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PWOD Penns Woods Bancorp

Filed: 10 May 21, 4:11pm
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, 2021. 
Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from                    to                   .

No. 0-17077
(Commission File Number)

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

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


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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company. or an emerging growth company.  See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filerAccelerated 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 1, 2020 there were 7,060,829 shares of the Registrant’s common stock outstanding.


PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

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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)20212020
ASSETS:  
Noninterest-bearing balances$28,539 $31,821 
Interest-bearing balances in other financial institutions249,149 181,537 
Total cash and cash equivalents277,688 213,358 
Investment debt securities, available for sale, at fair value166,895 162,261 
Investment equity securities, at fair value1,265 1,288 
Investment securities, trading44 40 
Restricted investment in bank stock, at fair value15,032 15,377 
Loans held for sale2,568 5,239 
Loans1,335,899 1,344,327 
Allowance for loan losses(14,202)(13,803)
Loans, net1,321,697 1,330,524 
Premises and equipment, net34,910 32,702 
Accrued interest receivable8,583 8,394 
Bank-owned life insurance33,839 33,638 
Goodwill17,104 17,104 
Intangibles618 671 
Operating lease right-of-use asset3,088 3,136 
Deferred tax asset3,717 2,526 
Other assets9,144 8,385 
TOTAL ASSETS$1,896,192 $1,834,643 
LIABILITIES:  
Interest-bearing deposits$1,085,448 $1,045,086 
Noninterest-bearing deposits478,916 449,357 
Total deposits1,564,364 1,494,443 
Short-term borrowings6,650 5,244 
Long-term borrowings141,094 153,475 
Accrued interest payable988 1,112 
Operating lease liability3,130 3,175 
Other liabilities15,903 13,048 
TOTAL LIABILITIES1,732,129 1,670,497 
SHAREHOLDERS’ EQUITY:  
Preferred stock, no par value, 3,000,000 shares authorized; 0 shares issued
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 outstanding41,873 41,847 
Additional paid-in capital52,818 52,523 
Retained earnings83,948 82,769 
Accumulated other comprehensive loss:  
Net unrealized gain on available for sale securities3,095 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' EQUITY164,059 164,142 
Non-controlling interest
TOTAL SHAREHOLDERS' EQUITY164,063 164,146 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,896,192 $1,834,643 

See accompanying notes to the unaudited consolidated financial statements.
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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended March 31,
(In Thousands, Except Per Share Data)20212020
INTEREST AND DIVIDEND INCOME:  
Loans, including fees$13,345 $14,657 
Investment securities:  
Taxable819 1,010 
Tax-exempt171 145 
Dividend and other interest income260 349 
TOTAL INTEREST AND DIVIDEND INCOME14,595 16,161 
INTEREST EXPENSE:  
Deposits1,684 3,035 
Short-term borrowings22 
Long-term borrowings839 943 
TOTAL INTEREST EXPENSE2,525 4,000 
NET INTEREST INCOME12,070 12,161 
PROVISION FOR LOAN LOSSES515 750 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES11,555 11,411 
NON-INTEREST INCOME:  
Service charges383 549 
Net debt securities gains, available for sale138 21 
Net equity securities (losses) gains(23)20 
Net securities gains (losses), trading(14)
Bank-owned life insurance173 192 
Gain on sale of loans908 444 
Insurance commissions157 127 
Brokerage commissions219 369 
Debit card income380 274 
Other275 455 
TOTAL NON-INTEREST INCOME2,614 2,437 
NON-INTEREST EXPENSE:  
Salaries and employee benefits5,598 5,667 
Occupancy976 702 
Furniture and equipment809 860 
Software amortization198 250 
Pennsylvania shares tax352 285 
Professional fees583 622 
Federal Deposit Insurance Corporation deposit insurance221 194 
Marketing63 53 
Intangible amortization53 62 
Other1,098 1,415 
TOTAL NON-INTEREST EXPENSE9,951 10,110 
INCOME BEFORE INCOME TAX PROVISION4,218 3,738 
INCOME TAX PROVISION771 661 
CONSOLIDATED NET INCOME$3,447 $3,077 
Less: Net income attributable to noncontrolling interest
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.$3,441 $3,073 
EARNINGS PER SHARE - BASIC$0.49 $0.44 
EARNINGS PER SHARE - DILUTED$0.49 $0.43 
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC7,055,116 7,040,740 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED7,055,116 7,102,990 
DIVIDENDS DECLARED PER SHARE$0.32 $0.32 
See accompanying notes to the unaudited consolidated financial statements.
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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 Three Months Ended March 31,
(In Thousands)20212020
Net Income$3,441 $3,073 
Other comprehensive (loss) income:  
Change in unrealized (loss) gain on available for sale securities(1,911)694 
Tax effect401 (146)
Net realized gain on available for sale securities included in net income(138)(21)
Tax effect29 
   Amortization of unrecognized pension gain46 41 
        Tax effect(10)(8)
Total other comprehensive (loss) income(1,583)564 
Comprehensive income$1,858 $3,637 
 
See accompanying notes to the unaudited consolidated financial statements.
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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)



 Three months ended:
COMMON STOCKADDITIONAL
PAID-IN CAPITAL
RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS
TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)SHARESAMOUNT
Balance, December 31, 20207,532,576 $41,847 $52,523 $82,769 $(882)$(12,115)$$164,146 
Net income3,441 3,447 
Other comprehensive loss(1,583)(1,583)
Stock-based compensation220 220 
Dividends declared ($0.32 per share)(2,262)(2,262)
Common shares issued for employee stock purchase plan939 15 20 
Director Compensation Plan3,727 21 60 81 
Distributions to noncontrolling interest(6)(6)
Balance, March 31, 20217,537,242 $41,873 $52,818 $83,948 $(2,465)$(12,115)$$164,063 


COMMON STOCKADDITIONAL
PAID-IN CAPITAL
RETAINED EARNINGSACCUMULATED OTHER
COMPREHENSIVE LOSS
TREASURY STOCKNON-CONTROLLING INTERESTTOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)SHARESAMOUNT
Balance, December 31, 20197,520,740 $41,782 $51,487 $76,583 $(2,777)$(12,115)$22 $154,982 
Net income3,073 3,077 
Other comprehensive income564 564 
Stock-based compensation198 198 
Dividends declared ($0.32 per share)(2,253)(2,253)
Common shares issued for employee stock purchase plan751 16 20 
Balance, March 31, 20207,521,491 $41,786 $51,701 $77,403 $(2,213)$(12,115)$26 $156,588 


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,
(In Thousands)20212020
OPERATING ACTIVITIES:  
Net Income$3,447 $3,077 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization839 760 
Gain on sale of premise and equipment(14)
Amortization of intangible assets53 62 
Provision for loan losses515 750 
Stock based compensation220 198 
Accretion and amortization of investment security discounts and premiums251 171 
Net securities gains, available for sale(138)(21)
Originations of loans held for sale(26,658)(14,977)
Proceeds of loans held for sale30,237 15,359 
Gain on sale of loans(908)(444)
Net equity securities losses (gains)23 (20)
Net securities (gains) losses, trading(4)14 
Earnings on bank-owned life insurance(173)(192)
Increase in deferred tax asset(761)(84)
Proceeds on sales of investment securities receivable6,627 
Other, net2,447 (2,658)
Net cash provided by operating activities9,390 8,608 
INVESTING ACTIVITIES:  
Proceeds from sales of available for sale securities11,372 2,774 
Proceeds from calls and maturities of available for sale securities3,428 2,598 
Purchases of available for sale securities(21,955)(11,753)
Net decrease in loans8,312 5,861 
Acquisition of premises and equipment(197)(1,547)
Proceeds from the sale of premises and equipment336 
Proceeds from the sale of foreclosed assets246 226 
Purchase of bank-owned life insurance(26)(26)
Proceeds from bank-owned life insurance death benefit248 
Investment in limited partnership(711)(370)
Proceeds from redemption of regulatory stock1,082 1,139 
Purchases of regulatory stock(737)(2,222)
Net cash used for investing activities814 (2,736)
FINANCING ACTIVITIES:  
Net increase in interest-bearing deposits40,362 4,716 
Net increase (decrease) in noninterest-bearing deposits29,559 (1,987)
Proceeds from long-term borrowings35,000 
Repayment of long-term borrowings(15,000)(25,000)
Net increase in short-term borrowings1,406 12,821 
Finance lease principal payments(34)(17)
Dividends paid(2,262)(2,253)
Distributions to non-controlling interest(6)
Issuance of common stock101 20 
Net cash provided by financing activities54,126 23,300 
NET INCREASE IN CASH AND CASH EQUIVALENTS64,330 29,172 
CASH AND CASH EQUIVALENTS, BEGINNING213,358 48,589 
CASH AND CASH EQUIVALENTS, ENDING$277,688 $77,761 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
Interest paid$2,649 $4,036 
Income taxes paid
Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities2,653 
Transfer of loans to foreclosed real estate139 
See accompanying notes to the unaudited consolidated financial statements.
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PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

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

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

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

Note 2.  Accumulated Other Comprehensive Gain (loss)

The changes in accumulated other comprehensive (loss) gain by component shown net of tax and parenthesis indicating debits, as of March 31, 2021 and 2020 were as follows:
 Three Months Ended March 31, 2021Three Months Ended March 31, 2020
(In Thousands)Net Unrealized Gain (Loss) on Available for Sale SecuritiesDefined
Benefit 
Plan
TotalNet Unrealized Gain (Loss) on Available
for Sale Securities
Defined
Benefit 
Plan
Total
Beginning balance$4,714 $(5,596)$(882)$2,455 $(5,232)$(2,777)
Other comprehensive (loss) gain before reclassifications(1,510)(1,510)548 548 
Amounts reclassified from accumulated other comprehensive (loss) gain(109)36 (73)(17)33 16 
Net current-period other comprehensive (loss) income(1,619)36 (1,583)531 33 564 
Ending balance$3,095 $(5,560)$(2,465)$2,986 $(5,199)$(2,213)

The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of March 31, 2021 and 2020 were as follows:
Details about Accumulated Other Comprehensive Loss ComponentsAmount Reclassified from Accumulated Other Comprehensive LossAffected Line Item
 in the Consolidated 
Statement of Income
Three months ended March 31, 2021Three months ended March 31, 2020
Net unrealized gain on available for sale securities$138 $21 Net debt securities gains, available for sale
Income tax effect(29)(4)Income tax provision
Total reclassifications for the period$109 $17 
Net unrecognized pension costs$(46)$(41)Other non-interest expense
Income tax effect10 Income tax provision
Total reclassifications for the period$(36)$(33)

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Note 3.  Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be 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 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. 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 reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

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

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

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

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

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

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

Note 4. Per Share Data

There are 0 convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 841,275 stock options, with an average exercise price of $28.17, outstanding on March 31, 2021. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the three period due to the average market price of common shares of $20.21, respectively, exceeding the exercise price of the options issued. There were a total of 864,300 stock options, with an average exercise price of $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 the exercise price of the options issued for all years except for 2017.
 Three Months Ended March 31,
 20212020
Weighted average common shares issued7,535,341 7,520,965 
Weighted average treasury stock shares(480,225)(480,225)
Weighted average common shares outstanding - basic7,055,116 7,040,740 
Dilutive effect of outstanding stock options62,250 
Weighted average common shares outstanding - basic and diluted7,055,116 7,102,990 
11

 
Note 5. Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at March 31, 2021 and December 31, 2020 are as follows:
 March 31, 2021
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
Mortgage-backed securities$1,792 $$$1,796 
State and political securities109,662 4,132 (542)113,252 
Other debt securities51,523 740 (416)51,847 
Total debt securities$162,977 $4,876 $(958)$166,895 
Investment equity securities:
Other equity securities$1,300 $$(36)$1,265 
Trading:
Other equity securities$50 $$(6)$44 
 December 31, 2020
  GrossGross 
 AmortizedUnrealizedUnrealizedFair
(In Thousands)CostGainsLossesValue
Available for sale (AFS):    
Mortgage-backed securities$2,118 $23 $$2,141 
State and political securities102,690 5,382 (59)108,013 
Other debt securities51,486 828 (207)52,107 
Total debt securities$156,294 $6,233 $(266)$162,261 
Investment equity securities:
Other equity securities$1,300 $10 $(22)$1,288 
Trading:
Other equity securities$50 $$(10)$40 

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at March 31, 2021 and December 31, 2020.
 March 31, 2021
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
State and political securities$27,816 $(532)$897 $(10)$28,713 $(542)
Other debt securities19,500 (289)3,953 (127)23,453 (416)
Total debt securities$47,316 $(821)$4,850 $(137)$52,166 $(958)
12

 December 31, 2020
 Less than Twelve MonthsTwelve Months or GreaterTotal
  Gross Gross Gross
 FairUnrealizedFairUnrealizedFairUnrealized
(In Thousands)ValueLossesValueLossesValueLosses
Available for sale (AFS):
State and political securities$12,311 $(51)$900 $(8)$13,211 $(59)
Other debt securities5,964 (74)4,429 (133)10,393 (207)
Total debt securities$18,275 $(125)$5,329 $(141)$23,604 $(266)
 
At March 31, 2021, there were a total of 62 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, 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, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands)Amortized CostFair Value
Due in one year or less$11,176 $11,158 
Due after one year to five years71,403 72,665 
Due after five years to ten years70,964 73,612 
Due after ten years9,434 9,460 
Total$162,977 $166,895 

Total gross proceeds from sales of debt securities available for sale for the three months ended March 31, 2021 was $11,372,000, compared to $2,774,000 for the corresponding 2020 periods.

The following table represents gross realized gains and losses from the sales of debt securities available for sale:
 Three Months Ended March 31,
(In Thousands)20212020
Available for sale (AFS):
Gross realized gains:  
State and political securities$$
Other debt securities138 20 
Total gross realized gains$138 $21 
Gross realized losses:  
State and political securities$$
Other debt securities
Total gross realized losses$$

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

Investment securities with a carrying value of approximately $109,699,000 and $111,247,000 at March 31, 2021 and December 31, 2020, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
13


At March 31, 2021 and December 31, 2020, we had $1,265,000 and $1,288,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
(In Thousands)20212020
Net (losses) gains recognized in equity securities during the period$(23)$20 
Less: Net gains realized on the sale of equity securities during the period
Unrealized gains recognized in equity securities held at reporting date$(23)$20 

Net gains and losses on trading account securities are as follows for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
(In Thousands)20212020
Net gains on sale transactions$$
Net mark-to-market gains (losses)(14)
Net gain (loss) on trading account securities$$(14)


Note 6. Loans

Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics.  Loans are segmented based on the underlying collateral characteristics.  Categories include commercial, financial, and agricultural, real estate, and installment loans.  Real estate loans are further segmented into 3 categories: residential, commercial, and construction, while installment loans are classified as either consumer automobile loans or other installment loans.

The following table presents the related aging categories of loans, by segment, as of March 31, 2021 and December 31, 2020:
 March 31, 2021
  Past DuePast Due 90  
  30 To 89Days Or MoreNon- 
(In Thousands)CurrentDays& Still AccruingAccrualTotal
Commercial, financial, and agricultural$181,171 $23 $$863 $182,059 
Real estate mortgage:     
Residential575,008 2,513 476 1,739 579,736 
Commercial357,225 584 57 5,859 363,725 
Construction39,604 128 53 39,785 
Consumer automobile loans149,917 316 72 151 150,456 
Other consumer installment loans19,241 417 19,658 
 1,322,166 $3,981 $607 $8,665 1,335,419 
Net deferred loan fees and discounts480    480 
Allowance for loan losses(14,202)   (14,202)
Loans, net$1,308,444    $1,321,697 
14

 December 31, 2020
  Past DuePast Due 90  
  30 To 89Days Or MoreNon- 
(In Thousands)CurrentDays& Still AccruingAccrualTotal
Commercial, financial, and agricultural$163,583 $247 $48 $865 $164,743 
Real estate mortgage:     
Residential580,292 6,386 983 2,060 589,721 
Commercial366,363 533 150 6,142 373,188 
Construction38,587 667 55 39,309 
Consumer automobile loans155,472 900 31 156,403 
Other consumer installment loans19,485 455 19,940 
 1,323,782 $9,188 $1,212 $9,122 1,343,304 
Net deferred loan fees and discounts1,023    1,023 
Allowance for loan losses(13,803)   (13,803)
Loans, net$1,311,002    $1,330,524 
 
The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three months ended March 31, 2021 and 2020:
 Three Months Ended March 31,
 20212020
(In Thousands)Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
Interest
Income
Recorded on
a Cash Basis
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
Interest
Income
Recorded on
a Cash Basis
Commercial, financial, and agricultural$28 $$$
Real estate mortgage:    
Residential
Commercial30 42 
Construction
Consumer automobile loans
Other consumer installment loans
 $68 $$62 $

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.

15

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

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2021 and December 31, 2020:
March 31, 2021
RecordedUnpaid PrincipalRelated
(In Thousands)InvestmentBalanceAllowance
With no related allowance recorded:   
Commercial, financial, and agricultural$803 $3,590 $— 
Real estate mortgage:   
Residential4,626 4,626 — 
Commercial5,886 5,886 — 
Construction120 120 — 
Consumer automobile loans— 
Installment loans to individuals— 
 11,435 14,222 — 
With an allowance recorded:   
Commercial, financial, and agricultural60 60 
Real estate mortgage:   
Residential1,543 1,543 330 
Commercial5,841 5,841 1,638 
Construction
Consumer automobile loans201 201 73 
Installment loans to individuals
 7,653 7,653 2,043 
Total:   
Commercial, financial, and agricultural863 3,650 
Real estate mortgage:   
Residential6,169 6,169 330 
Commercial11,727 11,727 1,638 
Construction128 128 
Consumer automobile loans201 201 73 
Installment loans to individuals
 $19,088 $21,875 $2,043 
16

 December 31, 2020
 RecordedUnpaid PrincipalRelated
(In Thousands)InvestmentBalanceAllowance
With no related allowance recorded:  
Commercial, financial, and agricultural$865 $3,652 $— 
Real estate mortgage:   
Residential5,023 5,023 — 
Commercial6,354 6,354 — 
Construction124 124 — 
Consumer automobile loans— 
Installment loans to individuals— 
 12,366 15,153 — 
With an allowance recorded:   
Commercial, financial, and agricultural
Real estate mortgage:   
Residential1,294 1,294 224 
Commercial3,023 3,023 811 
Construction
Consumer automobile loans
Installment loans to individuals
 4,317 4,317 1,035 
Total:   
Commercial, financial, and agricultural865 3,652 
Real estate mortgage:   
Residential6,317 6,317 224 
Commercial9,377 9,377 811 
Construction124 124 
Consumer automobile loans
Installment loans to individuals
 $16,683 $19,470 $1,035 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2021 and 2020:
 Three Months Ended March 31,
 20212020
(In Thousands)Average
Investment in
Impaired Loans
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Average
Investment in
Impaired Loans
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural$864 $$$2,155 $$
Real estate mortgage:      
Residential6,081 51 5,953 57 
Commercial9,167 28 8,568 26 
Construction122 65 
Consumer automobile76 76 
Other consumer installment loans
$16,310 $79 $$16,825 $84 $


17

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 2 loan modifications considered to be TDRs completed during the three months ended March 31, 2021. There were 0 loan modifications considered TDRs completed during the three months ended March 31, 2020. Loan modifications that are considered TDRs completed during the three months ended March 31, 2021 were as follows:

Three Months Ended March 31,
2021
(In Thousands, Except Number of Contracts)Number
of
Contracts
Pre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural$$
Real estate mortgage:   
Residential687 687 
Commercial125 125 
Construction
 $812 $812 

There was 1 loan modifications considered to be a TDR made during the twelve months previous to March 31, 2021 that defaulted during the three months ended March 31, 2021. The defaulted loan type and recorded investment at March 31, 2021 are as follows: 1 residential real estate loan with a recorded investment of $687,000. There were 3 loan modifications considered to be TDRs made during the twelve months previous to March 31, 2020 that defaulted during the three months ended March 31, 2020. The defaulted loan types and recorded investments at March 31, 2020 are as follows: 1 commercial real estate loan with a recorded investment of $1,040,000, and 2 commercial and agricultural loans with a recorded investment of $1,112,000.

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

The amount of foreclosed residential real estate held at March 31, 2021 and December 31, 2020, totaled $68,000 and $401,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2021 and December 31, 2020, totaled $421,000 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, 2021, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on 1,365 loans with 70 loans remaining in their deferral period with an aggregate outstanding balance of $12,345,000. These loan modifications met applicable requirements to not be considered troubled debt restructurings. The Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act (the “Economic Aid Act”) passed in December 2020 extended the CARES Act provisions permitting financial institutions to suspend TDR assessment and reporting requirements under generally accepted accounting principles until the earlier of 60 days after the date that the President terminates the COVID-19 national emergency or January 1, 2022. The number of customers seeking loan modifications or payment deferrals may increase as the effects of the pandemic continue.




18

Internal Risk Ratings

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first 6 categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated for substandard classification.  Loans in the doubtful category exhibit the same weaknesses found in the substandard loans, however, the weaknesses are more pronounced.  Such loans are static and collection in full is improbable.  However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.  Loans classified loss are considered uncollectible and charge-off is imminent.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 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, 2021 and December 31, 2020:
 March 31, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment loans 
(In Thousands)ResidentialCommercialConstructionTotals
Pass$180,038 $574,785 $343,898 $39,595 $150,456 $19,658 $1,308,430 
Special Mention180 2,474 9,253 11,907 
Substandard1,841 2,477 10,574 190 15,082 
$182,059 $579,736 $363,725 $39,785 $150,456 $19,658 $1,335,419 
 December 31, 2020
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment loans 
(In Thousands)ResidentialCommercialConstructionTotals
Pass$162,694 $584,599 $355,616 $39,192 $156,403 $19,938 $1,318,442 
Special Mention180 556 7,973 8,709 
Substandard1,869 4,566 9,599 117 16,153 
 $164,743 $589,721 $373,188 $39,309 $156,403 $19,940 $1,343,304 

Allowance for Loan Losses

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

The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  The total of the 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.
19


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

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

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

Activity in the allowance is presented for the three months ended March 31, 2021 and 2020:
 
tThree Months Ended March 31, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,936 $4,460 $3,635 $134 $1,906 $261 $1,471 $13,803 
Charge-offs(35)(14)(96)(29)(174)
Recoveries17 28 58 
Provision700 (48)541 (92)(25)(564)515 
Ending Balance$2,606 $4,401 $4,176 $142 $1,735 $235 $907 $14,202 
 Three Months Ended March 31, 2020
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer automobileOther consumer installment  
(In Thousands)ResidentialCommercialConstructionUnallocatedTotals
Beginning Balance$1,779 $4,306 $3,210 $118 $1,780 $278 $423 $11,894 
Charge-offs(14)(41)(75)(100)(230)
Recoveries21 21 41 86 
Provision111 251 204 40 149 48 (53)750 
Ending Balance$1,897 $4,537 $3,414 $160 $1,855 $267 $370 $12,500 

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

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

The Company has a concentration of the following to gross loans at March 31, 2021 and 2020: 
 March 31,
 20212020
Owners of residential rental properties16.73 %16.04 %
Owners of commercial rental properties13.66 %12.53 %
20

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, 2021 and December 31, 2020:
 March 31, 2021
 Commercial, Financial, and AgriculturalReal Estate MortgagesConsumer AutomobileOther consumer installmentUnallocated 
(In Thousands)ResidentialCommercialConstructionTotals
Allowance for Loan Losses:       
Ending allowance balance attributable to loans:       
Individually evaluated for impairment$$330 $1,638 $$73 $$$2,043 
Collectively evaluated for impairment2,605 4,071 2,538 141 1,662 235 907 12,159 
Total ending allowance balance$2,606 $4,401 $4,176 $142 $1,735 $235 $907 $14,202 
Loans:       
Individually evaluated for impairment$863 $6,169 $11,727 $128 $201 $$19,088 
Collectively evaluated for impairment181,196 573,567 351,998 39,657 150,255 19,658 1,316,331 
Total ending loans balance$182,059 $579,736 $363,725 $39,785 $150,456 $19,658 $1,335,419 

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

Note 7.  Net Periodic Benefit Cost-Defined Benefit Plans

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

The following sets forth the components of the net periodic benefit/cost of the domestic non-contributory defined benefit plan for the three months ended March 31, 2021 and 2020, respectively:
Three Months Ended March 31,
(In Thousands)20212020
Interest cost$127 $160 
Expected return on plan assets(386)(318)
Amortization of net loss46 41 
Net periodic benefit$(213)$(117)




21

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, 2021, there were contributions of $200,000 made to the plan with additional contributions of at least $300,000 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 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 months ended March 31, 2021 and 2020, there were 939 and 751 shares issued under the Plan, respectively.

Note 9.  Off-Balance Sheet Risk

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

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

Financial instruments whose contract amounts represent credit risk are as follows at March 31, 2021 and December 31, 2020:
(In Thousands)March 31, 2021December 31, 2020
Commitments to extend credit$216,331 $198,512 
Standby letters of credit10,091 10,120 
Credit exposure from the sale of assets with recourse9,634 9,182 
$236,056 $217,814 

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

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










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Note 10.  Fair Value Measurements

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.
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, 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 ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
Mortgage-backed securities$$1,796 $$1,796 
State and political securities113,252 113,252 
Other debt securities51,847 51,847 
Investment equity securities:
  Other equity securities1,265 1,265 
Investment securities, trading:
  Other equity securities44 44 

 December 31, 2020
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a recurring basis:    
Investment securities, available for sale:    
Mortgage-backed securities$$2,141 $$2,141 
State and political securities108,013 108,013 
Other debt securities52,107 52,107 
Investment equity securities:
  Other equity securities1,288 1,288 
Investment securities, trading:
  Other equity securities40 40 









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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, 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 ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$$$14,856 $14,856 
Other real estate owned68 68 
 December 31, 2020
(In Thousands)Level ILevel IILevel IIITotal
Assets measured on a non-recurring basis:    
Impaired loans$$$15,648 $15,648 
Other real estate owned401 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, 2021 and December 31, 2020: 
 March 31, 2021
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans$10,231 Discounted cash flowTemporary reduction in payment amount3% to (63)%(15)%
 4,625 
Appraisal of collateral (1)
Appraisal adjustments (1)
0% to (30)%(4)%
Other real estate owned$68 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
 December 31, 2020
 Quantitative Information About Level III Fair Value Measurements
(In Thousands)Fair ValueValuation Technique(s)Unobservable InputsRangeWeighted Average
Impaired loans$8,624 Discounted cash flowTemporary reduction in payment amount17% to (63)%(18)%
 7,024 
Appraisal of collateral (1)
Appraisal adjustments (1)
0% to (30)%(8)%
Other real estate owned$401 
Appraisal of collateral (1)
Appraisal adjustments (1)
(20)%(20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

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

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

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


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Note 11. Fair Value of Financial Instruments

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

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

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

The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at March 31, 2021 and December 31, 2020:
 CarryingFairFair Value Measurements at March 31, 2021
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Cash and cash equivalents (1)$277,688 $277,688 $277,688 $$
Restricted investment in bank stock (1)15,032 15,032 15,032 
Loans held for sale (1)2,568 2,568 2,568 
Loans, net1,321,697 1,314,153 1,314,153 
Bank-owned life insurance (1)33,839 33,839 33,839 
Accrued interest receivable (1)8,583 8,583 8,583 
Financial liabilities:     
Interest-bearing deposits$1,085,448 $1,088,714 $839,452 $$249,262 
Noninterest-bearing deposits (1)478,916 478,916 478,916 
Short-term borrowings (1)6,650 6,650 6,650 
Long-term borrowings141,094 145,456 145,456 
Accrued interest payable (1)988 988 988 
(1) The financial instrument is carried at cost at March 31, 2021, which approximate the fair value of the instruments
25

 CarryingFairFair Value Measurements at December 31, 2020
(In Thousands)ValueValueLevel ILevel IILevel III
Financial assets:     
Cash and cash equivalents (1)$213,358 $213,358 $213,358 $$
Restricted investment in bank stock (1)15,377 15,377 15,377 
Loans held for sale (1)5,239 5,239 5,239 
Loans, net1,330,524 1,339,993 1,339,993 
Bank-owned life insurance (1)33,638 33,638 33,638 
Accrued interest receivable (1)8,394 8,394 8,394 
Financial liabilities:     
Interest-bearing deposits$1,045,086 $1,048,281 $781,441 $$266,840 
Noninterest-bearing deposits (1)449,357 449,357 449,357 
Short-term borrowings (1)5,244 5,244 5,244 
Long-term borrowings153,475 159,575 159,575 
Accrued interest payable (1)1,112 1,112 1,112 
(1) The financial instrument is carried at cost at December 31, 2020, which approximate the fair value of the instruments

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


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 the period ended March 31, 2021.

Stock Options Granted
DateSharesForfeitedOutstandingStrike PriceVesting PeriodExpiration
March 11, 2020119,300 119,300 $25.31 3 years10 years
March 11, 2020119,200 119,200 25.31 5 years10 years
March 15, 2019120,900 (5,700)115,200 28.01 3 years10 years
March 15, 2019119,100 (5,550)113,550 28.01 5 years10 years
August 24, 201875,300 (5,250)70,050 30.67 3 years10 years
August 24, 2018149,250 (10,650)138,600 30.67 5 years10 years
January 5, 201818,750 18,750 30.07 3 years10 years
January 5, 201818,750 18,750 30.07 5 years10 years
March 24, 201769,375 (9,000)60,375 29.47 3 years10 years
March 24, 201735,625 (2,250)33,375 29.47 5 years10 years
August 27, 201558,125 (24,000)34,125 28.02 5 years10 years






26

A summary of stock option activity is presented below:
March 31, 2021March 31, 2020
SharesWeighted Average Exercise PriceSharesWeighted Average Exercise Price
Outstanding, beginning of year841,275 $28.17 625,800 $29.29 
Granted238,500 25.34 
Exercised
Forfeited
Expired
Outstanding, end of period841,275 $28.17 864,300 $29.20 
Exercisable, end of period113,250 $29.13 62,625 $29.47 

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

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


Note 13.  Leases

The following table shows finance lease right of use assets and finance lease liabilities as of:
(In Thousands)Statement of Financial Condition classificationMarch 31, 2021December 31, 2020
Finance lease right of use assetsPremises and equipment, net$7,758 $5,257 
Finance lease liabilitiesLong-term borrowings8,094 5,475 

The following table shows the components of finance and operating lease expense for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
(In Thousands)20212020
Finance Lease Cost:
Amortization of right-of-use asset$152 $50 
Interest expense71 53 
Operating lease cost76 91 
Variable lease cost
Total Lease Cost$299 $194 



27

A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
(In Thousands)OperatingFinance
2021$219 $314 
2022298 419 
2023273 421 
2024262 427 
2025265 929 
2026 and thereafter2,911 9,664 
Total undiscounted cash flows4,228 12,174 
Discount on cash flows(1,098)(4,080)
Total lease liability$3,130 $8,094 

The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of March 31, 2021.
OperatingFinance
Weighted-average term (years)18.125.1
Weighted-average discount rate3.51 %3.19 %

Note 14.  Reclassification of Comparative Amounts

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

Note 15.  Subsequent Events

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


Note 16.  Risks and Uncertainties

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

28

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.

29


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

EARNINGS SUMMARY

Comparison of the Three and Three Months Ended March 31, 2021 and 2020

Summary Results

Net income for the three months ended March 31, 2021 was $3,441,000 compared to $3,073,000 for the same period of 2020. Results for the three months ended March 31, 2021 compared to 2020 were impacted by an increase in after-tax securities gains of $72,000 (from a gain of $22,000 to a gain of $94,000). Basic and diluted earnings per share for the three months ended March 31, 2021 were $0.49 compared to basic and diluted earnings per share of $0.44 and $0.43, respectively, for the corresponding period of 2020. Return on average assets and return on average equity were 0.75% and 8.59% for the three months ended March 31, 2021 compared to 0.74% and 7.83% for the corresponding period of 2020. Net income from core operations (“core earnings”) was $3,347,000 the three months ended March 31, 2021 compared to $3,051,000 for the corresponding period of 2020. Core basic and diluted earnings per share for the three months ended March 31, 2021 were $0.47 compared to $0.44 and $0.43 basic and diluted for the corresponding period of 2020.

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

Reconciliation of GAAP and Non-GAAP Financial Measures
(Dollars in Thousands, Except Per Share Data)Three Months Ended March 31,
20212020
GAAP net income$3,441 $3,073 
Less: net securities gains, net of tax94 22 
Non-GAAP core earnings$3,347 $3,051 
Three Months Ended March 31,
 20212020
Return on average assets (ROA)0.75 %0.74 %
Less: net securities gains, net of tax0.02 %0.01 %
Non-GAAP core ROA0.73 %0.73 %
Three Months Ended March 31,
 20212020
Return on average equity (ROE)8.59 %7.83 %
Less: net securities gains, net of tax0.24 %0.06 %
Non-GAAP core ROE.8.35 %7.77 %
Three Months Ended March 31,
 20212020
Basic earnings per share (EPS)$0.49 $0.44 
Less: net securities gains, net of tax0.02 — 
Non-GAAP core operating EPS$0.47 $0.44 
30

Three Months Ended March 31,
 20212020
Diluted EPS$0.49 $0.43 
Less: net securities gains, net of tax0.02 — 
Non-GAAP diluted core EPS$0.47 $0.43 
 
Interest and Dividend Income

Interest and dividend income for the three months ended March 31, 2021 decreased to $14,595,000 compared to $16,161,000 for the same period 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 in dividend and other interest income is due to a decrease in the amount of dividends received on restricted investment in bank stock held.

Interest and dividend income composition for the three months ended March 31, 2021 and 2020 was as follows:
 Three Months Ended
 March 31, 2021March 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Loans including fees$13,345 91.44 %$14,657 90.69 %$(1,312)(8.95)%
Investment securities:      
Taxable819 5.61 1,010 6.25 (191)(18.91)
Tax-exempt171 1.17 145 0.90 26 17.93 
Dividend and other interest income260 1.78 349 2.16 (89)(25.50)
Total interest and dividend income$14,595 100.00 %$16,161 100.00 %$(1,566)(9.69)%

Interest Expense

Interest expense for the three months ended March 31, 2021 decreased $1,475,000 compared to the same period of 2020. Since March 31, 2020, interest-bearing deposit rates have been significantly reduced due to the economic impact of COVID-19 and increased level of excess balance sheet liquidity. The decrease in deposit rates was offset in part by a significant increase in average interest-bearing deposits. Long-term borrowings have been utilized to lock in funding at historically low interest rates and to assist with the funding of the loan and investment portfolios.

Interest expense composition for the three months ended March 31, 2021 and 2020 was as follows:
 Three Months Ended
 March 31, 2021March 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Deposits$1,684 66.69 %$3,035 75.88 %$(1,351)(44.51)%
Short-term borrowings0.08 22 0.55 (20)(90.91)
Long-term borrowings839 33.23 943 23.58 (104)(11.03)
Total interest expense$2,525 100.00 %$4,000 100.01 %$(1,475)(36.88)%

Net Interest Margin

The net interest margin (“NIM”) for the three months ended March 31, 2021 was 2.88% compared to 3.19% for the corresponding period of 2020. The decrease in the net interest margin was driven by a decrease in the yield of the loan portfolio of 31 basis points ("bps"), while the the investment portfolio yield declined 77 bps for the three month period during the current low interest rate environment. The significant increase of interest-bearing deposits further compressed the net interest margin. These deposits carry a current yield of a few basis points as commercial customers have received PPP funding and retail
31

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 months ended March 31, 2021 and 2020:
 AVERAGE BALANCES AND INTEREST RATES
 Three Months Ended March 31, 2021Three Months Ended March 31, 2020
(In Thousands)Average Balance (1)InterestAverage RateAverage Balance (1)InterestAverage Rate
Assets:      
Tax-exempt loans (3)$45,534 $349 3.11 %$52,979 $404 3.07 %
All other loans1,293,395 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 securities145,047 1,033 2.89 %142,788 1,273 3.63 %
Tax-exempt securities36,369 216 2.41 %23,773 184 3.15 %
Total securities181,416 1,249 2.79 %166,561 1,457 3.56 %
Interest-bearing deposits195,995 46 0.10 %26,716 86 1.29 %
Total interest-earning assets1,716,340 14,713 3.48 %1,550,094 16,285 4.23 %
Other assets124,074   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 deposits289,236 267 0.37 %219,826 424 0.78 %
Money market deposits306,000 267 0.35 %210,708 477 0.91 %
Time deposits254,460 1,106 1.76 %379,259 2,043 2.17 %
Total interest-bearing deposits1,064,332 1,684 0.64 %987,633 3,035 1.24 %
Short-term borrowings5,680 0.14 %10,847 22 0.85 %
Long-term borrowings141,483 839 2.40 %159,920 943 2.37 %
Total borrowings147,163 841 2.32 %170,767 965 2.28 %
Total interest-bearing liabilities1,211,495 2,525 0.85 %1,158,400 4,000 1.39 %
Demand deposits445,759   326,817   
Other liabilities22,872   19,991   
Shareholders’ equity160,288   157,105   
Total liabilities and shareholders’ equity$1,840,414   $1,662,313   
Interest rate spread  2.63 %  2.84 %
Net interest income/margin $12,188 2.88 % $12,285 3.19 %

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
(In Thousands)20212020
Total interest income$14,595 $16,161 
Total interest expense2,525 4,000 
Net interest income12,070 12,161 
Tax equivalent adjustment118 124 
Net interest income (fully taxable equivalent)$12,188 $12,285 
 
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The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three months ended March 31, 2021 and 2020:
 Three Months Ended March 31,
 2021 vs. 2020
 Increase (Decrease) Due to
(In Thousands)VolumeRateNet
Interest income:   
Tax-exempt loans$(60)$$(55)
All other loans(126)(1,143)(1,269)
Taxable investment securities21 (261)(240)
Tax-exempt investment securities83 (51)32 
Interest bearing deposits103 (143)(40)
Total interest-earning assets21 (1,593)(1,572)
Interest expense:   
Savings deposits17 (64)(47)
Super Now deposits110 (267)(157)
Money market deposits161 (371)(210)
Time deposits(595)(342)(937)
Short-term borrowings(7)(13)(20)
Long-term borrowings(116)12 (104)
Total interest-bearing liabilities(430)(1,045)(1,475)
Change in net interest income$451 $(548)$(97)

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, 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 at March 31, 2021. The increase in the allowance for loan losses was primarily driven by the economic uncertainity caused by the COVID-19 pandemic. At March 31, 2021 and December 31, 2020, the allowance for loan losses to total loans was 1.06% and 1.03%, respectively.

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The provision for loan losses totaled $515,000 three months ended March 31, 2021 and the amount for the corresponding 2020 period was $750,000. The decrease in the provision for loan losses for the three months ended March 31, 2021 compared to the corresponding 2020 period was the result of limited economic improvement and a decrease in the loan portfolio. The provision remained above historical levels, however, due to the continued economic uncertainty caused by COVID-19.

Nonperforming loans decreased to $9,272,000 at March 31, 2021 from $11,300,000 at March 31, 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% and 0.84% at March 31, 2021 and 2020, respectively, and the ratio of the allowance for loan losses to nonperforming loans was 153.17% and 110.62% at March 31, 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 for the three months ended March 31, 2021.

The following is a table showing total nonperforming loans as of:
 Total Nonperforming Loans
(In Thousands)90 Days Past DueNon-accrualTotal
March 31, 2021$607 $8,665 $9,272 
December 31, 20201,212 9,122 10,334 
September 30, 2020791 9,762 10,553 
June 30, 20201,279 9,818 11,097 
March 31, 20201,503 9,797 11,300 
 
Non-interest Income

Total non-interest income for the three months ended March 31, 2021 compared to the same period in 2020 decreased $177,000 to $2,614,000. Excluding net securities gains, non-interest income for the three months ended March 31, 2021 increased $85,000 compared to the same period in 2020. Gain on sale of loans increased as the low rate environment has led to an increase in refinancing activity. Service charges declined as the overdraft fee income has declined as a result of the impact of the COVID-19 pandemic. The decrease in brokerage commissions is due to a change in the product mix and reduced consumer activity during the COVID-19 pandemic. The 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.

Non-interest income composition for the three months ended March 31, 2021 and 2020 was as follows:
 Three Months Ended
 March 31, 2021March 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Service charges$383 14.65 %$549 22.53 %$(166)(30.24)%
Net debt securities gains, available for sale138 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), trading0.15 (14)(0.57)18 (128.57)
Bank-owned life insurance173 6.62 192 7.88 (19)(9.90)
Gain on sale of loans908 34.74 444 18.22 464 104.50 
Insurance commissions157 6.01 127 5.21 30 23.62 
Brokerage commissions219 8.38 369 15.14 (150)(40.65)
Debit card income380 14.54 274 11.24 106 38.69 
Other275 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 Expense

Total non-interest expense decreased $159,000 three months ended March 31, 2021 compared to the same period of 2020. The decrease in salaries and employee benefits is attributable to a staff reduction resulting from a change in banking channels utilized by customers during the COVID-19 pandemic. Furniture and equipment expenses decreased as maintenance costs have decreased and a decrease 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 primarily from the change in expense associated with the defined benefit pension and a decrease in the amortization of the low income housing partnerships.

Non-interest expense composition for the three months ended March 31, 2021 and 2020 was as follows:
 Three Months Ended
 March 31, 2021March 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Salaries and employee benefits$5,598 56.26 %$5,667 56.05 %$(69)(1.22)%
Occupancy976 9.81 702 6.94 274 39.03 
Furniture and equipment809 8.13 860 8.51 (51)(5.93)
Software amortization198 1.99 250 2.47 (52)(20.80)
Pennsylvania shares tax352 3.54 285 2.82 67 23.51 
Professional fees583 5.86 622 6.15 (39)(6.27)
Federal Deposit Insurance Corporation deposit insurance221 2.22 194 1.92 27 13.92 
Marketing63 0.63 53 0.52 10 18.87 
Intangible amortization53 0.53 62 0.61 (9)(14.52)
Other1,098 11.03 1,415 14.01 (317)(22.40)
Total non-interest expense$9,951 100.00 %$10,110 100.00 %$(159)(1.57)%

Provision for Income Taxes

Income taxes increased $110,000 for the three months ended March 31, 2021 compared to the same period of 2020. The effective tax rate for the three months ended March 31, 2021 was 18.28% compared to 17.68% for the same period 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 from $213,358,000 at December 31, 2020 to $277,688,000 at March 31, 2021, primarily as a result of the following activities during the three months ended March 31, 2021.

Loans Held for Sale

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

Loans

Gross loans decreased $8,428,000 since December 31, 2020 due primarily to a decrease 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. 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.

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The allocation of the loan portfolio, by category, as of March 31, 2021 and December 31, 2020 is presented below:
 March 31, 2021December 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Commercial, financial, and agricultural$182,059 13.63 %$164,743 12.25 %$17,316 10.51 %
Real estate mortgage:      
Residential579,736 43.40 589,721 43.87 (9,985)(1.69)%
Commercial363,725 27.23 373,188 27.76 (9,463)(2.54)%
Construction39,785 2.98 39,309 2.92 476 1.21 %
Consumer automobile loans150,456 11.26 156,403 11.63 (5,947)(3.80)%
Other consumer installment loans19,658 1.47 19,940 1.48 (282)(1.41)%
Net deferred loan fees and discounts480 0.03 1,023 0.09 (543)(53.08)%
Gross loans$1,335,899 100.00 %$1,344,327 100.00 %$(8,428)(0.63)%

The following table shows the amount of accrual and non-accrual TDRs at March 31, 2021 and December 31, 2020:
 March 31, 2021December 31, 2020
(In Thousands)AccrualNon-accrualTotalAccrualNon-accrualTotal
Commercial, financial, and agricultural$926 $860 $1,786 $988 $862 $1,850 
Real estate mortgage:      
Residential4,241 758 4,999 3,889 90 3,979 
Commercial2,258 4,251 6,509 2,107 4,423 6,530 
 $7,425 $5,869 $13,294 $6,984 $5,375 $12,359 
 
Investments

The fair value of the investment debt securities portfolio at March 31, 2021 increased $4,634,000 since December 31, 2020, while the amortized cost of the portfolio increased $6,683,000.  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. 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% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

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

The bond portion of the portfolio review is conducted with emphases on several factors.  Continued payment of principal and interest is given primary importance with credit rating and financial condition of the issuer following as the next most important.  Credit ratings were reviewed with the ratings of the bonds being satisfactory.  Bonds that were not currently rated were discussed with a third party and/or underwent an internal financial review. Each bond is reviewed to determine whether it is a general obligation bond, which is backed by the credit and taxing power of the issuing jurisdiction, or a revenue bond, which is only payable from specified revenues.  Based on the review undertaken by the Company, the Company determined that the decline in value of the various bond holdings were temporary and were the result of the general market downturns and interest rate/yield curve changes, not credit issues.  The fact that almost all of such bonds are general obligation bonds further solidified the Company’s determination that the decline in the value of these bond holdings is temporary.

The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at $1,300,000 for March 31, 2021 and December 31, 2020 while the fair value decreased $23,000 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, 2021 follows:
 A- to AAAB- to BBB+Not RatedTotal
(In Thousands)Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Available for sale (AFS):        
Mortgage-backed securities$1,792 7$1,796 $— $— $— $— $1,792 $1,796 
State and political securities107,656 111,126 1,320 1,435 686 691 109,662 113,252 
Other debt securities25,473 25,543 12,101 12,301 13,949 14,003 51,523 51,847 
Total debt securities AFS$134,921 $138,465 $13,421 $13,736 $14,635 $14,694 $162,977 $166,895 
 
Financing Activities

Deposits

Total deposits increased $69,921,000 from December 31, 2020 to March 31, 2021. The increase in core deposits (deposits less time deposits) has provided relationship driven funding for the loan and investment portfolios. Driving deposit growth was the receipt of PPP funding by commercial customers, stimulus funding by retail customers, and customers becoming more risk 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, 2021December 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Demand deposits$478,916 30.61 %$449,357 30.07 %$29,559 6.58 %
NOW accounts290,355 18.56 287,775 19.26 2,580 0.90 
Money market deposits324,207 20.72 283,742 18.99 40,465 14.26 
Savings deposits224,890 14.38 209,924 14.05 14,966 7.13 
Time deposits245,996 15.73 263,645 17.63 (17,649)(6.69)
 Total deposits$1,564,364 100.00 %$1,494,443 100.00 %$69,921 4.68 %

Borrowed Funds

Total borrowed funds decreased 6.91%, or $10,975,000, to $147,744,000 at March 31, 2021 compared to $158,719,000 at December 31, 2020. The decrease in long term borrowings occurred as a fixed rate borrowing matured. Securities sold under agreement to repurchase have increased as customers balances have increased.
 March 31, 2021December 31, 2020Change
(In Thousands)Amount% TotalAmount% TotalAmount%
Short-term borrowings:      
Securities sold under agreement to repurchase$6,650 4.50 %$5,244 3.30 %$1,406 26.81 %
Total short-term borrowings6,650 4.50 5,244 3.30 1,406 26.81 
Long-term borrowings:
Long-term FHLB borrowings133,000 90.01 148,000 93.25 (15,000)(10.14)
Long-term finance lease8,094 5.48 5,475 3.45 2,619 47.84 
Total long-term borrowings141,094 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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Short-Term Borrowings

The following table provides further information in regards to secured borrowings that have been accounted for as repurchase agreements.
Remaining Contractual Maturity Overnight and Continuous
(In Thousands)March 31, 2021December 31, 2020
Investment debt securities pledged, fair value$10,256 $11,672 
Repurchase agreements6,650 5,244 

Capital

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

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

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
























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The Company's capital ratios as of March 31, 2021 and December 31, 2020 were as follows:
 March 31, 2021December 31, 2020
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$149,476 11.447 %$147,887 11.267 %
For Capital Adequacy Purposes58,761 4.500 59,066 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date91,407 7.000 91,880 7.000 
To Be Well Capitalized84,878 6.500 85,317 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$158,038 12.102 %$159,490 12.151 %
For Capital Adequacy Purposes104,471 8.000 105,005 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date137,118 10.500 137,820 10.500 
To Be Well Capitalized130,588 10.000 131,257 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$149,476 11.447 %$147,887 11.267 %
For Capital Adequacy Purposes78,349 6.000 78,754 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date110,994 8.500 111,568 8.500 
To Be Well Capitalized104,465 8.000 105,005 8.000 
Tier I Capital (to Average Assets)   
Actual$149,476 8.224 %$147,887 8.436 %
For Capital Adequacy Purposes72,702 4.000 70,122 4.000 
To Be Well Capitalized90,878 5.000 87,652 5.000 
 
Jersey Shore State Bank's capital ratios as of March 31, 2021 and December 31, 2020 were as follows:
 March 31, 2021December 31, 2020
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$104,864 11.135 %$103,812 10.906 %
For Capital Adequacy Purposes42,379 4.500 42,835 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date65,923 7.000 66,632 7.000 
To Be Well Capitalized61,214 6.500 61,872 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$110,875 11.773 %$112,862 11.857 %
For Capital Adequacy Purposes75,342 8.000 76,149 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date98,886 10.500 99,945 10.500 
To Be Well Capitalized94,177 10.000 95,186 10.000 
Tier I Capital (to Risk-weighted Assets)- - 
Actual$104,864 10.964 %$103,812 10.906 %
For Capital Adequacy Purposes57,386 6.000 57,113 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date81,297 8.500 80,910 8.500 
To Be Well Capitalized76,515 8.000 76,150 8.000 
Tier I Capital (to Average Assets)   
Actual$104,864 8.156 %$103,812 8.062 %
For Capital Adequacy Purposes51,429 4.000 51,507 4.000 
To Be Well Capitalized64,286 5.000 64,384 5.000 





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Luzerne Bank's capital ratios as of March 31, 2021 and December 31, 2020 were as follows:
 March 31, 2021December 31, 2020
(In Thousands)AmountRatioAmountRatio
Common Equity Tier I Capital (to Risk-weighted Assets)    
Actual$40,761 11.195 %$40,206 11.156 %
For Capital Adequacy Purposes16,385 4.500 16,218 4.500 
Minimum To Maintain Capital Conservation Buffer At Reporting Date25,487 7.000 25,228 7.000 
To Be Well Capitalized23,667 6.500 23,426 6.500 
Total Capital (to Risk-weighted Assets)   
Actual$45,312 12.445 %$42,759 11.865 %
For Capital Adequacy Purposes29,128 8.000 28,830 8.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date38,230 10.500 37,840 10.500 
To Be Well Capitalized36,410 10.000 36,038 10.000 
Tier I Capital (to Risk-weighted Assets)   
Actual$40,761 11.195 %$40,206 11.156 %
For Capital Adequacy Purposes21,846 6.000 21,624 6.000 
Minimum To Maintain Capital Conservation Buffer At Reporting Date30,949 8.500 30,634 8.500 
To Be Well Capitalized29,128 8.000 28,832 8.000 
Tier I Capital (to Average Assets)   
Actual$40,761 7.739 %$40,206 7.860 %
For Capital Adequacy Purposes21,068 4.000 20,461 4.000 
To Be Well Capitalized26,335 5.000 25,576 5.000 

Liquidity; Interest Rate Sensitivity and Market Risk

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

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

1.           Net Loans to Total Assets, 85% maximum
2.             Net Loans to Total Deposits, 100% maximum
3.             Cumulative 90 day Maturity GAP %, +/- 20% maximum
4.             Cumulative 1 Year Maturity GAP %, +/- 25% maximum

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

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

Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating
40

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

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

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

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

Interest Rate Sensitivity

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

The following is a rate shock forecast for the twelve month period ending March 31, 2022 assuming a static balance sheet as of March 31, 2021.
 Parallel Rate Shock in Basis Points
(In Thousands)-200-100Static+100+200+300+400
Net interest income$44,892 $47,706 $50,894 $54,615 $58,324 $61,773 $65,193 
Change from static(6,002)(3,188)— 3,721 7,430 10,879 14,299 
Percent change from static-11.79 %-6.26 %— 7.31 %14.60 %21.38 %28.10 %
 
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities.  Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change.  In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change.  Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

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Inflation

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

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 with over 400 loan applications processed.
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk.  Interest rate risk and liquidity risk management is performed at both the level of the Company and the Banks.  The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party.  There have been no substantial changes in the Company’s gap analysis or simulation analysis compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 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, 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, 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, 2021.
PeriodTotal
Number of
Shares (or
Units) Purchased
Average
Price Paid
per Share
(or Units) Purchased
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced Plans or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased Under the Plans or Programs
Month #1 (January 1 - January 31, 2021)— — — 513,669 
Month #2 (February 1 - February 28, 2021)— — — 513,669 
Month #3 (March 1 - March 31, 2021)— — — 513,669 

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
 
 Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2019).
 Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020).
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
 Section 1350 Certification of Chief Executive Officer.
 Section 1350 Certification of Chief Financial Officer.
101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at March 31, 2021 and December 31, 2020; (ii) the Consolidated Statement of Income for the three months ended March 31, 2021 and 2020; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2021 and 2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2021 and 2020; (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 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.
44

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, 2021/s/ Richard A. Grafmyre
 Richard A. Grafmyre, Chief Executive Officer
 (Principal Executive Officer)
  
  
Date:May 10, 2021/s/ Brian L. Knepp
 Brian L. Knepp, President and Chief Financial Officer
 (Principal Financial Officer and Principal Accounting
 Officer)
45

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, 2021 and December 31, 2020; (ii) the Consolidated Statement of Income for the three months ended March 31, 2021 and 2020; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2021 and 2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2021 and 2020; (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 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.
46