total Amount % Total Amount %
Service charges $ 383 14.65 % $ 549 22.53 % $ (166) (30.24) %
Net debt securities gains, available for sale 138 5.28 21 0.86 117 (557.14)
Net equity securities (losses) gains (23) (0.88) 20 0.82 (43) 215.00
Net securities gains (losses), trading 4 0.15 (14) (0.57) 18 (128.57)
Bank-owned life insurance 173 6.62 192 7.88 (19) (9.90)
Gain on sale of loans 908 34.74 444 18.22 464 104.50
Insurance commissions 157 6.01 127 5.21 30 23.62
Brokerage commissions 219 8.38 369 15.14 (150) (40.65)
Debit card income 380 14.54 274 11.24 106 38.69
Other 275 10.51 455 18.67 (180) (39.56)
Total non-interest income $ 2,614 100.00 % $ 2,437 100.00 % $ 177 7.26 %

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Non-interest income composition for the three and nine months ended September 30, 2021 and 2020 was as follows:


	Three Months Ended
	September 30, 2021				September 30, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	$	456	15.45	%	$	388	9.62	%	$	68	17.53	%
Net debt securities gains, available for sale	48		1.63		1,013		25.11		(965)		95.26
Net equity securities losses	(6)		(0.20)		—		—		(6)		n/a
Net securities losses, trading	(2)		(0.07)		(2)		(0.05)		—		—
Bank-owned life insurance	279		9.45		156		3.87		123		78.85
Gain on sale of loans	456		15.45		1,449		35.91		(993)		(68.53)
Insurance commissions	129		4.37		101		2.50		28		27.72
Brokerage commissions	237		8.03		224		5.55		13		5.80
Debit card income	388		13.15		352		8.72		36		10.23
Other	966		32.74		354		8.77		612		172.88
Total non-interest income	$	2,951	100.00	%	$	4,035	100.00	%	$	(1,084)	(26.86)	%


	Nine Months Ended
	September 30, 2021				September 30, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	$	1,218	14.37	%	$	1,249	13.74	%	$	(31)	(2.48)	%
Net debt securities gains, available for sale	323		3.81		1,220		13.42		(897)		73.52
Net equity securities (losses) gains	(25)		(0.30)		30		0.33		(55)		183.33
Net securities gains (losses), trading	1		0.01		(16)		(0.18)		17		(106.25)
Bank-owned life insurance	614		7.25		492		5.41		122		24.80
Gain on sale of loans	2,034		24.00		2,921		32.12		(887)		(30.37)
Insurance commissions	436		5.15		320		3.52		116		36.25
Brokerage commissions	663		7.82		779		8.57		(116)		(14.89)
Debit card income	1,166		13.76		936		10.29		230		24.57
Other	2,044		24.13		1,162		12.78		882		75.90
Total non-interest income	$	8,474	100.00	%	$	9,093	100.00	%	$	(619)	(6.81)	%

Non-interest Expense

Total non-interest expense ~~decreased $159,000~~increased $740,000 and $1,218,000 for the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same ~~period~~periods of 2020. The ~~decrease~~increase in salaries and employee benefits is attributable to a ~~staff reduction resulting from~~branch opening and the callback of employees who were in lay off status during a ~~change in banking channels utilized by customers during~~portion of the 2020 periods due to the COVID-19 pandemic. Furniture and equipment expenses ~~decreased~~in addition to occupancy expenses increased as maintenance costs have ~~decreased~~increased and ~~a decrease~~an increase in the level of depreciation. Software amortization decreased as the number of vendors is being consolidated resulting in new licensing fee structures at a lower cost. ~~The fluctuation in professional fees consists primarily of an decrease in legal fees. Occupancy expenses have increased primarily due to recently opened branches.~~ Other expense decreased for the nine month period primarily from the change in expense associated with the defined benefit pension and a decrease in the amortization of the low income housing partnerships. Marketing expense increased for the three and nine months ended September 30, 2021 compared to the same periods of 2020 as direct mail marketing significantly increased from 2020 levels when the COVID-19 pandemic limited economic activity and included government mandated economic restrictions.

Table of Contents

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


	Three Months Ended
	September 30, 2021				September 30, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	$	5,837	55.87	%	$	5,465	56.30	%	$	372	6.81	%
Occupancy	745		7.13		599		6.17		146		24.37
Furniture and equipment	883		8.45		837		8.62		46		5.50
Software amortization	226		2.16		257		2.65		(31)		(12.06)
Pennsylvania shares tax	373		3.57		340		3.50		33		9.71
Professional fees	615		5.89		608		6.26		7		1.15
Federal Deposit Insurance Corporation deposit insurance	220		2.11		271		2.79		(51)		(18.82)

Marketing	231		2.21		61		0.63		170		278.69
Intangible amortization	44		0.42		53		0.55		(9)		(16.98)
Other	1,273		12.19		1,216		12.53		57		4.69
Total non-interest expense	$	10,447	100.00	%	$	9,707	100.00	%	$	740	7.62	%


		Three Months Ended													Nine Months Ended
		March 31, 2021				March 31, 2020				Change					September 30, 2021				September 30, 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	$	5,598	56.26	%	$	5,667	56.05	%	$	(69)	(1.22)	%	Salaries and employee benefits	$	17,107	55.82	%	$	16,362	55.60	%	$	745	4.55	%
Occupancy	Occupancy	976		9.81		702		6.94		274		39.03		Occupancy	2,438		7.96		1,927		6.55		511		26.52
Furniture and equipment	Furniture and equipment	809		8.13		860		8.51		(51)		(5.93)		Furniture and equipment	2,663		8.69		2,525		8.58		138		5.47
Software amortization	Software amortization	198		1.99		250		2.47		(52)		(20.80)		Software amortization	632		2.06		743		2.52		(111)		(14.94)
Pennsylvania shares tax	Pennsylvania shares tax	352		3.54		285		2.82		67		23.51		Pennsylvania shares tax	1,097		3.58		948		3.22		149		15.72
Professional fees	Professional fees	583		5.86		622		6.15		(39)		(6.27)		Professional fees	1,882		6.14		1,888		6.42		(6)		(0.32)
Federal Deposit Insurance Corporation deposit insurance	Federal Deposit Insurance Corporation deposit insurance	221		2.22		194		1.92		27		13.92		Federal Deposit Insurance Corporation deposit insurance	705		2.30		650		2.21		55		8.46

Marketing	Marketing	63		0.63		53		0.52		10		18.87		Marketing	434		1.42		170		0.58		264		155.29
Intangible amortization	Intangible amortization	53		0.53		62		0.61		(9)		(14.52)		Intangible amortization	147		0.48		174		0.59		(27)		(15.52)
Other	Other	1,098		11.03		1,415		14.01		(317)		(22.40)		Other	3,541		11.55		4,041		13.73		(500)		(12.37)
Total non-interest expense	Total non-interest expense	$	9,951	100.00	%	$	10,110	100.00	%	$	(159)	(1.57)	%	Total non-interest expense	$	30,646	100.00	%	$	29,428	100.00	%	$	1,218	4.14	%

Provision for Income Taxes

Income taxes ~~increased $110,000~~decreased $119,000 and $47,000 for the three and nine months ended ~~March 31,~~September 30, 2021 compared to the same ~~period~~periods of 2020. The effective tax rate for the three and nine months ended ~~March 31,~~September 30, 2021 was ~~18.28%~~18.42% and 18.39% compared to ~~17.68%~~19.01% and 18.46% for the same ~~period~~periods of 2020. The Company currently is in a deferred tax asset position. Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate carry forward period and therefore does not require a valuation allowance.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents increased ~~$64,330,000~~$68,289,000 from $213,358,000 at December 31, 2020 to ~~$277,688,000~~$281,647,000 at ~~March 31,~~September 30, 2021, primarily as a result of the following activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2021. The increase in fed funds sold of $40,000,000 comprised the majority of the change in cash and cash equivalents.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds being greater than loan originations, less ~~$908,000~~$2,034,000 in realized gains, by ~~$2,671,000~~$1,993,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2021.

Table of Contents

Loans

Gross loans ~~decreased $8,428,000~~increased $2,898,000 since December 31, 2020 due primarily to ~~a decrease~~an increase in both ~~residential and commercial real estate mortgage categories in addition to a decrease in the consumer automobile loan segment of the portfolio. These decreases were partially offset by growth in~~ commercial, financial, and agricultural ~~loans.~~and construction real estate mortgage categories. Consumer automobile loans decreased as used car inventories declined due to factors such as COVID-19 and the associated supply chain disruption the virus has caused. The economic environment caused by the COVID-19 pandemic has negatively impacted loan demand; however, demand has seen an uptick during ~~the latter part of the first quarter of~~ 2021.

~~Table of Contents~~

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


		March 31, 2021				December 31, 2020				Change					September 30, 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	$	182,059	13.63	%	$	164,743	12.25	%	$	17,316	10.51	%	Commercial, financial, and agricultural	$	179,648	13.33	%	$	164,743	12.25	%	$	14,905	9.05	%
Real estate mortgage:	Real estate mortgage:													Real estate mortgage:
Residential	Residential	579,736		43.40		589,721		43.87		(9,985)		(1.69)	%	Residential	587,925		43.64		589,721		43.87		(1,796)		(0.30)	%
Commercial	Commercial	363,725		27.23		373,188		27.76		(9,463)		(2.54)	%	Commercial	377,010		27.98		373,188		27.76		3,822		1.02	%
Construction	Construction	39,785		2.98		39,309		2.92		476		1.21	%	Construction	45,948		3.41		39,309		2.92		6,639		16.89	%
Consumer automobile loans	Consumer automobile loans	150,456		11.26		156,403		11.63		(5,947)		(3.80)	%	Consumer automobile loans	146,663		10.89		156,403		11.63		(9,740)		(6.23)	%
Other consumer installment loans	Other consumer installment loans	19,658		1.47		19,940		1.48		(282)		(1.41)	%	Other consumer installment loans	9,737		0.72		19,940		1.48		(10,203)		(51.17)	%
Net deferred loan fees and discounts	Net deferred loan fees and discounts	480		0.03		1,023		0.09		(543)		(53.08)	%	Net deferred loan fees and discounts	294		0.03		1,023		0.09		(729)		(71.26)	%
Gross loans	Gross loans	$	1,335,899	100.00	%	$	1,344,327	100.00	%	$	(8,428)	(0.63)	%	Gross loans	$	1,347,225	100.00	%	$	1,344,327	100.00	%	$	2,898	0.22	%

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


		March 31, 2021						December 31, 2020							September 30, 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	$	926	$	860	$	1,786	$	988	$	862	$	1,850	Commercial, financial, and agricultural	$	320	$	1,363	$	1,683	$	988	$	862	$	1,850
Real estate mortgage:	Real estate mortgage:													Real estate mortgage:
Residential	Residential	4,241		758		4,999		3,889		90		3,979		Residential	4,101		178		4,279		3,889		90		3,979
Commercial	Commercial	2,258		4,251		6,509		2,107		4,423		6,530		Commercial	2,595		4,055		6,650		2,107		4,423		6,530

		$	7,425	$	5,869	$	13,294	$	6,984	$	5,375	$	12,359		$	7,016	$	5,596	$	12,612	$	6,984	$	5,375	$	12,359

Investments

The fair value of the investment debt securities portfolio at ~~March 31,~~September 30, 2021 increased ~~$4,634,000~~$4,499,000 since December 31, 2020, while the amortized cost of the portfolio increased ~~$6,683,000.~~$6,030,000. The increase in the investment portfolio amortized value occurred within the state and political segment of the portfolio. The mortgage-backed segment was reduced as bonds prepaid due to the low interest rate environment. The other debt segment of the investment portfolio is primarily corporate bonds and this segment ~~was held constant.~~decreased as bonds matured with limited reinvestment. The municipal segment was increased as bonds with a final maturity of one to five years have been purchased. The portfolio continues to be actively managed in order to reduce interest rate and market risk. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately ~~82.79%~~84.41% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

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

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

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

The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at $1,300,000 for ~~March 31,~~September 30, 2021 and December 31, 2020 while the fair value decreased ~~$23,000~~$25,000 over the same time period.

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


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

Mortgage-backed securities	Mortgage-backed securities	$	1,792	7	$	1,796	$	—	$	—	$	—	$	—	$	1,792	$	1,796	Mortgage-backed securities	$	1,765	7	$	1,775	$	—	$	—	$	—	$	—	$	—	$	—	$	1,765	$	1,775

State and political securities	State and political securities	107,656			111,126		1,320		1,435		686		691		109,662		113,252		State and political securities	109,859			113,884		1,268		1,402		—		—		1,181		1,188		112,308		116,474
Other debt securities	Other debt securities	25,473			25,543		12,101		12,301		13,949		14,003		51,523		51,847		Other debt securities	25,399			25,613		6,001		6,131		2,000		1,720		14,851		15,047		48,251		48,511
Total debt securities AFS	Total debt securities AFS	$	134,921		$	138,465	$	13,421	$	13,736	$	14,635	$	14,694	$	162,977	$	166,895	Total debt securities AFS	$	137,023		$	141,272	$	7,269	$	7,533	$	2,000	$	1,720	$	16,032	$	16,235	$	162,324	$	166,760

Financing Activities

Deposits

Total deposits increased ~~$69,921,000~~$98,576,000 from December 31, 2020 to ~~March 31,~~September 30, 2021. The increase in core deposits (deposits less time deposits) has provided relationship driven funding for the loan and investment portfolios. Driving deposit growth was the receipt of PPP funding by commercial customers, stimulus funding by retail customers, and customers becoming more risk averse and seeking safety in a bank deposit. Emphasis during 2020 and 2021 has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking has increased since the start of 2020 due to these efforts coupled with a change in consumer behavior due to the business and travel restrictions caused by the COVID-19 pandemic.

Deposit balances and their changes for the periods being discussed follow:


		March 31, 2021				December 31, 2020				Change					September 30, 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	$	478,916	30.61	%	$	449,357	30.07	%	$	29,559	6.58	%	Demand deposits	$	481,875	30.25	%	$	449,357	30.07	%	$	32,518	7.24	%
NOW accounts	NOW accounts	290,355		18.56		287,775		19.26		2,580		0.90		NOW accounts	340,441		21.37		287,775		19.26		52,666		18.30
Money market deposits	Money market deposits	324,207		20.72		283,742		18.99		40,465		14.26		Money market deposits	305,156		19.16		283,742		18.99		21,414		7.55
Savings deposits	Savings deposits	224,890		14.38		209,924		14.05		14,966		7.13		Savings deposits	231,189		14.51		209,924		14.05		21,265		10.13
Time deposits	Time deposits	245,996		15.73		263,645		17.63		(17,649)		(6.69)		Time deposits	234,358		14.71		263,645		17.63		(29,287)		(11.11)
Total deposits	Total deposits	$	1,564,364	100.00	%	$	1,494,443	100.00	%	$	69,921	4.68	%	Total deposits	$	1,593,019	100.00	%	$	1,494,443	100.00	%	$	98,576	6.60	%

Borrowed Funds

Total borrowed funds decreased ~~6.91%~~14.69%, or ~~$10,975,000,~~$23,308,000, to ~~$147,744,000~~$135,411,000 at ~~March 31,~~September 30, 2021 compared to $158,719,000 at December 31, 2020. The decrease in long term borrowings occurred as a fixed rate ~~borrowing~~borrowings matured. Securities sold under agreement to repurchase have increased as customers balances have increased.

March 31, 2021 December 31, 2020 Change
(In Thousands) Amount % Total Amount % Total Amount %
Short-term borrowings:
Securities sold under agreement to repurchase $ 6,650 4.50 % $ 5,244 3.30 % $ 1,406 26.81 %
Total short-term borrowings 6,650 4.50 5,244 3.30 1,406 26.81
Long-term borrowings:
Long-term FHLB borrowings 133,000 90.01 148,000 93.25 (15,000) (10.14)
Long-term finance lease 8,094 5.48 5,475 3.45 2,619 47.84
Total long-term borrowings 141,094 95.50 153,475 96.70 (12,381) (8.07)
Total borrowed funds $ 147,744 100.00 % $ 158,719 100.00 % $ (10,975) (6.91) %

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	September 30, 2021				December 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Short-term borrowings:


Securities sold under agreement to repurchase	$	9,404	6.94	%	$	5,244	3.30	%	$	4,160	79.33	%
Total short-term borrowings	9,404		6.94		5,244		3.30		4,160		79.33
Long-term borrowings:
Long-term FHLB borrowings	118,000		87.13		148,000		93.25		(30,000)		(20.27)
Long-term finance lease	8,007		5.91		5,475		3.45		2,532		46.25

Total long-term borrowings	126,007		93.06		153,475		96.70		(27,468)		(17.90)
Total borrowed funds	$	135,411	100.00	%	$	158,719	100.00	%	$	(23,308)	(14.69)	%

Short-Term Borrowings

The following table provides further information in regards to secured borrowings that have been accounted for as repurchase agreements.


		Remaining Contractual Maturity Overnight and Continuous					Remaining Contractual Maturity Overnight and Continuous
(In Thousands)	(In Thousands)	March 31, 2021		December 31, 2020		(In Thousands)	September 30, 2021		December 31, 2020
Investment debt securities pledged, fair value	Investment debt securities pledged, fair value	$	10,256	$	11,672	Investment debt securities pledged, fair value	$	13,352	$	11,672
Repurchase agreements	Repurchase agreements	6,650		5,244		Repurchase agreements	9,404		5,244

Capital

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

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

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

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


		March 31, 2021				December 31, 2020					September 30, 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	$	149,476	11.447	%	$	147,887	11.267	%	Actual	$	153,469	10.882	%	$	147,887	11.267	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	58,761		4.500		59,066		4.500		For Capital Adequacy Purposes	63,464		4.500		59,066		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	91,407		7.000		91,880		7.000		Minimum To Maintain Capital Conservation Buffer At Reporting Date	98,721		7.000		91,880		7.000
To Be Well Capitalized	To Be Well Capitalized	84,878		6.500		85,317		6.500		To Be Well Capitalized	91,670		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	$	158,038	12.102	%	$	159,490	12.151	%	Actual	$	162,757	11.541	%	$	159,490	12.151	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	104,471		8.000		105,005		8.000		For Capital Adequacy Purposes	112,820		8.000		105,005		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	137,118		10.500		137,820		10.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	148,076		10.500		137,820		10.500
To Be Well Capitalized	To Be Well Capitalized	130,588		10.000		131,257		10.000		To Be Well Capitalized	141,025		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	$	149,476	11.447	%	$	147,887	11.267	%	Actual	$	153,469	10.882	%	$	147,887	11.267	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	78,349		6.000		78,754		6.000		For Capital Adequacy Purposes	84,618		6.000		78,754		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	110,994		8.500		111,568		8.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	119,876		8.500		111,568		8.500
To Be Well Capitalized	To Be Well Capitalized	104,465		8.000		105,005		8.000		To Be Well Capitalized	112,824		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	$	149,476	8.224	%	$	147,887	8.436	%	Actual	$	153,469	8.286	%	$	147,887	8.436	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	72,702		4.000		70,122		4.000		For Capital Adequacy Purposes	74,086		4.000		70,122		4.000
To Be Well Capitalized	To Be Well Capitalized	90,878		5.000		87,652		5.000		To Be Well Capitalized	92,607		5.000		87,652		5.000

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


		March 31, 2021				December 31, 2020					September 30, 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	$	104,864	11.135	%	$	103,812	10.906	%	Actual	$	108,508	10.487	%	$	103,812	10.906	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	42,379		4.500		42,835		4.500		For Capital Adequacy Purposes	46,561		4.500		42,835		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	65,923		7.000		66,632		7.000		Minimum To Maintain Capital Conservation Buffer At Reporting Date	72,428		7.000		66,632		7.000
To Be Well Capitalized	To Be Well Capitalized	61,214		6.500		61,872		6.500		To Be Well Capitalized	67,255		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	$	110,875	11.773	%	$	112,862	11.857	%	Actual	$	113,468	10.967	%	$	112,862	11.857	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	75,342		8.000		76,149		8.000		For Capital Adequacy Purposes	82,770		8.000		76,149		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	98,886		10.500		99,945		10.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	108,636		10.500		99,945		10.500
To Be Well Capitalized	To Be Well Capitalized	94,177		10.000		95,186		10.000		To Be Well Capitalized	103,463		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	$	104,864	10.964	%	$	103,812	10.906	%	Actual	$	108,508	10.487	%	$	103,812	10.906	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	57,386		6.000		57,113		6.000		For Capital Adequacy Purposes	62,081		6.000		57,113		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	81,297		8.500		80,910		8.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	87,949		8.500		80,910		8.500
To Be Well Capitalized	To Be Well Capitalized	76,515		8.000		76,150		8.000		To Be Well Capitalized	82,775		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	$	104,864	8.156	%	$	103,812	8.062	%	Actual	$	108,508	8.312	%	$	103,812	8.062	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	51,429		4.000		51,507		4.000		For Capital Adequacy Purposes	52,218		4.000		51,507		4.000
To Be Well Capitalized	To Be Well Capitalized	64,286		5.000		64,384		5.000		To Be Well Capitalized	65,272		5.000		64,384		5.000

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


		March 31, 2021				December 31, 2020					September 30, 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	$	40,761	11.195	%	$	40,206	11.156	%	Actual	$	41,392	11.020	%	$	40,206	11.156	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	16,385		4.500		16,218		4.500		For Capital Adequacy Purposes	16,902		4.500		16,218		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	25,487		7.000		25,228		7.000		Minimum To Maintain Capital Conservation Buffer At Reporting Date	26,293		7.000		25,228		7.000
To Be Well Capitalized	To Be Well Capitalized	23,667		6.500		23,426		6.500		To Be Well Capitalized	24,415		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	$	45,312	12.445	%	$	42,759	11.865	%	Actual	$	45,720	12.172	%	$	42,759	11.865	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	29,128		8.000		28,830		8.000		For Capital Adequacy Purposes	30,049		8.000		28,830		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	38,230		10.500		37,840		10.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	39,440		10.500		37,840		10.500
To Be Well Capitalized	To Be Well Capitalized	36,410		10.000		36,038		10.000		To Be Well Capitalized	37,562		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	$	40,761	11.195	%	$	40,206	11.156	%	Actual	$	41,392	11.020	%	$	40,206	11.156	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	21,846		6.000		21,624		6.000		For Capital Adequacy Purposes	22,536		6.000		21,624		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	Minimum To Maintain Capital Conservation Buffer At Reporting Date	30,949		8.500		30,634		8.500		Minimum To Maintain Capital Conservation Buffer At Reporting Date	31,927		8.500		30,634		8.500
To Be Well Capitalized	To Be Well Capitalized	29,128		8.000		28,832		8.000		To Be Well Capitalized	30,049		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	$	40,761	7.739	%	$	40,206	7.860	%	Actual	$	41,392	7.198	%	$	40,206	7.860	%
For Capital Adequacy Purposes	For Capital Adequacy Purposes	21,068		4.000		20,461		4.000		For Capital Adequacy Purposes	23,002		4.000		20,461		4.000
To Be Well Capitalized	To Be Well Capitalized	26,335		5.000		25,576		5.000		To Be Well Capitalized	28,752		5.000		25,576		5.000

Liquidity; Interest Rate Sensitivity and Market Risk

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

The following liquidity measures are monitored for compliance and were within the limits cited at ~~March 31,~~September 30, 2021:

1. Net Loans to Total Assets, 85% maximum

2. Net Loans to Total Deposits, 100% maximum

3. Cumulative 90 day Maturity GAP %, +/- ~~20%~~15% maximum

4. Cumulative 1 Year Maturity GAP %, +/- ~~25%~~20% maximum

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

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

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

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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 ~~$571,174,000.~~$576,229,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of ~~$57,000,000.~~$100,000,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled ~~$133,000,000~~$118,000,000 as of ~~March 31,~~September 30, 2021.

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

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

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

Interest Rate Sensitivity

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

The following is a rate shock forecast for the twelve month period ending ~~March 31,~~September 30, 2022 assuming a static balance sheet as of ~~March 31,~~September 30, 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	$	44,892		$	47,706		$	50,894	$	54,615		$	58,324		$	61,773		$	65,193		Net interest income	$	45,065		$	48,132		$	51,811	$	56,578		$	61,243		$	65,512		$	69,649
Change from static	Change from static	(6,002)			(3,188)			—		3,721			7,430			10,879			14,299			Change from static	(6,746)			(3,679)			—		4,767			9,432			13,701			17,838
Percent change from static	Percent change from static	-11.79		%	-6.26		%	—		7.31		%	14.60		%	21.38		%	28.10		%	Percent change from static	-13.02		%	-7.10		%	—		9.20		%	18.20		%	26.44		%	34.43		%

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

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Inflation

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

Paycheck Protection Program

The Company participated in the Paycheck Protection Program ('PPP"). Loans retained by the bank through this program ~~total $29,200,000 in loans~~totaled $30,600,000 with ~~over 400 loan applications processed.~~$10,600,000 remaining on the balance sheet as of September 30, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of ~~March 31,~~September 30, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~March 31,~~September 30, 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, 2020.

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

The following table provides certain information with respect to the Company's repurchase of common stock during the quarter ended ~~March 31,~~September 30, 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 ~~(January~~(July 1 - ~~January~~July 31, 2021)	—	—	—	~~513,669~~353,000
Month #2 ~~(February~~(August 1 - ~~February 28, 2021)~~	—	—	—	~~513,669~~
~~Month #3 (March 1 - March~~August 31, 2021)	—	—	—	~~513,669~~353,000
Month #3 (September 1 - September 30, 2021)	—	—	—	353,000

On April 13, 2021, the Board of Directors authorized the repurchase of up to 353,000 shares, or approximately 5%, of the outstanding shares of the Company for a one year period ending April 30, 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 Annual Report on Form 10-K for the year ended 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 ~~March 31,~~September 30, 2021 and December 31, 2020; (ii) the Consolidated Statement of Income for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020; (v) the Consolidated Statement of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.

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


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

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EXHIBIT INDEX


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

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

Total cash and cash equivalents	277,688		213,358

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

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

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

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

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