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NWFL Norwood Financial

Filed: 5 Nov 20, 7:00pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 0-28364

 

Norwood Financial Corp

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-2828306

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification no.)

717 Main Street, Honesdale, Pennsylvania

 

18431

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (570) 253-1455

N/A

Former name, former address and former fiscal year, if changed since last report.

 

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

 

Title of each class

 

Trading

symbol(s)

 

Name of each exchange

on which registered

Common Stock, par value $0.10 per share

 

NWFL

 

The Nasdaq Stock Market LLC

Indicate by check (x) 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 definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding as of November 1, 2020

Common stock, par value $0.10 per share

 

8,201,128


2


PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

NORWOOD FINANCIAL CORP

Consolidated Balance Sheets (unaudited)

(dollars in thousands, except share and per share data)

September 30,

December 31,

2020

2019

ASSETS

Cash and due from banks

$

23,874

$

15,038

Interest-bearing deposits with banks

100,566

377

Cash and cash equivalents

124,440

15,415

Securities available for sale, at fair value

197,436

210,205

Loans receivable

1,414,662

924,581

Less: Allowance for loan losses

11,674

8,509

Net loans receivable

1,402,988

916,072

Regulatory stock, at cost

3,876

4,844

Bank premises and equipment, net

18,124

14,228

Bank owned life insurance

39,400

38,763

Accrued interest receivable

6,104

3,719

Foreclosed real estate owned

965

1,556

Goodwill

30,213

11,331

Other intangibles

565

235

Other assets

17,996

14,242

TOTAL ASSETS

$

1,842,107

$

1,230,610

LIABILITIES

Deposits:

Non-interest bearing demand

$

372,237

$

207,299

Interest-bearing

1,143,685

750,230

Total deposits

1,515,922

957,529

Short-term borrowings

69,294

62,256

Other borrowings

46,438

56,438

Accrued interest payable

2,194

2,432

Other liabilities

17,712

14,527

TOTAL LIABILITIES

1,651,560

1,093,182

STOCKHOLDERS’ EQUITY

Preferred stock, no par value per share,

authorized: 5,000,000 shares; issued: NaN

Common stock, $0.10 par value per share,

authorized: 20,000,000 shares,

issued: 2020: 8,210,982 shares, 2019: 6,340,563 shares

821

634

Surplus

95,108

49,471

Retained earnings

90,422

86,536

Treasury stock at cost: 2020: 13,778 shares; 2019: 12,007 shares

(469)

(400)

Accumulated other comprehensive income

4,665

1,187

TOTAL STOCKHOLDERS’ EQUITY

190,547

137,428

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

1,842,107

$

1,230,610

See accompanying notes to the unaudited consolidated financial statements. 

3


NORWOOD FINANCIAL CORP

Consolidated Statements of Income (unaudited)

(dollars in thousan ds, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

INTEREST INCOME

Loans receivable, including fees

$

16,260

$

10,776

$

37,711

$

31,074

Securities

1,031

1,278

3,272

4,155

Other

18

5

43

70

Total interest income

17,309

12,059

41,026

35,299

INTEREST EXPENSE

Deposits

1,676

1,787

5,096

5,355

Short-term borrowings

61

135

244

344

Other borrowings

242

246

824

827

Total interest expense

1,979

2,168

6,164

6,526

NET INTEREST INCOME

15,330

9,891

34,862

28,773

PROVISION FOR LOAN LOSSES

1,850

300

3,850

1,050

NET INTEREST INCOME AFTER

PROVISION FOR LOAN LOSSES

13,480

9,591

31,012

27,723

OTHER INCOME

Service charges and fees

1,301

1,200

3,201

3,283

Income from fiduciary activities

205

167

533

454

Net realized gains on sales of securities

33

169

71

233

Gain on sale of loans, net

164

15

285

125

Earnings and proceeds on bank owned life insurance

217

222

638

630

Other

152

109

391

358

Total other income

2,072

1,882

5,119

5,083

OTHER EXPENSES

Salaries and employee benefits

4,812

3,667

11,878

10,915

Occupancy, furniture & equipment, net

1,109

916

2,983

2,780

Data processing and related operations

746

480

1,649

1,400

Taxes, other than income

214

179

641

520

Professional fees

292

276

735

752

Federal Deposit Insurance Corporation insurance

144

(5)

186

150

Foreclosed real estate

31

24

44

37

Amortization of intangibles

35

23

79

79

Merger related

386

1,983

Other

1,611

1,231

4,353

3,591

Total other expenses

9,380

6,791

24,531

20,224

INCOME BEFORE INCOME TAXES

6,172

4,682

11,600

12,582

INCOME TAX EXPENSE

1,173

775

2,033

1,963

NET INCOME

$

4,999

$

3,907

$

9,567

$

10,619

BASIC EARNINGS PER SHARE

$

0.62

$

0.62

$

1.39

$

1.70

DILUTED EARNINGS PER SHARE

$

0.62

$

0.62

$

1.39

$

1.68

See accompanying notes to the unaudited consolidated financial statements.

 

4


NORWOOD FINANCIAL CORP

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

Three Months Ended

September 30,

2020

2019

Net income

$

4,999

$

3,907

Other comprehensive income:

Investment securities available for sale:

Unrealized holding gain (loss)

(115)

1,059

Tax effect

24

(224)

Reclassification of investment securities gains

recognized in net income

(33)

(169)

Tax effect

7

37

Other comprehensive (loss) income

(117)

703

Comprehensive Income

$

4,882

$

4,610

Nine Months Ended

September 30,

2020

2019

Net income

$

9,567

$

10,619

Other comprehensive income

Investment securities available for sale:

Unrealized holding gain

4,474

8,034

Tax effect

(940)

(1,688)

Reclassification of investment securities gains

recognized in net income

(71)

(233)

Tax effect

15

50

Other comprehensive income

3,478

6,163

Comprehensive Income

$

13,045

$

16,782

See accompanying notes to the unaudited consolidated financial statements.

 

5


NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Nine Months Ended September 30, 2020 and 2019

(dollars in thousands, except share and per share data)

Accumulated

Other

Common Stock

Retained

Treasury Stock

Comprehensive

Shares

Amount

Surplus

Earnings

Shares

Amount

Income

Total

Balance, December 31, 2019

6,340,563

$

634 

$

49,471 

$

86,536 

12,007

$

(400)

$

1,187 

$

137,428 

Net Income

-

-

-

9,567 

-

-

-

9,567 

Other comprehensive income

-

-

-

-

-

-

3,478 

3,478 

Cash dividends declared ($0.75 per share)

-

-

-

(5,681)

-

-

-

(5,681)

Acquisition of UpState New York Bancorp, Inc.

1,865,738 

186 

45,151 

-

-

-

-

45,337 

Acquisition of treasury stock

-

-

-

-

1,771 

(69)

-

(69)

Compensation expense related to restricted stock

-

-

250 

-

-

-

-

250 

Stock options exercised

4,681 

83 

-

-

-

-

84 

Compensation expense related to stock options

-

-

153 

-

-

-

-

153 

Balance, September 30, 2020

8,210,982

$

821

$

95,108

$

90,422

13,778

$

(469)

$

4,665

$

190,547

Accumulated

Other

Common Stock

Retained

Treasury Stock

Comprehensive

Shares

Amount

Surplus

Earnings

Shares

Amount

Income

Total

Balance, December 31, 2018

6,295,113

$

630 

$

48,322 

$

78,434 

2,470

$

(81)

$

(5,020)

$

122,285 

Net Income

-

-

-

10,619 

-

-

-

10,619 

Other comprehensive loss

-

-

-

-

-

-

6,163 

6,163 

Cash dividends declared ($0.72 per share)

-

-

-

(4,531)

-

-

-

(4,531)

Compensation expense related to restricted stock

-

-

217 

-

-

-

-

217 

Acquisition of treasury stock

-

-

-

-

11,337 

(374)

-

(374)

Stock options exercised

19,575 

357 

-

-

-

-

359 

Compensation expense related to stock options

-

-

156 

-

-

-

-

156 

Balance, September 30, 2019

6,314,688

$

632

$

49,052

$

84,522

13,807

$

(455)

$

1,143

$

134,894


6


NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Three Months Ended September 30, 2020 and 2019

(dollars in thousands, except share and per share data)

Accumulated

Other

Common Stock

Retained

Treasury Stock

Comprehensive

Shares

Amount

Surplus

Earnings

Shares

Amount

Income (Loss)

Total

Balance, June 30, 2020

6,342,568

$

634 

$

49,778 

$

87,939 

13,778

$

(469)

$

4,782 

$

142,664 

Net Income

-

-

-

4,999 

-

-

-

4,999 

Other comprehensive loss

-

-

-

-

-

-

(117)

(117)

Cash dividends declared ($0.25 per share)

-

-

-

(2,516)

-

-

-

(2,516)

Acquisition of UpState New York Bancorp, Inc.

1,865,738 

186 

45,151 

-

-

-

-

45,337 

Compensation expense related to restricted stock

-

-

83 

-

-

-

-

83 

Stock options exercised

2,676 

45 

-

-

-

-

46 

Compensation expense related to stock options

-

-

51 

-

-

-

-

51 

Balance, September 30, 2020

8,210,982

$

821

$

95,108

$

90,422

13,778

$

(469)

$

4,665

$

190,547

Accumulated

Other

Common Stock

Retained

Treasury Stock

Comprehensive

Shares

Amount

Surplus

Earnings

Shares

Amount

Income

Total

Balance, June 30, 2019

6,304,413

$

630 

$

48,741 

$

82,127 

13,807

$

(455)

$

440 

$

131,483 

Net Income

-

-

-

3,907 

-

-

-

3,907 

Other comprehensive income

-

-

-

-

-

-

703 

703 

Cash dividends declared ($0.24 per share)

-

-

-

(1,512)

-

-

-

(1,512)

Compensation expense related to restricted stock

-

-

72 

-

-

-

-

72 

Stock options exercised

10,275 

187 

-

-

-

-

189 

Compensation expense related to stock options

-

-

52 

-

-

-

-

52 

Balance, September 30, 2019

6,314,688

$

632

$

49,052

$

84,522

13,807

$

(455)

$

1,143

$

134,894

See accompanying notes to the unaudited consolidated financial statements.

 

7


NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

Nine Months Ended September 30,

2020

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income

$

9,567

$

10,619

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

3,850

1,050

Depreciation

953

739

Amortization of intangible assets

79

79

Deferred income taxes

(418)

(176)

Net amortization of securities premiums and discounts

933

1,104

Net realized gain on sales of securities

(71)

(232)

Earnings and proceeds on life insurance policies

(638)

(630)

Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net

(22)

(67)

Net gain on sale of loans

(285)

(125)

Loans originated for sale

(7,163)

(2,767)

Proceeds from sale of loans originated for sale

7,402

2,846

Compensation expense related to stock options

153

156

Compensation expense related to restricted stock

250

217

(Increase) decrease in accrued interest receivable

(959)

50

(Decrease) increase in accrued interest payable

(413)

817

Other, net

(4,198)

1,017

Net cash provided by operating activities

9,020

14,697

CASH FLOWS FROM INVESTING ACTIVITIES

Securities available for sale:

Proceeds from sales

24,497

22,862

Proceeds from maturities and principal reductions on mortgage-backed securities

42,806

21,211

Purchases

(37,132)

(5,066)

Purchase of regulatory stock

(3,350)

(2,963)

Redemption of regulatory stock

6,781

3,752

Net increase in loans

(84,990)

(57,891)

Purchase of premises and equipment

(539)

(1,056)

Proceeds from sales of foreclosed real estate owned

611

312

Proceeds from sales of bank premises and equipment

10

246

Acquisition, net of cash and cash equivalents acquired

15,193

Net cash used in investing activities

(36,113)

(18,593)

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in deposits

144,280

27,653

Net increase (decrease) in short-term borrowings

7,038

(268)

Repayments of other borrowings

(20,001)

(22,378)

Proceeds from other borrowings

10,000

6,000

Stock options exercised

84

359

Purchase of treasury stock

(69)

(374)

Cash dividends paid

(5,214)

(4,529)

Net cash provided by financing activities

136,118

6,463

Increase in cash and cash equivalents

109,025

2,567

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

15,415

18,348

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

124,440

$

20,915

 

8


NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited) (continued)

(dollars in thousands)

Nine Months Ended September 30,

2020

2019

Supplemental Disclosures of Cash Flow Information

Cash payments for:

Interest on deposits and borrowings

$

6,402

$

5,709

Income taxes paid, net of refunds

$

1,018

$

1,447

Supplemental Schedule of Noncash Investing Activities:

Transfers of loans to foreclosed real estate and repossession of other assets

$

393

$

1,478

Dividends payable

$

2,049

$

1,512

Merger with UpState New York Bancorp, Inc.

Noncash assets acquired:

Securities available-for-sale

$

13,948

Regulatory stock

2,487

Loans

413,535

Premises and equipment, net

5,529

Accrued interest receivable

1,426

Deferred tax assets

1,495

Other assets

376

438,796

Liabilities assumed:

Time deposits

204,440

Deposits other than time deposits

206,919

Accrued interest payable

175

Other liabilities

6,496

418,030

Net Noncash Assets Acquired

20,766

Cash Acquired

$

24,037

See accompanying notes to the unaudited consolidated financial statements.


9


Notes to the Unaudited Consolidated Financial Statements

 

1.           Basis of Presentation

The unaudited consolidated financial statements include the accounts of Norwood Financial Corp (the “Company”) and its wholly-owned subsidiary, Wayne Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., and WTRO Properties, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the consolidated financial position and results of operations of the Company. The operating results for the three-month and nine-month periods ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other future interim period.

 

2.           Revenue Recognition

Under ASC Topic 606, management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on the sale of loans sold and earnings on bank-owned life insurance are not within the scope of this Topic.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30:

Three months ended

September 30,

(dollars in thousands)

Noninterest Income

2020

2019

In-scope of Topic 606:

Service charges on deposit accounts

$

93

$

72

ATM fees

155

106

Overdraft fees

224

323

Safe deposit box rental

26

22

Loan related service fees

282

228

Debit card fees

443

370

Fiduciary activities

205

167

Commissions on mutual funds and annuities

26

30

Other income

152

143

Noninterest Income (in-scope of Topic 606)

1,606

1,461

Out-of-scope of Topic 606:

Net realized gains on sales of securities

33

169

Loan servicing fees

52

15

Gains on sales of loans

164

15

Earnings on and proceeds from bank-owned life insurance

217

222

Noninterest Income (out-of-scope of Topic 606)

466

421

Total Noninterest Income

$

2,072

$

1,882

 

10


Nine months ended

September 30,

(dollars in thousands)

Noninterest Income

2020

2019

In-scope of Topic 606:

Service charges on deposit accounts

$

278

$

205

ATM fees

354

287

Overdraft fees

715

1,017

Safe deposit box rental

79

71

Loan related service fees

464

451

Debit card fees

1,154

1,067

Fiduciary activities

533

454

Commissions on mutual funds and annuities

89

111

Other income

391

379

Noninterest Income (in-scope of Topic 606)

4,057

4,042

Out-of-scope of Topic 606:

Net realized gains on sales of securities

71

233

Loan servicing fees

68

53

Gains on sales of loans

285

125

Earnings on and proceeds from bank-owned life insurance

638

630

Noninterest Income (out-of-scope of Topic 606)

1,062

1,041

Total Noninterest Income

$

5,119

$

5,083

3.           Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and restricted stock, and are determined using the treasury stock method.

The following table sets forth the weighted average shares outstanding used in the computations of basic and diluted earnings per share.

(in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

Weighted average shares outstanding

8,073

6,296

6,915

6,293

Less: Unvested restricted shares

(36)

(35)

(36)

(35)

Basic EPS weighted average shares outstanding

8,037

6,261

6,879

6,258

Basic EPS weighted average shares outstanding

8,037

6,261

6,879

6,258

Add: Dilutive effect of stock options and restricted shares

22

48

22

50

Diluted EPS weighted average shares outstanding

8,059

6,309

6,901

6,308

For the three and nine month periods ended September 30, 2020, there were 112,600 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of the Company’s common stock of $24.32 per share as of September 30, 2020.

For the three and nine month periods ending September 30, 2019, there were 60,650 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of the Company’s common stock of $31.61 per share on September 30, 2019.

 

4.           Stock-Based Compensation

NaN awards were granted during the nine-month period ended September 30, 2020. As of September 30, 2020, there was $51,000 of total unrecognized compensation cost related to non-vested options granted in 2019 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2020. Compensation costs related to stock options amounted to $153,000 and $156,000 during the nine-month periods ended September 30, 2020 and 2019, respectively.

11


A summary of the Company’s stock option activity for the nine-month period ended September 30, 2020 is as follows:

Weighted

Average Exercise

Weighted Average

Aggregate

Price

Remaining

Intrinsic Value

Options

Per Share

Contractual Term

($000)

Outstanding at January 1, 2020

199,825

$

24.78

5.9

Yrs.

$

2,823

Granted

0

0

Exercised

(4,681)

17.87

2.6

Yrs.

Forfeited

Outstanding at September 30, 2020

195,144

$

24.94

5.2

Yrs.

$

654

Exercisable at September 30, 2020

168,394

$

23.18

4.6

Yrs.

$

654

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The market price was $24.32 per share as of September 30, 2020 and $38.90 per share as of December 31, 2019.

A summary of the Company’s restricted stock activity for the nine-month periods ended September 30, 2020 and 2019 is as follows:

2020

2019

Weighted-Average

Weighted-Average

Number of

Grant Date

Number of

Grant Date

Restricted Stock

Fair Value

Restricted Stock

Fair Value

Non-vested, January 1,

36,195

$

31.65

34,615

$

27.82

Granted

Vested

Forfeited

Non-vested, September 30,

36,195

$

31.65

34,615

$

27.82

The expected future compensation expense relating to the 36,195 shares of non-vested restricted stock outstanding as of September 30, 2020 is $895,000. This cost will be recognized over the remaining vesting period of 4.25 years. Compensation costs related to restricted stock amounted to $250,000 and $217,000 during the nine-month periods ended September 30, 2020 and 2019, respectively.

 

12


5.           Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three and nine months ended September 30, 2020 and 2019:

Unrealized gains (losses) on

available for sale

securities (a)

Balance as of June 30, 2020

$

4,782

Other comprehensive loss before reclassification

(91)

Amount reclassified from accumulated other comprehensive loss

(26)

Total other comprehensive loss

(117)

Balance as of September 30, 2020

$

4,665

Unrealized gains (losses) on

available for sale

securities (a)

Balance as of June 30, 2019

$

440

Other comprehensive income before reclassification

835

Amount reclassified from accumulated other comprehensive income

(132)

Total other comprehensive income

703

Balance as of September 30, 2019

$

1,143

Unrealized gains (losses) on

available for sale

securities (a)

Balance as of December 31, 2019

$

1,187

Other comprehensive income before reclassification

3,534

Amount reclassified from accumulated other comprehensive income

(56)

Total other comprehensive income

3,478

Balance as of September 30, 2020

$

4,665

Unrealized gains (losses) on

available for sale

securities (a)

Balance as of December 31, 2018

$

(5,020)

Other comprehensive income before reclassification

6,346

Amount reclassified from accumulated other comprehensive income

(183)

Total other comprehensive income

6,163

Balance as of September 30, 2019

$

1,143

(a)All amounts are net of tax. Amounts in parentheses indicate debits.

13


The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three and nine months ended September 30, 2020 and 2019:

Amount Reclassified

From Accumulated

Affected Line Item in

Other

Consolidated

Comprehensive

Statements

Details about other comprehensive income

Income (Loss) (a)

of Income

Three months ended

September 30,

2020

2019

Unrealized gains on available for sale securities

$

33

$

169

Net realized gains on sales of securities

(7)

(37)

Income tax expense

$

26

$

132

Nine months ended

September 30,

2020

2019

Unrealized gains on available for sale securities

$

71

$

233

Net realized gains on sales of securities

(15)

(50)

Income tax expense

$

56

$

183

(a) Amounts in parentheses indicate debits to net income

 

6.           Off-Balance Sheet Financial Instruments and Guarantees

The Bank 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 include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

A summary of the Bank’s financial instrument commitments is as follows:

(in thousands)

September 30,

2020

2019

Commitments to grant loans

$

76,029

$

49,806

Unfunded commitments under lines of credit

122,050

65,854

Standby letters of credit

5,654

3,687

$

203,733

$

119,347

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer and generally consists of real estate.

The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds

14


collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2020 for guarantees under standby letters of credit issued is not material.

 

7.           Securities

The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale were as follows:

September 30, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(In Thousands)

Available for Sale:

States and political subdivisions

$

51,134

$

1,931

$

$

53,065

Corporate obligations

3,038

25

3,063

Mortgage-backed securities-

government sponsored entities

138,414

2,941

(47)

141,308

Total debt securities

$

192,586

$

4,897

$

(47)

$

197,436

December 31, 2019

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(In Thousands)

Available for Sale:

States and political subdivisions

$

70,015

$

1,293

$

(3)

$

71,305

Corporate obligations

4,097

3

-

4,100

Mortgage-backed securities-government

sponsored entities

135,646

238

(1,084)

134,800

Total debt securities

$

209,758

$

1,534

$

(1,087)

$

210,205

The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by length of time that individual securities have been in a continuous unrealized loss position (in thousands):

September 30, 2020

Less than 12 Months

12 Months or More

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Mortgage-backed securities-government sponsored entities

$

20,888

$

(47)

$

$

$

20,888

$

(47)

$

20,888

$

(47)

$

$

$

20,888

$

(47)

December 31, 2019

Less than 12 Months

12 Months or More

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

States and political subdivisions

$

1,296

$

(2)

$

481

$

(1)

$

1,777

$

(3)

Mortgage-backed securities-government sponsored entities

32,415

(241)

61,096

(843)

93,511

(1,084)

$

33,711

$

(243)

$

61,577

$

(844)

$

95,288

$

(1,087)

At September 30, 2020, the Company had 8 debt securities in an unrealized loss position in the less than twelve months category and 0 debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. NaN other-than-temporary-impairment charges were recorded in

15


2020. Management believes that all unrealized losses represent temporary impairment of the securities as the Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.

The amortized cost and fair value of debt securities as of September 30, 2020 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

Available for Sale

Amortized Cost

Fair Value

(In Thousands)

Due in one year or less

$

4,348

$

4,386

Due after one year through five years

7,385

7,447

Due after five years through ten years

17,958

18,415

Due after ten years

24,481

25,880

54,172

56,128

Mortgage-backed securities-government sponsored entities

138,414

141,308

$

192,586

$

197,436

Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands):

Three Months

Nine Months

Ended September 30,

Ended September 30,

2020

2019

2020

2019

Gross realized gains

$

33

$

169

$

71

$

233

Gross realized losses

Net realized gain

$

33

$

169

$

71

$

233

Proceeds from sales of securities

$

2,425

$

19,326

$

24,497

$

22,862

Securities with a carrying value of $189,346,000 and $157,233,000 at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

 

8.           Loans Receivable and Allowance for Loan Losses

Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated (dollars in thousands):

September 30, 2020

December 31, 2019

Real Estate Loans:

Residential

$

263,404

18.6

%

$

229,781

24.9

%

Commercial

574,123

40.5

391,327

42.3

Agricultural

68,340

4.8

Construction

20,797

1.5

17,732

1.9

Commercial loans

285,295

20.1

134,150

14.5

Other agricultural loans

42,297

3.0

Consumer loans to individuals

162,217

11.5

151,686

16.4

Total loans

1,416,473

100.0

%

924,676

100.0

%

Deferred fees, net

(1,811)

(95)

Total loans receivable

1,414,662

924,581

Allowance for loan losses

(11,674)

(8,509)

Net loans receivable

$

1,402,988

$

916,072

During 2020 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the United States Small Business Administration (“SBA”). The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of September 30, 2020, the Company had outstanding principal balances of $95,035,000 in PPP loans. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs,

16


rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $2.5 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.

The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):

September 30, 2020

December 31, 2019

Outstanding Balance

$

15,344

$

793

Carrying Amount

$

8,586

$

696

As a result of the acquisition of UpState New York Bancorp, Inc. (“UpState”), the Company added $15,410,000 of loans that were accounted for in accordance with ASC 310-30. Based on a review of the loans acquired by the Company’s senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $6,937,000.  For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.

Changes in the accretable yield for purchased credit impaired loans for the nine-months ended September 30, 2019 and 2020, were as follows:

   

2020

2019

Balance at beginning of period

$

97

$

168

Additions

1,724

Accretion

(179)

(29)

Reclassification and other

(96)

Balance at end of period

$

1,546

$

139

Loans acquired with credit deterioration of $15,410,000 and accounted for in accordance with ASC 310-30 were individually evaluated to estimate credit losses and a net recovery amount for each loan. The net cash flows for each loan were then discounted to present value using a risk-adjusted market rate. The table below presents the components of the purchase accounting adjustments:

  

(In Thousands)

July 7, 2020

Contractually required principal and interest

$

15,410

Non-accretable discount

(5,213)

Expected cash flows

10,197

Accretable discount

(1,724)

Estimated fair value

$

8,473

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

17


Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, foreclosed real estate owned totaled $965,000 and $1,556,000, respectively. During the nine months ended September 30, 2020, there were no additions to the foreclosed real estate category. The Company disposed of 1 property that was previously transferred to foreclosed real estate owned with a carrying value of $591,000 through the sale of the property. As of September 30, 2020, the Company has initiated formal foreclosure proceedings on 3 properties classified as consumer residential mortgages with an aggregate carrying value of $440,000.

The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:

Real Estate Loans

Commercial

Other

Consumer

Residential

Commercial

Agricultural

Construction

Loans

Agricultural

Loans

Total

September 30, 2020

(In thousands)

Individually evaluated for impairment

$

$

1,654

$

$

$

$

$

$

1,654

Loans acquired with deteriorated credit quality

122

3,771

2,078

190

245

2,180

8,586

Collectively evaluated for impairment

263,282

568,698

66,262

20,607

285,050

40,117

162,217

1,406,233

Total Loans

$

263,404

$

574,123

$

68,340

$

20,797

$

285,295

$

42,297

$

162,217

$

1,416,473

Real Estate Loans

Commercial

Consumer

Residential

Commercial

Construction

Loans

Loans

Total

December 31, 2019

(In thousands)

Individually evaluated for impairment

$

-

$

2,144

$

-

$

-

$

-

$

2,144

Loans acquired with deteriorated credit quality

476

220

-

-

-

696

Collectively evaluated for impairment

229,305

388,963

17,732

134,150

151,686

921,836

Total Loans

$

229,781

$

391,327

$

17,732

$

134,150

$

151,686

$

924,676

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.

Unpaid

Recorded

Principal

Associated

Investment

Balance

Allowance

September 30, 2020

(in thousands)

With no related allowance recorded:

Real Estate Loans:

Commercial

$

1,654

$

2,287

Total Impaired Loans

$

1,654

$

2,287

18


Unpaid

Recorded

Principal

Associated

Investment

Balance

Allowance

December 31, 2019

(in thousands)

With no related allowance recorded:

Real Estate Loans:

Commercial

$

143

$

394

$

Subtotal

143

394

With an allowance recorded:

Real Estate Loans

Commercial

2,001

2,001

417

Subtotal

2,001

2,001

417

Total:

Real Estate Loans:

Commercial

2,144

2,395

417

Total Impaired Loans

$

2,144

$

2,395

$

417

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended September 30, 2020 and 2019, respectively (in thousands):

Average Recorded

Interest Income

Investment

Recognized

2020

2019

2020

2019

Real Estate Loans:

Commercial

1,874

633

2

Total

$

1,874

$

633

$

2

$

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the nine-month periods ended September 30, 2020 and 2019, respectively (in thousands):

Average Recorded

Interest Income

Investment

Recognized

2020

2019

2020

2019

Real Estate Loans:

Commercial

1,986

759

8

24

Total

$

1,986

$

759

$

8

$

24

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of September 30, 2020 and December 31, 2019, troubled debt restructured loans totaled $91,000 and $99,000, respectively, with 0 specific reserve. For the nine-month period ended September 30, 2020 and 2019, there were 0 new loans identified as troubled debt restructurings. During 2019, the Company recognized a charge-off $451,000 on a loan that was previously identified as a troubled debt restructuring. The loan was transferred to foreclosed real estate during the first quarter of 2019 with a carrying value of $608,000.

On April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

19


Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four 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 considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,500,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of September 30, 2020 and December 31, 2019 (in thousands):

Special

Doubtful

Pass

Mention

Substandard

or Loss

Total

September 30, 2020

Commercial real estate loans

$

558,137

$

10,341

$

5,645

$

$

574,123

Agricultural real estate loans

5,554

3,529

68,340

Commercial loans

284,625

275

395

285,295

Other agricultural loans

2,595

2,270

42,297

Total

$

842,762

$

18,765

$

11,839

$

$

970,055

Special

Doubtful

Pass

Mention

Substandard

or Loss

Total

December 31, 2019

Commercial real estate loans

$

376,109

$

12,268

$

2,950

$

$

391,327

Commercial loans

133,695

248

207

134,150

Total

$

509,804

$

12,516

$

3,157

$

$

525,477

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2020 and December 31, 2019 (in thousands):

Performing

Nonperforming

Total

September 30, 2020

Residential real estate loans

$

262,741

$

663

$

263,404

Construction

20,797

20,797

Consumer loans

162,078

139

162,217

Total

$

445,616

$

802

$

446,418

Performing

Nonperforming

Total

December 31, 2019

Residential real estate loans

$

229,214

$

567

$

229,781

Construction

17,732

17,732

Consumer loans

151,607

79

151,686

Total

$

398,553

$

646

$

399,199

20


Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2020 and December 31, 2019 (in thousands):

Current

31-60 Days Past Due

61-90 Days Past Due

Greater than 90 Days Past Due and still accruing

Nonaccrual

Total Past Due and Non-Accrual

Purchased Credit-Impaired

Total Loans

September 30, 2020

Real Estate loans

Residential

$

261,906

$

443

$

270

$

-

$

663

$

1,376

$

122

$

263,404

Commercial

568,601

420

51

-

1,280

1,751

3,771

574,123

Agricultural

65,557

29

676

705

2,078

68,340

Construction

20,607

-

-

-

-

-

190

20,797

Commercial loans

283,130

878

19

1,000

23

1,920

245

285,295

Other agricultural loans

39,844

10

263

273

2,180

42,297

Consumer loans

161,682

346

50

-

139

535

-

162,217

Total

$

1,401,327

$

2,126

$

390

$

1,000

$

3,044

$

6,560

$

8,586

$

1,416,473

Current

31-60 Days Past Due

61-90 Days Past Due

Greater than 90 Days Past Due and still accruing

Nonaccrual

Total Past Due and Non-Accrual

Purchased Credit-Impaired

Total Loans

December 31, 2019

Real Estate loans

Residential

$

227,766

$

727

$

245

$

-

$

567

$

1,539

-

$

476

$

229,781

Commercial

387,897

176

2,935

-

99

3,210

-

220

391,327

Construction

17,695

-

37

-

-

37

-

-

17,732

Commercial loans

134,018

82

-

-

50

132

-

-

134,150

Consumer loans

151,309

233

65

-

79

377

-

-

151,686

Total

$

918,685

$

1,218

$

3,282

$

-

$

795

$

5,295

-

$

696

$

924,676

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

As of September 30, 2020, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2019. This increase is due primarily to an increase in the qualitative factor for economic conditions which worsened as a result of the COVID-19 pandemic. The increase in the economic factor added $2.2 million to the required allowance for loan losses. As of September 30, 2020, the Company has also added qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries and to recognize risk related to loans that have been granted deferral of payments due to COVID-19. At September 30, 2020, the allowance for loan losses includes $1.5 million of COVID related factors. These increases in the required allowance were offset partially by a decrease in the qualitative factor relating to loan growth which decreased by $986,000 due to a reduction in loan growth from 8.75% in 2019 to projected growth of approximately 2.00% for the year

21


of 2020. The 2020 growth excludes growth in Paycheck Protection Program loans which are fully guaranteed by the Small Business Association as well as loans acquired from UpState.

The following table presents the allowance for loan losses by the classes of the loan portfolio:

(In thousands)

Residential Real Estate

Commercial Real Estate

Construction

Commercial

Consumer

Total

Beginning balance, December 31, 2019

$

1,552

$

4,687

$

95

$

949

$

1,226

$

8,509

Charge Offs

(41)

(433)

(18)

(275)

(767)

Recoveries

5

10

36

31

82

Provision for loan losses

162

2,904

30

242

512

3,850

Ending balance, September 30, 2020

$

1,678

$

7,168

$

125

$

1,209

$

1,494

$

11,674

Ending balance individually evaluated
for impairment

$

$

$

$

$

$

Ending balance collectively evaluated
for impairment

$

1,678

$

7,168

$

125

$

1,209

$

1,494

$

11,674

(In thousands)

Residential Real Estate

Commercial Real Estate

Construction

Commercial

Consumer

Total

Beginning balance, June 30, 2020

$

1,652

$

6,079

$

86

$

1,076

$

1,419

$

10,312

Charge Offs

(40)

(400)

-

-

(83)

(523)

Recoveries

2

4

-

18

11

35

Provision for loan losses

64

1,485

39

115

147

1,850

Ending balance, September 30, 2020

$

1,678

$

7,168

$

125

$

1,209

$

1,494

$

11,674

(In thousands)

Residential Real Estate

Commercial Real Estate

Construction

Commercial

Consumer

Total

Beginning balance, December 31, 2018

$

1,328

$

5,455

$

93

$

712

$

864

$

8,452

Charge Offs

(90)

(615)

(254)

(246)

(1,205)

Recoveries

20

18

31

39

108

Provision for loan losses

310

(292)

14

454

564

1,050

Ending balance, September 30, 2019

$

1,568

$

4,566

$

107

$

943

$

1,221

$

8,405

Ending balance individually evaluated
for impairment

$

$

$

$

$

$

Ending balance collectively evaluated
for impairment

$

1,568

$

4,566

$

107

$

943

$

1,221

$

8,405

(In thousands)

Residential Real Estate

Commercial Real Estate

Construction

Commercial

Consumer

Total

Beginning balance, June 30, 2019

$

1,447

$

4,694

$

112

$

896

$

1,079

$

8,228

Charge Offs

(15)

(20)

(111)

(146)

Recoveries

5

4

10

4

23

Provision for loan losses

131

(132)

(5)

57

249

300

Ending balance, September 30, 2019

$

1,568

$

4,566

$

107

$

943

$

1,221

$

8,405

22


The Company’s primary business activity as of September 30, 2020 was with customers located in northeastern Pennsylvania and the New York counties of Delaware, Sullivan, Ontario, Otsego and Yates. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region’s economy.

As of September 30, 2020, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $119.7 million of loans outstanding, or 8.5% of total loans outstanding, and residential rentals with loans outstanding of $117.2 million, or 8.3% of loans outstanding. During 2020, the Company did not recognize any charge offs on loans in the named concentrations.

 

9.           Operating Leases

The Company leases 8 office locations under operating leases. Several assumptions and judgments were made when applying the requirements of Topic 842 to the Company’s existing lease commitments, including the allocation of consideration in the contracts between lease and nonlease components, determination of the lease term, and determination of the discount rate used in calculating the present value of the lease payments.

The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on the Consolidated Balance Sheets. The lease cost associated with the operating leases for the nine-month periods ending September 30, 2020 and 2019, amounted to $425,000 and $382,000 respectively.

Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at September 30, 2020.

Operating

Weighted-average remaining term

12.4

Weighted-average discount rate

3.20%

The following table presents the undiscounted cash flows due related to operating leases as of September 30, 2020, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

Undiscounted cash flows due (in thousands)

Operating

2020

$

140

2021

561

2022

546

2023

534

2024

544

2025 and thereafter

3,880

Total undiscounted cash flows

6,205

Discount on cash flows

(1,121)

Total lease liabilities

$

5,084

 

10.          Fair Value of Assets and Liabilities

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis”. There are three levels of inputs that may be used to measure fair values:

23


Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 15 of the Company’s 2019 Form 10-K.

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2020 and December 31, 2019 are as follows:

Fair Value Measurement Using

Reporting Date

Description

Total

Level 1

Level 2

Level 3

(In thousands)

September 30, 2020

Available for Sale:

States and political subdivisions

$

53,065

$

-

$

53,065

$

-

Corporate obligations

3,063

-

3,063

-

Mortgage-backed securities-government

sponsored entities

141,308

-

141,308

-

Total

$

197,436

$

-

$

197,436

$

-

Description

Total

Level 1

Level 2

Level 3

(In thousands)

December 31, 2019

Available for Sale:

States and political subdivisions

$

71,305

$

-

$

71,305

$

-

Corporate obligations

4,100

-

4,100

-

Mortgage-backed securities-government

sponsored entities

134,800

-

134,800

-

Total

$

210,205

$

-

$

210,205

$

-

Securities:

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.

24


Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2020 and December 31, 2019 are as follows:

Fair Value Measurement Using Reporting Date

(In thousands)

Description

Total

Level 1

Level 2

Level 3

September 30, 2020

Impaired Loans

$

-

$

-

$

-

$

-

Foreclosed Real Estate Owned

965

-

-

965

December 31, 2019

Impaired Loans

$

1,584

$

-

$

-

$

1,584

Foreclosed Real Estate Owned

1,556

-

-

1,556

Impaired loans (generally carried at fair value):

The Company measures impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the lowest level of input that is significant to the fair value measurements.

As of September 30, 2020, the fair value investment in impaired loans was $0 since 0 loans required a specific reserve at period end.

As of December 31, 2019, the fair value investment in impaired loans totaled $1,584,000 which included 2 loans that required a valuation allowance of $417,000 since the estimated realizable value of the collateral or the discounted cash flows were not sufficient to cover the recorded investment in the loans. As of December 31, 2019, the Company had 0t recognized any charge-offs against the allowance for loan losses on these impaired loans.

Foreclosed real estate owned (carried at fair value):

Real estate properties acquired through loan foreclosures, or by deed in lieu of loan foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements

(dollars in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

September 30, 2020

Impaired loans

$

-

Appraisal of collateral(1)

Appraisal adjustments(2)

-

Foreclosed real estate owned

$

965

Appraisal of collateral(1)

Liquidation Expenses(2)

7.00% (7.00%)

25


Quantitative Information about Level 3 Fair Value Measurements

(dollars in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

December 31, 2019

Impaired loans

$

1,531

Appraisal of collateral(1)

Appraisal adjustments(2)

10.00% (10.00%)

Impaired loans

$

53

Present value of future cash flows

Loan discount rate

4.00-6.97% (5.55%)

Probability of default

0%

Foreclosed real estate owned

$

1,556

Appraisal of collateral(1)

Liquidation Expenses(2)

0-7.00% (4.34%)

(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable, less any associated allowance.

(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

Assets and Liabilities Not Required to be Measured or Reported at Fair Value

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019.

Loans receivable (carried at cost):

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Mortgage servicing rights (generally carried at cost)

The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.

Deposit liabilities (carried at cost):

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Other borrowings (carried at cost):

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.

26


The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at September 30, 2020 and December 31, 2019. (In thousands)

Fair Value Measurements at September 30, 2020

Carrying Amount

Fair Value

Level 1

Level 2

Level 3

Financial assets:

Cash and cash equivalents (1)

$

124,440

$

124,440

$

124,440

$

-

$

-

Loans receivable, net

1,402,988

1,494,158

-

-

1,494,158

Mortgage servicing rights

324

406

-

-

406

Regulatory stock (1)

3,876

3,876

3,876

-

-

Bank owned life insurance (1)

39,400

39,400

39,400

-

-

Accrued interest receivable (1)

6,104

6,104

6,104

-

-

Financial liabilities:

Deposits

1,515,922

1,521,857

980,745

-

541,112

Short-term borrowings (1)

69,294

69,294

69,294

-

-

Other borrowings

46,438

47,567

-

-

47,567

Accrued interest payable (1)

2,194

2,194

2,194

-

-

Off-balance sheet financial instruments:

Commitments to extend credit and
outstanding letters of credit

-

-

-

-

-

Fair Value Measurements at December 31, 2019

Carrying Amount

Fair Value

Level 1

Level 2

Level 3

Financial assets:

Cash and cash equivalents (1)

$

15,415

$

15,415

$

15,415

$

-

$

-

Loans receivable, net

916,072

943,143

-

-

943,143

Mortgage servicing rights

187

226

-

-

226

Regulatory stock (1)

4,844

4,844

4,844

-

-

Bank owned life insurance (1)

38,763

38,763

38,763

-

-

Accrued interest receivable (1)

3,719

3,719

3,719

-

-

Financial liabilities:

Deposits

957,529

961,120

596,811

-

364,309

Short-term borrowings (1)

62,256

62,256

62,256

-

-

Other borrowings

56,438

56,618

-

-

56,618

Accrued interest payable (1)

2,432

2,432

2,432

-

-

Off-balance sheet financial instruments:

Commitments to extend credit and
outstanding letters of credit

-

-

-

-

-

(1)This financial instrument is carried at cost, which approximates the fair value of the instrument.

 

11.           New and Recently Adopted Accounting Pronouncements

New Accounting Pronouncements Not Yet Adopted

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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 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

27


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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one percentage point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost, and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses, amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging, amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments, amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10. 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 ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to

28


be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles ‒ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders.