Equibles

10-Q

NORWOOD FINANCIAL CORP (NWFL)

10-Q 2021-11-12 For: 2021-09-30
View Original
Added on April 06, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

OR

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

For the transition period from __________ to __________

Commission file number 0-28364

Norwood Financial Corp

(Exact name of registrant as specified in its charter)

Pennsylvania 23-2828306
(State or other jurisdiction of<br><br>incorporation or organization) (I.R.S. employer<br><br>identification no.)
717 Main Street, Honesdale, Pennsylvania 18431
(Address of principal executive offices) (Zip Code)

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

N/A

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

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

Title of each class Trading<br><br>symbol(s) Name of each exchange<br><br>on which registered
Common Stock, par value $0.10 per share NWFL The Nasdaq Stock Market LLC

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    ☐  Yes    ☒  No

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

Class Outstanding as of November 1, 2021
Common stock, par value $0.10 per share 8,176,424

NORWOOD FINANCIAL CORP

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2021

Page<br><br>Number
PART I - CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP 3
Item 1. Financial Statements (unaudited) 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
Item 4. Controls and Procedures 53
PART II - OTHER INFORMATION 54
Item 1. Legal Proceedings 54
Item 1A. Risk Factors 54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
Item 3. Defaults Upon Senior Securities 54
Item 4. Mine Safety Disclosures 54
Item 5. Other Information 54
Item 6. Exhibits 55
Signatures 56

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

NORWOOD FINANCIAL CORP

Consolidated Balance Sheets (unaudited)

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

December 31,
2020
ASSETS
Cash and due from banks 28,353 $ 19,445
Interest-bearing deposits with banks 191,580 92,248
Cash and cash equivalents 219,933 111,693
Securities available for sale, at fair value 361,988 226,586
Loans receivable 1,371,002 1,410,732
Less: Allowance for loan losses 16,103 13,150
Net loans receivable 1,354,899 1,397,582
Regulatory stock, at cost 3,898 3,981
Bank premises and equipment, net 17,364 17,814
Bank owned life insurance 39,864 39,608
Accrued interest receivable 6,049 6,232
Foreclosed real estate owned 1,876 965
Goodwill 29,266 29,290
Other intangibles 434 530
Other assets 18,120 17,583
TOTAL ASSETS 2,053,691 $ 1,851,864
LIABILITIES
Deposits:
Non-interest bearing demand 442,534 $ 359,559
Interest-bearing 1,279,988 1,175,826
Total deposits 1,722,522 1,535,385
Short-term borrowings 78,246 63,303
Other borrowings 33,136 42,459
Accrued interest payable 1,341 1,601
Other liabilities 15,838 14,331
TOTAL LIABILITIES 1,851,083 1,657,079
STOCKHOLDERS’ EQUITY
Preferred stock, no par value per share,
authorized: 5,000,000 shares; issued: none — —
Common stock, 0.10 par value per share,
authorized: 20,000,000 shares,
issued: 2021: 8,245,951 shares, 2020: 8,236,331 shares 825 824
Surplus 96,100 95,388
Retained earnings 105,668 93,796
Treasury stock at cost: 2021: 51,568 shares; 2020: 10,263 shares (1,423) (342)
Accumulated other comprehensive income 1,438 5,119
TOTAL STOCKHOLDERS’ EQUITY 202,608 194,785
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 2,053,691 $ 1,851,864

All values are in US Dollars.

See accompanying notes to the unaudited consolidated financial statements.  ‎

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NORWOOD FINANCIAL CORP

Consolidated Statements of Income (unaudited)

(dollars in thousan ds, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
INTEREST INCOME
Loans receivable, including fees $ 16,859 $ 16,260 $ 49,107 $ 37,711
Securities 1,468 1,031 3,936 3,272
Other 72 18 174 43
Total interest income 18,399 17,309 53,217 41,026
INTEREST EXPENSE
Deposits 1,167 1,676 3,627 5,096
Short-term borrowings 71 61 214 244
Other borrowings 172 242 559 824
Total interest expense 1,410 1,979 4,400 6,164
NET INTEREST INCOME 16,989 15,330 48,817 34,862
PROVISION FOR LOAN LOSSES 750 1,850 3,750 3,850
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,239 13,480 45,067 31,012
OTHER INCOME
Service charges and fees 1,485 1,301 4,268 3,201
Income from fiduciary activities 209 205 550 533
Net realized gains on sales of securities 35 33 56 71
Gain on sale of loans, net 39 164 177 285
Earnings and proceeds on bank owned life insurance 200 217 767 638
Other 160 152 486 391
Total other income 2,128 2,072 6,304 5,119
OTHER EXPENSES
Salaries and employee benefits 5,491 4,812 15,616 11,878
Occupancy, furniture & equipment, net 1,163 1,109 3,568 2,983
Data processing and related operations 594 746 1,760 1,649
Taxes, other than income 229 214 763 641
Professional fees 189 292 1,072 735
Federal Deposit Insurance Corporation insurance 177 144 512 186
Foreclosed real estate (15) 31 27 44
Amortization of intangibles 28 35 96 79
Merger related — 386 — 1,983
Other 1,736 1,611 5,122 4,353
Total other expenses 9,592 9,380 28,536 24,531
INCOME BEFORE INCOME TAXES 8,775 6,172 22,835 11,600
INCOME TAX EXPENSE 1,794 1,173 4,558 2,033
NET INCOME $ 6,981 $ 4,999 $ 18,277 $ 9,567
BASIC EARNINGS PER SHARE $ 0.85 $ 0.62 $ 2.23 $ 1.39
DILUTED EARNINGS PER SHARE $ 0.85 $ 0.62 $ 2.23 $ 1.39

See accompanying notes to the unaudited consolidated financial statements.

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NORWOOD FINANCIAL CORP

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

Three Months Ended
September 30,
2021 2020
Net income $ 6,981 $ 4,999
Other comprehensive income:
Investment securities available for sale:
Unrealized holding loss (2,652) (115)
Tax effect 557 24
Reclassification of investment securities gains
recognized in net income (35) (33)
Tax effect 7 7
Other comprehensive loss (2,123) (117)
Comprehensive Income $ 4,858 $ 4,882
Nine Months Ended
--- --- --- --- ---
September 30,
2021 2020
Net income $ 18,277 $ 9,567
Other comprehensive income
Investment securities available for sale:
Unrealized holding (loss) gain (4,604) 4,474
Tax effect 967 (940)
Reclassification of investment securities gains
recognized in net income (56) (71)
Tax effect 12 15
Other comprehensive (loss) income (3,681) 3,478
Comprehensive Income $ 14,596 $ 13,045

See accompanying notes to the unaudited consolidated financial statements.

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NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Nine Months Ended September 30, 2021 and 2020

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

Accumulated
Other
Retained Treasury Stock Comprehensive
Amount Surplus Earnings Shares Amount Income Total
Balance, December 31, 2020 8,236,331 $ 824 $ 95,388 $ 93,796 10,263 $ (342) $ 5,119 $ 194,785
Net Income - - - 18,277 - - - 18,277
Other comprehensive loss - - - - - - (3,681) (3,681)
Cash dividends declared (0.78 per share) - - - (6,405) - - - (6,405)
Acquisition of treasury stock - - - - 37,405 (961) - (961)
Compensation expense related to restricted stock - - 371 - 3,900 (120) - 251
Stock options exercised 9,620 1 181 - - - - 182
Compensation expense related to stock options - - 160 - - - - 160
Balance, September 30, 2021 8,245,951 $ 825 $ 96,100 $ 105,668 51,568 $ (1,423) $ 1,438 $ 202,608
Accumulated
Other
Retained Treasury Stock Comprehensive
Amount Surplus Earnings Shares Amount Income Total
Balance, December 31, 2019 6,340,563 $ 634 $ 49,471 $ 86,536 12,007 $ (400) $ 1,187 $ 137,428
Net Income - - - 9,567 - - - 9,567
Other comprehensive income - - - - - - 3,478 3,478
Cash dividends declared (0.75 per share) - - - (5,681) - - - (5,681)
Acquisition of UpState New York Bancorp, Inc. 1,865,738 186 45,151 45,337
Acquisition of treasury stock - - - - 1,771 (69) - (69)
Compensation expense related to restricted stock - - 250 - - - - 250
Stock options exercised 4,681 1 83 - - - - 84
Compensation expense related to stock options - - 153 - - - - 153
Balance, September 30, 2020 8,210,982 $ 821 $ 95,108 $ 90,422 13,778 $ (469) $ 4,665 $ 190,547

All values are in US Dollars.

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6

NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Three Months Ended September 30, 2021 and 2020

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

Accumulated
Other
Retained Treasury Stock Comprehensive
Amount Surplus Earnings Shares Amount Income (Loss) Total
Balance, June 30, 2021 8,245,301 $ 825 $ 95,951 $ 100,818 21,568 $ (656) $ 3,561 $ 200,499
Net Income - - - 6,981 - - - 6,981
Other comprehensive loss - - - - - - (2,123) (2,123)
Cash dividends declared (0.26 per share) - - - (2,131) - - - (2,131)
Acquisition of treasury stock - - - - 30,000 (767) - (767)
Compensation expense related to restricted stock - - 84 - - - - 84
Stock options exercised 650 - 12 - - - - 12
Compensation expense related to stock options - - 53 - - - - 53
Balance, September 30, 2021 8,245,951 $ 825 $ 96,100 $ 105,668 51,568 $ (1,423) $ 1,438 $ 202,608
Accumulated
Other
Retained Treasury Stock Comprehensive
Amount Surplus Earnings Shares Amount Income Total
Balance, June 30, 2020 6,342,568 $ 634 $ 49,778 $ 87,939 13,778 $ (469) $ 4,782 $ 142,664
Net Income - - - 4,999 - - - 4,999
Other comprehensive loss - - - - - - (117) (117)
Cash dividends declared (0.25 per share) - - - (2,516) - - - (2,516)
Acquisition of UpState New York Bancorp, Inc. 1,865,738 186 45,151 45,337
Compensation expense related to restricted stock - - 83 - - - - 83
Stock options exercised 2,676 1 45 46
Compensation expense related to stock options - - 51 - - - - 51
Balance, September 30, 2020 8,210,982 $ 821 $ 95,108 $ 90,422 13,778 $ (469) $ 4,665 $ 190,547

All values are in US Dollars.

See accompanying notes to the unaudited consolidated financial statements. ‎

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NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)
Nine Months Ended September 30,
2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 18,277 $ 9,567
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 3,750 3,850
Depreciation 1,117 953
Amortization of intangible assets 96 79
Deferred income taxes 497 (418)
Net amortization of securities premiums and discounts 1,133 933
Net realized gain on sales of securities (56) (71)
Earnings and proceeds on life insurance policies (767) (638)
Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net (52) (22)
Net gain on sale of loans (177) (285)
Loans originated for sale (8,616) (7,163)
Proceeds from sale of loans originated for sale 8,793 7,402
Compensation expense related to stock options 160 153
Compensation expense related to restricted stock 251 250
Decrease (increase) in accrued interest receivable 183 (959)
Decrease in accrued interest payable (260) (413)
Other, net (1,327) (4,198)
Net cash provided by operating activities 23,002 9,020
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 3,841 24,497
Proceeds from maturities and principal reductions on mortgage-backed securities 52,770 42,806
Purchases (197,750) (37,132)
Purchase of regulatory stock (3,327) (3,350)
Redemption of regulatory stock 3,410 6,781
Net decrease (increase) in loans 40,969 (84,990)
Proceeds from bank-owned life insurance policies 511 —
Purchase of premises and equipment (809) (539)
Proceeds from sales of bank premises and fixed assets 158 10
Proceeds from sales of foreclosed real estate owned 157 611
Acquisition, net of cash and cash equivalents acquired — 15,193
Net cash used in investing activities (100,070) (36,113)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 186,880 144,280
Net increase in short-term borrowings 14,943 7,038
Repayments of other borrowings (9,323) (20,001)
Proceeds from other borrowings — 10,000
Stock options exercised 182 84
Purchase of treasury stock (961) (69)
Cash dividends paid (6,413) (5,214)
Net cash provided by financing activities 185,308 136,118
Increase in cash and cash equivalents 108,240 109,025
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 111,693 15,415
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 219,933 $ 124,440

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NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited) (continued)

(dollars in thousands)
Nine Months Ended September 30,
2021 2020
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest on deposits and borrowings $ 4,660 $ 6,402
Income taxes paid, net of refunds $ 4,214 $ 1,018
Supplemental Schedule of Noncash Investing Activities:
Transfers of loans to foreclosed real estate and repossession of other assets $ 1,638 $ 393
Dividends payable $ 2,131 $ 2,049
Merger with UpState New York Bancorp, Inc.
--- --- ---
Noncash assets acquired:
Securities available-for-sale $ 13,948
Regulatory stock 2,487
Loans 413,535
Premises and equipment, net 5,529
Accrued interest receivable 1,426
Deferred tax assets 1,495
Other assets 376
438,796
Liabilities assumed:
Time deposits 204,440
Deposits other than time deposits 206,919
Accrued interest payable 175
Other liabilities 6,496
418,030
Net Noncash Assets Acquired 20,766
Cash Acquired $ 24,037

See accompanying notes to the unaudited consolidated financial statements.

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Notes to the Unaudited Consolidated Financial Statements

1.           Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the consolidated financial position and results of operations of the Company. The operating results for the three-month and nine-month periods ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other future interim period.

2.           Revenue Recognition

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

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

Three months ended
September 30,
(dollars in thousands)
Noninterest Income 2021 2020
In-scope of Topic 606:
Service charges on deposit accounts $ 99 $ 93
ATM fees 125 155
Overdraft fees 275 224
Safe deposit box rental 24 26
Loan related service fees 314 282
Debit card fees 584 443
Fiduciary activities 209 205
Commissions on mutual funds and annuities 34 26
Other income 160 152
Noninterest Income (in-scope of Topic 606) 1,824 1,606
Out-of-scope of Topic 606:
Net realized gains on sales of securities 35 33
Loan servicing fees 30 52
Gains on sales of loans 39 164
Earnings on and proceeds from bank-owned life insurance 200 217
Noninterest Income (out-of-scope of Topic 606) 304 466
Total Noninterest Income $ 2,128 $ 2,072

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Nine months ended
September 30,
(dollars in thousands)
Noninterest Income 2021 2020
In-scope of Topic 606:
Service charges on deposit accounts $ 294 $ 278
ATM fees 333 354
Overdraft fees 733 715
Safe deposit box rental 77 79
Loan related service fees 963 464
Debit card fees 1,661 1,154
Fiduciary activities 550 533
Commissions on mutual funds and annuities 98 89
Other income 486 391
Noninterest Income (in-scope of Topic 606) 5,195 4,057
Out-of-scope of Topic 606:
Net realized gains on sales of securities 56 71
Loan servicing fees 109 68
Gains on sales of loans 177 285
Earnings on and proceeds from bank-owned life insurance 767 638
Noninterest Income (out-of-scope of Topic 606) 1,109 1,062
Total Noninterest Income $ 6,304 $ 5,119

3.          Earnings Per Share

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

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

(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Weighted average shares outstanding 8,223 8,073 8,223 6,915
Less: Unvested restricted shares (35) (36) (36) (36)
Basic EPS weighted average shares outstanding 8,188 8,037 8,187 6,879
Basic EPS weighted average shares outstanding 8,188 8,037 8,187 6,879
Add: Dilutive effect of stock options and restricted shares 19 22 19 22
Diluted EPS weighted average shares outstanding 8,207 8,059 8,206 6,901

For the three and nine month periods ended September 30, 2021, there were 110,100 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of the Company’s common stock of $25.50 per share as of September 30, 2021.

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

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4.           Stock-Based Compensation

During the nine-month period ended September 30, 2021, 1,000 stock options were granted at a price of $26.35 per share, and 1,000 stock options were granted at a price of $25.38 per share. As of September 30, 2021, there was $53,000 of total unrecognized compensation cost related to non-vested options granted in 2020 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2021. Compensation costs related to stock options amounted to $160,000 and $153,000 during the nine-month periods ended September 30, 2021 and 2020, respectively.

A summary of the Company’s stock option activity for the nine-month period ended September 30, 2021 is as follows:

Weighted
Average Exercise Weighted Average Aggregate
Price Remaining Intrinsic Value
Options Per Share Contractual Term (000)
Outstanding at January 1, 2021 215,970 $ 25.73 6.0 Yrs.
Granted 2,000 25.87 9.4
Exercised (9,620) 18.85 2.4
Forfeited (8,250) 33.72 7.3
Outstanding at September 30, 2021 200,100 $ 25.73 5.4 Yrs.
Exercisable at September 30, 2021 164,350 $ 25.48 4.6 Yrs.

All values are in US Dollars.

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The market price was $25.50 per share as of September 30, 2021 and $26.17 per share as of December 31, 2020.

A summary of the Company’s restricted stock activity for the nine-month periods ended September 30, 2021 and 2020 is as follows:

2021 2020
Weighted-Average Weighted-Average
Number of Grant Date Number of Grant Date
Restricted Stock Fair Value Restricted Stock Fair Value
Non-vested, January 1, 39,135 $ 30.72 36,195 $ 31.65
Granted — — — —
Vested — — — —
Forfeited (3,900) 30.86 — —
Non-vested, September 30, 35,235 $ 30.71 36,195 $ 31.65

The expected future compensation expense relating to the 35,235 shares of non-vested restricted stock outstanding as of September 30, 2021 is $830,000. This cost will be recognized over the remaining vesting period of 4.25 years. Compensation costs related to restricted stock amounted to $251,000 and $250,000 during the nine-month periods ended September 30, 2021 and 2020, respectively.

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5.           Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three and nine months ended September 30, 2021 and 2020:

Unrealized gains (losses) on
available for sale
securities (a)
Balance as of December 31, 2020 $ 5,119
Other comprehensive loss before reclassification (3,637)
Amount reclassified from accumulated other comprehensive income (44)
Total other comprehensive loss (3,681)
Balance as of September 30, 2021 $ 1,438
Unrealized gains (losses) on
available for sale
securities (a)
Balance as of December 31, 2019 $ 1,187
Other comprehensive income before reclassification 3,534
Amount reclassified from accumulated other comprehensive income (56)
Total other comprehensive income 3,478
Balance as of September 30, 2020 $ 4,665
Unrealized gains (losses) on
available for sale
securities (a)
Balance as of June 30, 2021 $ 3,561
Other comprehensive loss before reclassification (2,095)
Amount reclassified from accumulated other comprehensive loss (28)
Total other comprehensive loss (2,123)
Balance as of September 30, 2021 $ 1,438
Unrealized gains (losses) on
available for sale
securities (a)
Balance as of June 30, 2020 $ 4,782
Other comprehensive income before reclassification (91)
Amount reclassified from accumulated other comprehensive income (26)
Total other comprehensive income (117)
Balance as of September 30, 2020 $ 4,665

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

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The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three and nine months ended September 30, 2021 and 2020:

Amount Reclassified
From Accumulated
Other
Comprehensive
Income (Loss) (a) Affected Line Item in
Three months ended Consolidated
September 30, Statements
Details about other comprehensive income 2021 2020 of Income
Unrealized gains on available for sale securities $ 35 $ 33 Net realized gains on sales of securities
Tax effect (7) (7) Income tax expense
$ 28 $ 26
Nine months ended
September 30,
2021 2020
Unrealized gains on available for sale securities $ 56 $ 71 Net realized gains on sales of securities
Tax effect (12) (15) Income tax expense
$ 44 $ 56

(a) Amounts in parentheses indicate debits to net income

6.           Off-Balance Sheet Financial Instruments and Guarantees

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

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

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

(in thousands) September 30,
2021 2020
Commitments to grant loans $ 91,186 $ 76,029
Unfunded commitments under lines of credit 136,168 122,050
Standby letters of credit 8,335 5,654
$ 235,689 $ 203,733

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

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

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liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2021 for guarantees under standby letters of credit issued is not material.

7.           Securities

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

September 30, 2021
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
Available for Sale:
U.S. Treasury securities $ 15,596 $ 1 $ (91) $ 15,506
U.S. Government agencies 14,222 21 (195) 14,048
States and political subdivisions 120,562 2,003 (1,214) 121,351
Mortgage-backed securities-
government sponsored entities 211,083 1,756 (1,756) 211,083
Total debt securities $ 361,463 $ 3,781 $ (3,256) $ 361,988
December 31, 2020
--- --- --- --- --- --- --- --- ---
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
Available for Sale:
U.S. Government agencies $ 3,998 $ - $ (29) $ 3,969
States and political subdivisions 70,672 2,419 - 73,091
Corporate obligations 3,019 13 - 3,032
Mortgage-backed securities-government
sponsored entities 143,712 2,809 (27) 146,494
Total debt securities $ 221,401 $ 5,241 $ (56) $ 226,586

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

September 30, 2021
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
U.S. Treasury securities $ 13,566 $ (91) $ - $ - $ 13,566 $ (91)
U.S. Government agencies 4,850 (160) 1,964 (35) 6,814 (195)
States and political subdivisions 58,432 (1,214) - - 58,432 (1,214)
Mortgage-backed securities-government sponsored entities 121,046 (1,756) - - 121,046 (1,756)
$ 197,894 $ (3,221) $ 1,964 $ (35) $ 199,858 $ (3,256)
December 31, 2020
--- --- --- --- --- --- --- --- --- --- --- --- ---
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
U.S. Government agencies $ 3,969 $ (29) $ - $ - $ 3,969 $ (29)
Mortgage-backed securities-government sponsored entities 4,980 (27) - - 4,980 (27)
$ 8,949 $ (56) $ - $ - $ 8,949 $ (56)

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At September 30, 2021, the Company had 98 debt securities in an unrealized loss position in the less than twelve months category and one debt security in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2021. Management believes that all unrealized losses represent temporary impairment of the securities as the Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.

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

Available for Sale
Amortized Cost Fair Value
(In Thousands)
Due in one year or less $ 939 $ 941
Due after one year through five years 11,003 11,307
Due after five years through ten years 44,400 44,125
Due after ten years 94,038 94,532
150,380 150,905
Mortgage-backed securities-government sponsored entities 211,083 211,083
$ 361,463 $ 361,988

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

Three Months Nine Months
Ended September 30, Ended September 30,
2021 2020 2021 2020
Gross realized gains $ 35 $ 33 $ 56 $ 71
Gross realized losses — — — —
Net realized gain $ 35 $ 33 $ 56 $ 71
Proceeds from sales of securities $ 2,714 $ 2,425 $ 3,841 $ 24,497

Securities with a carrying value of $303,809,000 and $199,361,000 at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

8.           Loans Receivable and Allowance for Loan Losses

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

September 30, 2021 December 31, 2020
Real Estate Loans:
Residential $ 265,778 19.4 % $ 263,127 18.6 %
Commercial 612,794 44.6 579,104 41.0
Agricultural 64,018 4.7 66,334 4.7
Construction 23,892 1.7 21,005 1.5
Commercial loans 216,692 15.8 283,741 20.1
Other agricultural loans 40,257 2.9 40,929 2.9
Consumer loans to individuals 149,343 10.9 158,049 11.2
Total loans 1,372,774 100.0 % 1,412,289 100.0 %
Deferred fees, net (1,772) (1,557)
Total loans receivable 1,371,002 1,410,732
Allowance for loan losses (16,103) (13,150)
Net loans receivable $ 1,354,899 $ 1,397,582

During 2020 and 2021 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the United States Small Business Administration (“SBA”). The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of

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September 30, 2021 and December 31, 2020, the Company had outstanding principal balances of $35.8 million and $95.0 million, respectively, in PPP loans. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. As of September 30, 2021, $116.4 million of PPP loans have been forgiven. PPP loans are included in the commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $5.2 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.

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

September 30, 2021 December 31, 2020
Outstanding Balance $ 13,332 $ 15,570
Carrying Amount $ 8,481 $ 9,281

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

Changes in the accretable yield for purchased credit impaired loans for the nine-months ended September 30, 2021 and 2020, were as follows (in thousands):

2021 2020
Balance at beginning of period $ 1,365 $ 97
Additions — 1,724
Accretion (523) (179)
Reclassification and other 993 (96)
Balance at end of period $ 1,835 $ 1,546

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

(In Thousands) July 7, 2020
Contractually required principal and interest $ 15,410
Non-accretable discount (5,213)
Expected cash flows 10,197
Accretable discount (1,724)
Estimated fair value $ 8,473

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

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

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Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of September 30, 2021 and December 31, 2020, foreclosed real estate owned totaled $1,876,000 and $965,000, respectively. During the nine months ended September 30, 2021, the Company transferred one property with a carrying value of $1,032,000 to the foreclosed real estate category. The Company disposed of a parcel of the one property that was previously transferred to foreclosed real estate owned with a carrying value of $121,000 through the sale of the property. As of September 30, 2021, the Company has initiated formal foreclosure proceedings on four properties classified as consumer residential mortgages with an aggregate carrying value of $492,000.

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

Real Estate Loans
Commercial Other Consumer
Residential Commercial Agricultural Construction Loans Agricultural Loans Total
September 30, 2021 (In thousands)
Individually evaluated for impairment $ — $ 1,603 $ 858 $ — $ 18 $ 126 $ — $ 2,605
Loans acquired with deteriorated credit quality 787 3,405 1,959 — 128 2,202 — 8,481
Collectively evaluated for impairment 264,991 606,927 62,059 23,892 216,421 38,055 149,343 1,361,688
Total Loans $ 265,778 $ 611,935 $ 64,876 $ 23,892 $ 216,567 $ 40,383 $ 149,343 $ 1,372,774
Real Estate Loans
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Commercial Other Consumer
Residential Commercial Agricultural Construction Loans Agricultural Loans Total
(In thousands)
December 31, 2020
Individually evaluated for impairment $ - $ 2,582 $ — $ - $ 80 $ — $ - $ 2,662
Loans acquired with deteriorated credit quality 591 3,995 2,043 194 246 2,212 - 9,281
Collectively evaluated for impairment 262,536 572,527 64,291 20,811 283,415 38,717 158,049 1,400,346
Total Loans $ 263,127 $ 579,104 $ 66,334 $ 21,005 $ 283,741 $ 40,929 $ 158,049 $ 1,412,289

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

Unpaid
Recorded Principal Associated
Investment Balance Allowance
September 30, 2021 (in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial $ 83 $ 83 $ —
Agriculture 858 858 —
Commercial Loans 18 18 —
Other agricultural loans 126 126 —
Subtotal $ 1,085 $ 1,085 $ —
With an allowance recorded:
Real Estate - Commercial $ 1,520 $ 1,520 $ 275
Subtotal $ 1,520 $ 1,520 $ 275
Total:
Real Estate Loans:
Commercial $ 1,603 $ 1,603 $ 275
Agriculture 858 858 —
Commercial Loans 18 18 —
Other agricultural loans 126 126 —
Total Impaired Loans $ 2,605 $ 2,605 $ 275
Unpaid
--- --- --- --- --- --- ---
Recorded Principal Associated
Investment Balance Allowance
December 31, 2020 (in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial $ 2,582 $ 3,234 $ —
Commercial Loans 80 80 —
Subtotal 2,662 3,314 —
Total:
Real Estate Loans:
Commercial 2,582 3,234 —
Commercial Loans 80 80 —
Total Impaired Loans $ 2,662 $ 3,314 $ —

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended September 30, 2021 and 2020, respectively (in thousands):

Average Recorded Interest Income
Investment Recognized
2021 2020 2021 2020
Real Estate Loans:
Commercial $ 1,405 $ 1,874 $ 55 $ 2
Agriculture 858 — — —
Commercial Loans 19 — — —
Other agricultural loans 125 — — —
Total $ 2,407 $ 1,874 $ 55 $ 2

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The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the nine-month periods ended September 30, 2021 and 2020, respectively (in thousands):

Average Recorded Interest Income
Investment Recognized
2021 2020 2021 2020
Real Estate Loans:
Commercial $ 1,560 $ 1,986 $ 56 $ 6
Agriculture 858 — — —
Commercial Loans 19 — — —
Other agricultural loans 114 — — —
Total $ 2,551 $ 1,986 $ 56 $ 6

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of September 30, 2021 and December 31, 2020, troubled debt restructured loans totaled $0 and $75,000, respectively, with no specific reserve. For the nine-month period ended September 30, 2021 and 2020, there were no new loans identified as troubled debt restructurings. During 2020, the Company recognized a charge-off $20,000 on a loan that was previously identified as a troubled debt restructuring.

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

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

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

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The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of September 30, 2021 and December 31, 2020 (in thousands):

Special Doubtful
Pass Mention Substandard or Loss Total
September 30, 2021
Commercial real estate loans $ 602,548 $ 5,596 $ 4,375 $ 275 $ 612,794
Real estate - agricultural 61,387 — 2,631 — 64,018
Commercial loans 216,374 208 110 — 216,692
Other agricultural loans 37,424 212 2,621 — 40,257
Total $ 917,733 $ 6,016 $ 9,737 $ 275 $ 933,761
Special Doubtful
--- --- --- --- --- --- --- --- --- --- ---
Pass Mention Substandard or Loss Total
December 31, 2020
Commercial real estate loans $ 566,418 $ 6,346 $ 6,340 $ — $ 579,104
Real estate - agricultural 58,322 5,111 2,901 — 66,334
Commercial loans 282,915 437 389 — 283,741
Other agricultural loans 35,772 2,786 2,371 — 40,929
Total $ 943,427 $ 14,680 $ 12,001 $ — $ 970,108

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2021 and December 31, 2020 (in thousands):

Performing Nonperforming Total
September 30, 2021
Residential real estate loans $ 265,256 $ 522 $ 265,778
Construction 23,892 — 23,892
Consumer loans to individuals 149,243 100 149,343
Total $ 438,391 $ 622 $ 439,013
Performing Nonperforming Total
--- --- --- --- --- --- ---
December 31, 2020
Residential real estate loans $ 262,556 $ 571 $ 263,127
Construction 21,005 — 21,005
Consumer loans to individuals 157,864 185 158,049
Total $ 441,425 $ 756 $ 442,181

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Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2021 and December 31, 2020 (in thousands):

Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due and still accruing Nonaccrual Total Past Due and Non-Accrual Purchased Credit-Impaired Total Loans
September 30, 2021
Real Estate loans
Residential $ 264,251 $ 186 $ 32 $ - $ 522 $ 740 $ 787 $ 265,778
Commercial 609,048 244 58 - 39 341 3,405 612,794
Agricultural 61,201 - - - 858 858 1,959 64,018
Construction 23,831 61 - - - 61 - 23,892
Commercial loans 215,349 112 26 - 1,077 1,215 128 216,692
Other agricultural loans 37,929 - - 126 126 2,202 40,257
Consumer loans 148,858 310 75 - 100 485 - 149,343
Total $ 1,360,467 $ 913 $ 191 $ - $ 2,722 $ 3,826 $ 8,481 $ 1,372,774
Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due and still accruing Nonaccrual Total Past Due and Non-Accrual Purchased Credit-Impaired Total Loans
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2020
Real Estate loans
Residential $ 261,406 $ 355 $ 204 $ - $ 571 $ 1,130 $ 591 $ 263,127
Commercial 573,376 59 - - 1,674 1,733 3,995 579,104
Agricultural 63,615 - - 676 676 2,043 66,334
Construction 20,811 - - - - - 194 21,005
Commercial loans 282,374 1,009 90 - 22 1,121 246 283,741
Other agricultural loans 38,454 - - 263 263 2,212 40,929
Consumer loans 157,538 233 93 - 185 511 - 158,049
Total $ 1,397,574 $ 1,656 $ 387 $ - $ 3,391 $ 5,434 $ 9,281 $ 1,412,289

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

As of September 30, 2021, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2020. This increase is due primarily to an increase in the qualitative factors related to lending management and external factors. As of September 30, 2021, the Company has also continued to incorporate qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries and to recognize risk related to loans that have been granted deferral of payments due to COVID-19. At September 30, 2021, the allowance for loan losses includes $2.1 million of COVID related factors. The 2021 allowance for loan losses excludes growth in Paycheck Protection Program loans which are fully guaranteed by the Small Business Association as well as loans acquired from UpState which were recorded at fair value.

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

(In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total
Beginning balance, December 31, 2020 $ 1,960 $ 8,004 $ 150 $ 1,360 $ 1,676 $ 13,150
Charge Offs (5) (452) — (174) (368) (999)
Recoveries 64 15 — 33 90 202
Provision for loan losses 424 2,324 13 386 603 3,750
Ending balance, September 30, 2021 $ 2,443 $ 9,891 $ 163 $ 1,605 $ 2,001 $ 16,103
Ending balance individually evaluated<br>‎for impairment $ — $ 275 $ — $ — $ — $ 275
Ending balance collectively evaluated<br>‎for impairment $ 2,443 $ 9,616 $ 163 $ 1,605 $ 2,001 $ 15,828
(In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
Beginning balance, June 30, 2021 $ 2,233 $ 9,580 $ 137 $ 1,503 $ 1,887 $ 15,340
Charge Offs - (13) - - (107) (120)
Recoveries 59 5 - 9 60 133
Provision for loan losses 151 319 26 93 161 750
Ending balance, September 30, 2021 $ 2,443 $ 9,891 $ 163 $ 1,605 $ 2,001 $ 16,103
(In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
Beginning balance, December 31, 2019 $ 1,552 $ 4,687 $ 95 $ 949 $ 1,226 $ 8,509
Charge Offs (41) (433) — (18) (275) (767)
Recoveries 5 10 — 36 31 82
Provision for loan losses 162 2,904 30 242 512 3,850
Ending balance, September 30, 2020 $ 1,678 $ 7,168 $ 125 $ 1,209 $ 1,494 $ 11,674
Ending balance individually evaluated<br>‎for impairment $ — $ — $ — $ — $ — $ —
Ending balance collectively evaluated<br>‎for impairment $ 1,678 $ 7,168 $ 125 $ 1,209 $ 1,494 $ 11,674
(In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
Beginning balance, June 30, 2020 $ 1,652 $ 6,079 $ 86 $ 1,076 $ 1,419 $ 10,312
Charge Offs (40) (400) — — (83) (523)
Recoveries 2 4 — 18 11 35
Provision for loan losses 64 1,485 39 115 147 1,850
Ending balance, September 30, 2020 $ 1,678 $ 7,168 $ 125 $ 1,209 $ 1,494 $ 11,674

The Company’s primary business activity as of September 30, 2021 was with customers located in northeastern Pennsylvania and the New York counties of Delaware, Sullivan, Ontario, Otsego and Yates. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to repay their loans is influenced by the region’s economy.

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As of September 30, 2021, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $133.7 million of loans outstanding, or 9.7% of total loans outstanding, and residential rentals with loans outstanding of $116.5 million, or 8.5% of loans outstanding. During 2021, the Company did not recognize any charge offs on loans in the named concentrations.

9.           Operating Leases

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

The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on the Consolidated Balance Sheets. The lease cost associated with the operating leases for the nine-month periods ended September 30, 2021 and 2020, amounted to $441,000 and $425,000 respectively.

Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at September 30, 2021.

Operating
Weighted-average remaining term 11.6
Weighted-average discount rate 3.01%

The following table presents the undiscounted cash flows due related to operating leases as of September 30, 2021, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:

Undiscounted cash flows due (in thousands) Operating
2021 $ 140
2022 546
2023 534
2024 544
2025 561
2026 and thereafter 3,319
Total undiscounted cash flows 5,644
Discount on cash flows (964)
Total lease liabilities $ 4,680

10.          Fair Value of Assets and Liabilities

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

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

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

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

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 16 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2021 and December 31, 2020 are as follows:

Fair Value Measurement Using
Reporting Date
Description Total Level 1 Level 2 Level 3
September 30, 2021 (In thousands)
ASSETS
Available for Sale:
U.S. Treasury securities $ 15,506 $ - $ 15,506 $ -
U.S. Government agencies 14,048 14,048
States and political subdivisions 121,351 - 121,351 -
Mortgage-backed securities-government
sponsored entities 211,083 - 211,083 -
Interest rate derivatives 171 - 171 -
LIABILITIES
Interest rate derivatives 171 - 171 -
Description Total Level 1 Level 2 Level 3
December 31, 2020 (In thousands)
ASSETS
Available for Sale:
U.S. Government agencies $ 3,969 $ - $ 3,969 $ -
States and political subdivisions 73,091 73,091
Corporate obligations 3,032 - 3,032 -
Mortgage-backed securities-government
sponsored entities 146,494 - 146,494 -
Interest rate derivatives 276 - 276 -
LIABILITIES
Interest rate derivatives 276 - 276 -

Securities:

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

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Interest rate derivatives:

The fair value of interest rate derivatives is based on settlement values adjusted for credit risks associated with the counter parties and the Company and observable market interest rate curves.

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

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2021 and December 31, 2020 are as follows:

Fair Value Measurement Using Reporting Date
(In thousands)
Description Total Level 1 Level 2 Level 3
September 30, 2021
Impaired Loans $ 2,330 $ - $ - $ 2,330
Foreclosed Real Estate Owned 1,876 - - 1,876
December 31, 2020
Impaired Loans $ 2,662 $ - $ - $ 2,662
Foreclosed Real Estate Owned 965 - - 965

Impaired loans (generally carried at fair value):

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

As of September 30, 2021, the fair value investment in impaired loans was $2,330,000 which included three loan relationships that did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan, and one loan relationship with a carrying value of $1,520,000 that required a valuation allowance of $275,000 based on the estimated realizable. As of September 30, 2021, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $0 over the life of the loans.

As of December 31, 2020, the fair value investment in impaired loans totaled $2,662,000 which included six loan relationships that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31, 2020, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $652,000 over the life of the loans. There were no loan relationships which required a valuation allowance.

Foreclosed real estate owned (carried at fair value):

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

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

Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands) Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average)
September 30, 2021
Impaired loans $ 2,330 Appraisal of collateral(1) Appraisal adjustments(2) 10%-18.09% (14.73%)
Foreclosed real estate owned $ 1,876 Appraisal of collateral(1) Liquidation Expenses(2) 7.00% (7.00%)

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Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands) Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average)
December 31, 2020
Impaired loans $ 2,662 Appraisal of collateral(1) Appraisal adjustments(2) 0%-10.59% (9.75%)
Foreclosed real estate owned $ 965 Appraisal of collateral(1) Liquidation Expenses(2) 7.00% (7.00%)

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

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

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

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020.

Loans receivable (carried at cost):

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

Mortgage servicing rights (generally carried at cost)

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

Deposit liabilities (carried at cost):

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

Other borrowings (carried at cost):

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

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The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at September 30, 2021 and December 31, 2020. (In thousands)

Fair Value Measurements at September 30, 2021
Carrying Amount Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents (1) $ 219,933 $ 219,933 $ 219,933 $ - $ -
Loans receivable, net 1,354,899 1,415,701 - - 1,415,701
Mortgage servicing rights 313 479 - - 479
Regulatory stock (1) 3,898 3,898 3,898 - -
Bank owned life insurance (1) 39,864 39,864 39,864 - -
Accrued interest receivable (1) 6,049 6,049 6,049 - -
Financial liabilities:
Deposits 1,722,522 1,725,871 1,241,518 - 484,353
Short-term borrowings (1) 78,246 78,246 78,246 - -
Other borrowings 33,136 33,593 - - 33,593
Accrued interest payable (1) 1,341 1,341 1,341 - -
Off-balance sheet financial instruments:
Commitments to extend credit and<br>‎outstanding letters of credit - - - - -
Fair Value Measurements at December 31, 2020
--- --- --- --- --- --- --- --- --- --- ---
Carrying Amount Fair Value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents (1) $ 111,693 $ 111,693 $ 111,693 $ - $ -
Loans receivable, net 1,397,582 1,493,480 - - 1,493,480
Mortgage servicing rights 337 476 - - 476
Regulatory stock (1) 3,981 3,981 3,981 - -
Bank owned life insurance (1) 39,608 39,608 39,608 - -
Accrued interest receivable (1) 6,232 6,232 6,232 - -
Financial liabilities:
Deposits 1,535,385 1,540,661 1,001,555 - 539,106
Short-term borrowings (1) 63,303 63,303 63,303 - -
Other borrowings 42,459 43,452 - - 43,452
Accrued interest payable (1) 1,601 1,601 1,601 - -
Off-balance sheet financial instruments:
Commitments to extend credit and<br>‎outstanding letters of credit - - - - -

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

11.          Interest Rate Swaps

The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are not marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented. At September 30, 2021 and December 31, 2020, based upon the swap contract values, the company pledged cash in the amount of $350,000 as collateral for its interest rate swaps with a third-party financial institution. The fair value of the swaps as of September 30, 2021 and December 31, 2020 was $171,000 and $276,000, respectively.

‎

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Summary information regarding these derivatives is presented below:

(Amounts in thousands)
Notional Amount Fair Value
September 30, 2021 December 31, 2020 Interest Rate Paid Interest Rate Received September 30, 2021 December 31, 2020
Customer interest rate swap
Maturing November, 2030 $ 6,962 $ 7,222 1 month LIBOR + Margin Fixed $ 106 $ 165
Maturing December, 2030 4,615 4,800 1 month LIBOR + Margin Fixed 65 111
Total $ 11,577 $ 12,022 $ 171 $ 276
Third party interest rate swap
Maturing November, 2030 $ 6,962 $ 7,222 Fixed 1 month LIBOR + Margin $ 106 $ 165
Maturing December, 2030 4,615 4,800 Fixed 1 month LIBOR + Margin 65 111
Total $ 11,577 $ 12,022 $ 171 $ 276

The following table presents the fair values of derivative instruments in the Consolidated Balance Sheet.

(Amounts in thousands)
Assets Liabilities
Balance Sheet Location Fair Value Balance Sheet Location Fair Value
September 30, 2021
Interest rate derivatives Other assets $ 171 Other liabilities $ 171
December 31, 2020
Interest rate derivatives Other assets 276 Other liabilities 276

12.           New and Recently Adopted Accounting Pronouncements

New Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. 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.

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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 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

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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 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.

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

13.           Acquisition of UpState New York Bancorp, Inc. and USNY Bank.

On January 8, 2020, the Company and the Bank, and UpState and its wholly owned subsidiary, USNY Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which UpState would merge with and into the Company, with the Company as the surviving corporation (“the Merger”). The Merger was completed on July 7, 2020. Pursuant to the terms of the Merger Agreement, UpState was merged with and into the Company, with the Company as the surviving corporation of the Merger. Immediately following the Merger, USNY Bank was merged with and into the Bank, with the Bank as the surviving entity.

USNY Bank conducted its business from two Bank of the Finger Lakes offices in Geneva and Penn Yan, New York, and two Bank of Cooperstown offices in Cooperstown and Oneonta, New York. At June 30, 2020, UpState had total assets of $463.8 million, total deposits of $412.8 million and total stockholders’ equity of $44.8 million.

Pursuant to the terms of the Merger Agreement, shareholders of UpState elected to receive for each share of UpState common stock they owned, either 0.9390 shares of the Company’s common stock or $33.33 in cash, or a combination of both. All shareholder elections were subject to the allocation and proration procedures set forth in the Merger Agreement which were intended to ensure that 90% of the shares of UpState would be exchanged for the Company’s common stock and 10% of the shares of UpState would be exchanged for cash. In addition, under the terms of the Merger Agreement, UpState shareholders received an additional $0.67 per share in cash for each share of UpState common stock held. In the aggregate, the merger consideration paid to UpState shareholders consisted of approximately $8,845,198 in cash and 1,865,738 shares of the Company’s common stock.

The senior management of the Company and The Bank remained the same following the completion of the Merger.  UpState directors Jeffrey S. Gifford and Alexandra K. Nolan were appointed to the boards of directors of the Company and the Bank. In addition,

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the remaining former directors of UpState have been invited to join a regional advisory board. UpState President and CEO R. Michael Briggs entered into a consulting agreement with the Bank. The Company has retained the brand names of USNY Bank’s two units, Bank of the Finger Lakes and Bank of Cooperstown, and has also retained USNY Bank’s administration center in Geneva, New York. Scott D. White, unit President of Bank of Cooperstown, and Jeffrey E. Franklin, unit President of Bank of the Finger Lakes, have also remained in place as executives of their units.

The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgement in accounting for the acquisition. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors. The Company also recorded and identifiable asset representing the core deposit base of UpState based on management’s evaluation of the cost of such deposits relative to alternative funding sources. Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products. Management used market quotations to determine the fair value of investment securities.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. UpState loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $15,410,000 of purchased credit-impaired loans subject to a non-accretable difference of $5,213,000. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

UpState’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, UpState’s loan portfolio without evidence of deterioration totaled $400,127,000 and was recorded at a fair value of $393,580,000.

The allocation of purchase consideration related to the Merger was considered preliminary, primarily with respect to certain tax-related assets and liabilities. Subsequent to the closing date of the acquisition, final tax returns were prepared and filed for UpState, which are expected to result in tax refunds, which relate to the operations of UpState and USNY Bank.

In accordance with ASC 805 the acquiring Company shall adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. A provisional amount is necessary when the buyer must issue financial statements prior to completing its accounting for the business combination (i.e. prior to the end of the measurement period). The measurement period begins on the acquisition date and ends on the earlier of either: (a) the buyer obtaining the information needed to finish the accounting for the business combination or (b) one year from the acquisition date.

Adjustments to preliminary allocations related to certain tax-related assets and liabilities occurred in the fourth quarter of 2020. The change to provisional amounts resulted in a reduction in goodwill of $923,000 and no impact to results of operations during the fourth quarter. During the second quarter of 2021, the Company recorded final measurement period adjustments to goodwill which resulted in a $24,000 decrease, net, in the carrying value. The final adjustments were related to tax-related assets and liabilities and an unrecorded liability. The adjustments had no impact on the results of operations.

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The following table summarizes the purchase of UpState as of July 7, 2020:

(Dollars in Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
UpState common shares settled for stock 1,987,206
Exchange Ratio 0.9390
Norwood Financial Corp shares issued 1,865,738
Value assigned to each Norwood Financial Corp common share $ 24.30
Purchase price assigned to UpState common shares $ 45,337
exchanged for Norwood Financial Corp shares
Purchase Price Consideration - Cash for Common Stock
UpState shares exchanged for cash, excluding fractional shares 220,794
Purchase price paid to each UpState common share exchanged for cash $ 33.33
Purchase price assigned to UpState common shares exchanged for cash $ 7,359
Purchase price additional cash consideration per share 1,479
Purchase price consideration - Cash-in-lieu of Fractional Shares 6
Total Purchase Price $ 54,181
Net Assets Acquired:
UpState shareholders' equity $ 44,803
UpState goodwill and intangibles -
Total tangible equity 44,803
Adjustments to reflect assets acquired at fair value:
Investments (112)
Loans
Interest rate 3,982
General credit (10,529)
Specific credit - non-amortizing (5,213)
Specific credit - amortizing (1,724)
Core deposit intangible 409
Deferred loan fees (812)
Premises and equipment (1,211)
Allowance for loan and lease losses 5,982
Deferred tax assets 3,730
Other (48)
Adjustments to reflect liabilities acquired at fair value:
Deposits (3,011)
Net assets acquired 36,246
Goodwill resulting from merger $ 17,935

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The following condensed statement reflects the values assigned to UpState net assets as of the acquisition date:

(In Thousands)
Total purchase price $ 54,181
Net assets acquired:
Cash $ 24,037
Securities available for sale 13,836
Loans 405,221
Premises and equipment, net 4,318
Regulatory stock 2,487
Accrued interest receivable 1,426
Core deposit intangible 564
Other assets 5,398
Deposits (414,370)
Accrued interest payable (175)
Other liabilities (6,496)
Total identifiable net assets acquired 36,246
Goodwill resulting from UpState Merger $ 17,935

The Company recorded goodwill associated with the acquisition of UpState totaling $17,935,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment during the nine months ended September 30, 2021.

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the nine months ended September 30, 2021, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized on an accelerated basis over the useful life of such asset. The gross carrying amount of the core deposit intangible at September 30, 2021 was $409,000, with $91,000 accumulated amortization as of that date.

As of September 30, 2021, the current year and estimated future amortization expense for the core deposit intangible associated with the UpState acquisition is:

(In thousands)
2021 $ 17
2022 63
2023 56
2024 48
2025 41
After five years 93
$ 318

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14.           Risks and Uncertainties

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans.

An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity; and (c) principal and interest payments deferred for ten months from the end of the coverage period. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. As of September 30, 2021, the Company has approved over 1,200 applications for $274.3 million of loans since the inception of the PPP.

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. Norwood may be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against and is not resolved in a manner favorable to Norwood, it may result in significant financial liability or adversely affect reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

COVID-19 Loan Forbearance Programs. Section 4013 of the CARES Act provides that banks may elect not to categorize a loan modification as a TDR if the loan modification is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date on which the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates, or (B) January 1, 2022. According to the Interagency Statement on Loan

Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by the federal bank regulatory agencies on April 7, 2020, short-term loan modifications not otherwise eligible under Section 4013 that are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 8 of the financial statements for additional disclosure of TDRs at September 30, 2021.

The following table presents a summary of loans that were granted forbearance by type of loan since the inception of the CARES Act through September 30, 2021:

Loan Type Number of<br>‎Loans Balance<br>‎(in thousands)
Real Estate Loans:
Residential 121 $ 10,883
Commercial 388 218,984
Agricultural 16 5,267
Construction 24 4,125
Commercial, financial and agricultural 190 23,801
Other agricultural loans — —
Consumer loans to individuals 493 11,196
Total 1,232 $ 274,256

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The following table presents a summary of loans that remain in forbearance by type of loan as of September 30, 2021:

Loan Type Number of<br>‎Loans Balance<br>‎(in thousands)
Real Estate Loans:
Residential — $ —
Commercial — —
Agricultural — —
Construction — —
Commercial, financial and agricultural — —
Other agricultural loans — —
Consumer loans to individuals — —
Total — $ —

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36

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

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes,” “anticipates,” “contemplates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include:

possible future impairment of intangible assets

our ability to effectively manage future growth

loan losses in excess of our allowance

the impact of the COVID-19 pandemic on us

risk of litigation from participation in the PPP loan program

risks inherent in the COVID-19 loan forbearance programs under the CARES Act

risks inherent in commercial lending

real estate collateral which is subject to declines in value

potential other-than-temporary impairments

soundness of other financial institutions

interest rate risks

potential liquidity risk

deposits acquired through competitive bidding

availability of capital

regional economic factors

loss of senior officers

comparatively low legal lending limits

risks of new capital requirements

potential impact of Tax Cuts and Jobs Act

limited market for the Company’s stock

restrictions on ability to pay dividends

common stock may lose value

insider ownership

issuing additional shares may dilute ownership

competitive environment

certain anti-takeover provisions

extensive and complex governmental regulation and associated cost

cybersecurity

The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

Note 2 to the Company’s consolidated financial statements for the fiscal year ended December 31, 2020 (included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2020) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the fair value of financial instruments, the determination of other-than-

37

temporary impairment on securities and the determination of goodwill impairment. Please refer to the discussion of the allowance for loan losses calculation under “Loans” in the “Changes in Financial Condition” section.

The Company uses the modified prospective transition method to account for stock options. Under this method companies are required to record compensation expense, based on the fair value of options over the vesting period. Restricted shares vest over a five-year period. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted stock.

Deferred income taxes reflect temporary differences in the recognition of the revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. Although realization is not assured, the Company believes that it is more likely than not that all deferred tax assets will be realized.

The fair value of financial instruments is based upon quoted market prices, when available.  For those instances where a quoted price is not available, fair values are based upon observable market based parameters as well as unobservable parameters.  Any such valuation is applied consistently over time.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each Consolidated Balance Sheet date.

Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, the Company considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and whether it is more likely than not that it will not have to sell the securities before recovery of their cost basis. The Company believes that all unrealized losses on securities at September 30, 2021 and December 31, 2020 represent temporary impairment of the securities, related to changes in interest rates.

In connection with acquisitions, the Company recorded goodwill in the amount of $29.3 million, representing the excess of amounts paid over the fair value of net assets of the institutions acquired in purchase transactions, at its fair value at the date of acquisition. Goodwill is tested and deemed impaired when the carrying value of goodwill exceeds its implied fair value. The value of the goodwill can change in the future. We expect the value of the goodwill to decrease if there is a significant decrease in the franchise value of the Company or the Bank. If an impairment loss is determined in the future, we will reflect the loss as an expense for the period in which the impairment is determined, leading to a reduction of our net income for that period by the amount of the impairment loss.

Changes in Financial Condition

General

Total assets as of September 30, 2021 were $2.054 billion compared to $1.852 billion as of December 31, 2020. The increase was due primarily to a $135.4 million increase in securities available-for-sale and a $99.3 million increase in interest-bearing deposits with banks. Both increases resulted from deposit growth related to economic stimulus programs.

Securities

The fair value of securities available for sale as of September 30, 2021 was $362.0 million compared to $226.6 million as of December 31, 2020. The increase in the securities portfolio is the result of purchases executed to invest excess liquidity and to provide pledging for public deposits.

The carrying value of the Company’s securities portfolio (Available-for Sale) consisted of the following:

September 30, 2021 December 31, 2020
(dollars in thousands) Amount % of portfolio Amount % of portfolio
U.S. Treasury securities $ 15,506 4.3 % $ — — %
U.S. Government agencies 14,048 3.9 3,969 1.8
States and political subdivisions 121,351 33.5 73,091 32.3
Corporate obligations — — 3,032 1.3
Mortgage-backed securities-
government sponsored entities 211,083 58.3 146,494 64.6
Total $ 361,988 100.0 % $ 226,586 100.0 %

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The Company has securities in an unrealized loss position. In management’s opinion, the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses on all holdings represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Loans

Loans receivable totaled $1.371 billion at September 30, 2021 compared to $1.411 billion as of December 31, 2020. The $39.7 million decrease recorded during the first nine months of 2021 includes a $59.2 million reduction in PPP loans due to loan forgiveness. Organic loan growth for the nine-month period ended September 30, 2021 resulted in a $19.5 million increase in total loans. Commercial real estate loans increased $33.7 million during the nine-month period ended September 30, 2021, which was offset partially by an $8.7 million decrease in consumer loans. The Company also sold $8.6 million of residential mortgage loans during the nine-month period ended September 30, 2021.

The allowance for loan losses totaled $16,103,000 as of September 30, 2021, and represented 1.17% of total loans outstanding, compared to $13,150,000, or 0.93% of total loans, at December 31, 2020. The Company had net charge-offs for the nine months ended September 30, 2021 of $797,000 compared to $685,000 in the corresponding period in 2020. The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. In addition, management has included qualitative factors during 2021 which are specifically related to the economic impact of the COVID-19 pandemic. Management considers the allowance adequate at September 30, 2021 based on the Company’s criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, which might be incurred in the future.

As of September 30, 2021, non-performing loans totaled $2,722,000 or 0.20% of total loans compared to $3,391,000, or 0.24%, of total loans at December 31, 2020. At September 30, 2021, non-performing assets totaled $4,598,000 million, or 0.22%, of total assets, compared to $4,356,000, or 0.24%, of total assets at December 31, 2020.

The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:

(dollars in thousands) September 30, 2021 December 31, 2020
Loans accounted for on a non-accrual basis:
Real Estate
Residential $ 522 $ 571
Commercial 39 1,674
Agricultural 858 676
Construction — —
Commercial and financial loans 1,077 22
Other agricultural loans 126 263
Consumer loans to individuals 100 185
Total non-accrual loans * 2,722 3,391
Accruing loans which are contractually
past due 90 days or more — —
Total non-performing loans 2,722 3,391
Foreclosed real estate 1,876 965
Total non-performing assets $ 4,598 $ 4,356
Purchased credit impaired loans (a) $ 8,481 $ 9,281
Allowance for loans losses $ 16,103 $ 13,150
Coverage of non-performing loans (a) (b) 592% % 388% %
Non-performing loans to total loans(a) 0.20 % 0.24 %
Non-performing loans to total assets(a) 0.13 % 0.18 %
Non-performing assets to total assets(a) 0.22 % 0.24 %

*Includes non-accrual TDRs of $0 as of September 30, 2021 and $75,000 as of December 31, 2020. There were no accruing TDRs as of September 30, 2021 or as of December 31, 2020.

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(a) Purchased impaired loans are loans obtained in acquisition transactions that as of the acquisition date were specifically identified as displaying signs of credit deterioration and for which the Company did not expect to collect all contractually required principal and interest payments. Those loans were impaired at the date of acquisition, were recorded at estimated fair value and were generally delinquent in payments. The Company estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount on the acquisition date relating to these impaired loans that is recognized in interest income.

(b) For loans acquired with specific evidence of deterioration in credit quality, a specific credit fair value adjustment is established at the date of acquisition and will not impact the allowance for loan losses unless actual losses exceed the established fair value adjustment.

Since the inception of the CARES Act, over 1,200 of our loan customers had requested loan payment deferrals or payments of interest only on loans totaling $274.3 million. In accordance with interagency guidance and the CARES Act issued in March 2020, these short-term deferrals are not considered TDRs unless the borrower was previously experiencing financial difficulty. As of September 30, 2021, all of these loans have returned to full payment status.

In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.

Deposits

During the nine-month period ended September 30, 2021, total deposits increased $187.1 million due primarily to the impact from the PPP and other economic stimulus programs.

The following table sets forth deposit balances as of the dates indicated:

(dollars in thousands) December 31, 2020
Non-interest bearing demand 442,534 $ 359,559
Interest-bearing demand 209,304 149,692
Money market deposit accounts 307,665 259,974
Savings 282,016 232,329
Time deposits <100,000 164,236 180,316
Time deposits >100,000 316,767 353,515
Total 1,722,522 $ 1,535,385

All values are in US Dollars.

Borrowings

Other borrowings as of September 30, 2021, totaled $33.1 million compared to $42.5 million as of December 31, 2020. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $14.9 million due to a $14.9 million increase in repurchase agreements.

Other borrowings consisted of the following:

(dollars in thousands) September 30, 2021 December 31, 2020
Notes with the FHLB:
Amortizing fixed rate borrowing due March 2022 at 1.748% $ 453 $ 1,126
Amortizing fixed rate borrowing due August 2022 at 1.94% 1,870 3,376
Amortizing fixed rate borrowing due October 2022 at 1.88% 1,798 3,021
Amortizing fixed rate borrowing due October 2023 at 3.24% 4,364 5,865
Amortizing fixed rate borrowing due December 2023 at 3.22% 2,350 3,096
Fixed rate term borrowing due December 2023 at 1.95% 10,000 10,000
Amortizing fixed rate borrowing due December 2023 at 1.73% 5,801 7,616
Amortizing fixed rate borrowing due April 2024 at 0.91% 6,500 8,359
$ 33,136 $ 42,459

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Stockholders’ Equity and Capital Ratios

As of September 30, 2021, stockholders’ equity totaled $202.6 million, compared to $194.8 million as of December 31, 2020. The net change in stockholders’ equity included $18.3 million of net income, which was partially offset by $6.4 million of dividends declared. In addition, total equity decreased $3.7 million due to a decrease in the fair value of securities in the available for sale portfolio, net of tax. This decrease in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities. Because of interest rate volatility, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

A comparison of the Company’s consolidated regulatory capital ratios is as follows:

September 30, 2021 December 31, 2020
Tier 1 Capital
(To average assets) 8.54% 8.71%
Tier 1 Capital
(To risk-weighted assets) 12.17% 11.65%
Common Equity Tier 1 Capital
(To risk-weighted assets) 12.17% 11.65%
Total Capital
(To risk-weighted assets) 13.32% 12.62%

Effective January 1, 2015, the Company and the Bank became subject to new regulatory capital rules, which, among other things, impose a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets, increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new rules also require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement became effective. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of September 30, 2021.

Liquidity

As of September 30, 2021, the Company had cash and cash equivalents of $219.9 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $362.0 million which could be used for liquidity needs. This totals $581.9 million of liquidity and represents 28.4% of total assets compared to $338.3 million and 18.3% of total assets as of December 31, 2020. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of September 30, 2021 and December 31, 2020. Based upon these measures, the Company believes its liquidity is adequate.

Capital Resources

The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2022. There were no borrowings under this line as of September 30, 2021 and December 31, 2020.

The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $16,000,000. There were no borrowings under this line as of September 30, 2021 and December 31, 2020.

The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000. There were no borrowings under this line as of September 30, 2021 and December 31, 2020.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $587,518,000 as of September 30, 2021, of which $33,136,000 was outstanding in the form of borrowings. As of December 31, 2020, the maximum borrowing capacity was $686,360,000, of which $42,459,000 of borrowings was outstanding. Additionally, as of September 30, 2021, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $40,000,000 as collateral for specific

41

municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. There was $165,500,000 outstanding in the form of Letters of Credit as of December 31, 2020. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

Non-GAAP Financial Measures

This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on pages 44 and 48. Fully taxable equivalent interest income and net interest income is also reflected in the tables on pages 45 and 49. Although the Company believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.

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42

Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis, Three Months Ended September 30,
dollars in thousands) 2021 2020
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Interest-bearing deposits with banks $ 182,259 $ 72 0.16% $ 78,525 $ 18 0.09%
Securities available for sale:
Taxable 286,413 1,096 1.53 147,864 687 1.86
Tax-exempt (1) 62,473 471 3.02 50,543 436 3.45
Total securities available for sale (1) 348,886 1,567 1.80 198,407 1,123 2.26
Loans receivable (1) (4) (5) 1,375,748 16,957 4.93 1,391,012 16,385 4.71
Total interest-earning assets 1,906,893 18,596 3.90 1,667,944 17,526 4.20
Non-interest earning assets:
Cash and due from banks 26,622 23,036
Allowance for loan losses (15,714) (10,894)
Other assets 115,229 106,437
Total non-interest earning assets 126,137 118,579
Total Assets $ 2,033,030 $ 1,786,523
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market $ 492,464 $ 237 0.19 $ 360,183 $ 192 0.21
Savings 270,172 45 0.07 219,441 34 0.06
Time 494,459 885 0.72 537,146 1,450 1.08
Total interest-bearing deposits 1,257,095 1,167 0.37 1,116,770 1,676 0.60
Short-term borrowings 77,799 71 0.37 58,527 61 0.42
Other borrowings 34,683 172 1.98 48,415 242 2.00
Total interest-bearing liabilities 1,369,577 1,410 0.41 1,223,712 1,979 0.65
Non-interest bearing liabilities:
Demand deposits 443,303 356,827
Other liabilities 14,966 21,859
Total non-interest bearing liabilities 458,269 378,686
Stockholders' equity 205,184 184,125
Total Liabilities and Stockholders' Equity $ 2,033,030 $ 1,786,523
Net interest income/spread (tax equivalent basis) 17,186 3.49% 15,547 3.55%
Tax-equivalent basis adjustment (197) (217)
Net interest income $ 16,989 $ 15,330
Net interest margin (tax equivalent basis) 3.61% 3.73%

(1)Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.

(2)Average balances have been calculated based on daily balances.

(3)Annualized

(4)Loan balances include non-accrual loans and are net of unearned income.

(5)Loan yields include the effect of amortization of deferred fees, net of costs.

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43

Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.

Increase/(Decrease)
Three months ended September 30, 2021 Compared to
Three months ended September 30, 2020
Variance due to
Volume Rate Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks $ 30 $ 24 $ 54
Securities available for sale:
Taxable 610 (201) 409
Tax-exempt securities 97 (62) 35
Total securities 707 (263) 444
Loans receivable (187) 759 572
Total interest-earning assets 550 520 1,070
Interest-bearing liabilities:
Interest-bearing demand and money market 68 (23) 45
Savings 6 5 11
Time (83) (482) (565)
Total interest-bearing deposits (9) (500) (509)
Short-term borrowings 19 (9) 10
Other borrowings (68) (2) (70)
Total interest-bearing liabilities (58) (511) (569)
Net interest income (tax-equivalent basis) $ 608 $ 1,031 $ 1,639

Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.

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44

Comparison of Operating Results for the Three Months Ended September 30, 2021 to September 30, 2020

General

For the three months ended September 30, 2021, net income totaled $6,981,000 compared to $4,999,000 earned in the similar period in 2020. The increase in net income for the three months ended September 30, 2021 was due primarily to a $1,659,000 increase in net interest income and a $1.1 million decrease in the provision for loan losses. Earnings per share for the three-months ended September 30, 2021 were $0.85 per share for basic shares and fully diluted shares compared to $0.62 per share for basic shares and fully diluted shares for the three months ended September 30, 2020. The resulting annualized return on average assets and annualized return on average equity for the three months ended September 30, 2021 were 1.36% and 13.50%, respectively, compared to 1.11% and 10.64%, respectively, for the same period in 2020.

The following table sets forth changes in net income:

(dollars in thousands) Three months ended
September 30, 2021 to September 30, 2020
Net income three months ended September 30, 2020 $ 4,999
Change due to:
Net interest income 1,659
Provision for loan losses 1,100
Net gains on sales of securities and loans (123)
Service charges and fees 184
Other income (5)
Salaries and employee benefits (679)
Occupancy, furniture and equipment (54)
Data processing related 152
FDIC insurance assessment (33)
Professional fees 103
Merger related 386
All other expenses (87)
Income tax expense (621)
Net income three months ended September 30, 2021 $ 6,981

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2021 totaled $17,186,000 which was $1,639,000 higher than the comparable period in 2020. The increase in net interest income was due primarily to a $444,000 increase in interest income (fte) on securities due to purchases of securities, and a $572,000 increase in interest income (fte) on loans primarily due to $1,385,000 of PPP fees recognized. The fte net interest spread and net interest margin were 3.49% and 3.61%, respectively, for the three months ended September 30, 2021 compared to 3.55% and 3.73%, respectively, for the same period in 2020. See “Non-GAAP Financial Measures” described above on page 42.

For the three-months ended September 30, 2021, interest income (fte) totaled $18,596,000 with a yield on average earning assets of 3.90% compared to $17,526,000 and 4.20% for the 2020 period. Average loans decreased $15.3 million during the three-months ended September 30, 2021, over the comparable period of 2020, while average securities increased $150.5 million. Average earning assets totaled $1.907 billion for the three months ended September 30, 2021, an increase of $238.9 million over the average for the same period in 2020. See “Non-GAAP Financial Measures” described above on page 42.

Interest expense for the three months ended September 30, 2021 totaled $1,410,000 at an average cost of 0.41% compared to $1,979,000 and 0.65%, respectively, for the same period in 2020. The decrease in interest expense during the three-months ended September 30, 2021 reflects the overall lower level of market interest rates. The average cost of time deposits, which is the most significant component of funding costs, decreased 0.36% compared to the same three-month period of last year.

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended September 30, 2021 was $750,000, compared to $1,850,000 for the three months ended September 30, 2020. The decreased provision reflects a reduction in certain qualitative factors related to the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. The Company recorded a net recovery of $13,000 for the quarter ended September 30, 2021,

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compared to a net charge-off of $448,000 for the similar period in 2020. At September 30, 2021, the allowance for loan losses represented 1.17% of loans receivable. Additionally, the allowance for loan losses represented 592% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other Income

Other income totaled $2,128,000 for the three months ended September 30, 2021, compared to $2,072,000 for the same period in 2020. The increase was due primarily to a $184,000 increase in service charges and fees. Net gains on the sale of securities totaled $35,000 for the three months ended September 30, 2021 compared to $33,000 in the three months ended September 30, 2020. Net gains on the sale of loans totaled $39,000 for the three months ended September 30, 2021 compared to $164,000 in the three months ended September 30, 2020.

Other Expense

Other expense for the three months ended September 30, 2021 totaled $9,592,000, which was $212,000 higher than the same period of 2020, due primarily to a $679,000 increase in salaries and employee benefits costs.

Income Tax Expense

Income tax expense totaled $1,794,000 for an effective tax rate of 20.5% for the three months ended September 30, 2021 compared to $1,173,000 for an effective tax rate of 19.0% for the three months ended September 30, 2020. The increase in the effective tax rate in the 2021 period reflects the increased level of taxable income.

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46

Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis, Nine Months Ended September 30,
dollars in thousands) 2021 2020
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(2) (1) (3) (2) (1) (3)
Assets
Interest-earning assets:
Interest bearing deposits with banks $ 158,600 $ 174 0.15% $ 51,705 $ 43 0.11%
Securities available for sale:
Taxable 242,253 2,831 1.56 144,582 2,182 2.01
Tax-exempt (1) 60,126 1,399 3.10 55,002 1,380 3.35
Total securities available for sale (1) 302,379 4,230 1.87 199,584 3,562 2.38
Loans receivable (1) (4) (5) 1,398,563 49,425 4.71 1,099,586 38,097 4.62
Total interest-earning assets 1,859,542 53,829 3.86 1,350,875 41,702 4.12
Non-interest earning assets:
Cash and due from banks 23,357 17,752
Allowance for loan losses (14,915) (9,692)
Other assets 115,048 93,351
Total non-interest earning assets 123,490 101,411
Total Assets $ 1,983,032 $ 1,452,286
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market $ 459,405 $ 671 0.19 $ 277,606 $ 468 0.22
Savings 261,308 121 0.06 191,164 81 0.06
Time 520,057 2,835 0.73 427,351 4,547 1.42
Total interest-bearing deposits 1,240,770 3,627 0.39 896,121 5,096 0.76
Short-term borrowings 73,272 214 0.39 54,957 244 0.59
Other borrowings 37,764 559 1.97 52,287 824 2.10
Total interest-bearing liabilities 1,351,806 4,400 0.43 1,003,365 6,164 0.82
Non-interest bearing liabilities:
Demand deposits 415,935 274,297
Other liabilities 14,746 18,336
Total non-interest bearing liabilities 430,681 292,633
Stockholders' equity 200,545 156,288
Total Liabilities and Stockholders' Equity $ 1,983,032 $ 1,452,286
Net interest income/spread (tax equivalent basis) 49,429 3.43% 35,538 3.30%
Tax-equivalent basis adjustment (612) (676)
Net interest income $ 48,817 $ 34,862
Net interest margin (tax equivalent basis) 3.54% 3.51%

(1)Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.

(2)Average balances have been calculated based on daily balances.

(3)Annualized

(4)Loan balances include non-accrual loans and are net of unearned income.

(5)Loan yields include the effect of amortization of deferred fees, net of costs.

‎

47

Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.

Increase/(Decrease)
Nine months ended September 30, 2021 Compared to
Nine months ended September 30, 2020
Variance due to
Volume Rate Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks $ 94 $ 37 $ 131
Securities available for sale:
Taxable 1,014 (365) 649
Tax-exempt securities 87 (68) 19
Total securities 1,101 (433) 668
Loans receivable 10,399 929 11,328
Total interest-earning assets 11,594 533 12,127
Interest-bearing liabilities:
Interest-bearing demand and money market 292 (89) 203
Savings 40 — 40
Time 580 (2,292) (1,712)
Total interest-bearing deposits 912 (2,381) (1,469)
Short-term borrowings 62 (92) (30)
Other borrowings (226) (39) (265)
Total interest-bearing liabilities 748 (2,512) (1,764)
Net interest income (tax-equivalent basis) $ 10,846 $ 3,045 $ 13,891

Comparison of Operating Results for the Nine Months Ended September 30, 2021 to September 30, 2020

General

For the nine months ended September 30, 2021, net income totaled $18,277,000 compared to $9,567,000 earned in the same period in 2020. The increase in net income for the nine months ended September 30, 2021 was due primarily to a $13,955,000 million increase in net interest income which includes the benefits realized from the acquisition of UpState. This increase was partially offset by a $4,005,000 increase in other operating expenses. Earnings per share for the nine months ended September 30, 2021 were $2.23 per share for basic shares and for fully diluted shares, compared to $1.39 per share for basic shares and fully diluted shares for the nine months ended September 30, 2020. The resulting annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2021 were 1.23% and 12.19%, respectively, compared to 0.88% and 8.13%, respectively, for the same period in 2020.

48

The following table sets forth changes in net income:

(dollars in thousands) Nine months ended
September 30, 2021 to September 30, 2020
Net income nine months ended September 30, 2020 $ 9,567
Change due to:
Net interest income 13,955
Provision for loan losses 100
Service charges and fees 1,067
Net gains on sales (123)
Earnings and proceeds on bank-owned life insurance 129
Other income 112
Salaries and employee benefits (3,738)
Occupancy, furniture and equipment (585)
Data processing related (111)
Professional fees (337)
FDIC insurance assessment (326)
Merger related 1,983
All other expenses (891)
Income tax expense (2,525)
Net income six months ended September 30, 2021 $ 18,277

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2021 totaled $49,429,000 which was $13,891,000 higher than the comparable period in 2020. The increase in net interest income was due primarily to an $11,328,000 increase in interest income (fte) on loans resulting from the acquisition of UpState. The fte net interest spread and net interest margin were 3.43% and 3.54%, respectively, for the nine months ended September 30, 2021 compared to 3.30% and 3.51%, respectively, for the same period in 2020. The increase in the net interest spread reflects the growth in average interest-earning assets. See “Non-GAAP Financial Measures” above.

For the nine-months ended September 30, 2021, interest income (fte) totaled $53,829,000 with a yield on average earning assets of 3.86% compared to $41,702,000 and 4.12% for the same period of 2020. Average loans increased $299.0 million during the nine-months ended September 30, 2021, over the comparable period of 2020, while average securities increased $102.8 million. Average earning assets totaled $1.860 billion for the nine months ended September 30, 2021, an increase of $508.7 million over the average for the same period in 2020. All increases include growth resulting from the merger with UpState and growth in PPP loans. See “Non-GAAP Financial Measures” above.

Interest expense for the nine months ended September 30, 2021 totaled $4,400,000 at an average cost of 0.43%, compared to $6,164,000 and 0.82% for the same period in 2020. The decrease in average cost during the 2021 quarter reflects the overall lower level of market interest rates. The average cost of time deposits, which is the most significant component of funding, decreased 0.69% during the period.

Provision for Loan Losses

The Company’s provision for loan losses for the nine months ended September 30, 2021 was $3,750,000, compared to $3,850,000 for the nine months ended September 30, 2020. The decreased provision reflects a reduction in qualitative factors related to the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were $797,000 for the nine months ended September 30, 2021, compared to $685,000 for the similar period in 2020. At September 30, 2021, the allowance for loan losses represented 1.17% of loans receivable. Additionally, the allowance for loan losses represented 592% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other Income

Other income totaled $6,304,000 for the nine months ended September 30, 2021, compared to $5,119,000 for the same period in 2020. The increase was due primarily to a $1,067,000 increase in service charges and fees. Net gains from the sale of securities totaled $56,000 for the nine-months ended September 30, 2021, compared to $71,000 in the nine-months ended September 30, 2020.

49

Net gains on the sale of loans totaled $177,000 for the nine-months ended September 30, 2021 compared to $285,000 in the nine-months ended September 30, 2020.

Other Expense

Other expense for the nine months ended September 30, 2021 totaled $28,536,000, which was $4,005,000 higher than the same period of 2020, due primarily to a $3,738,000 increase in salaries and employee benefits costs and the costs associated with four community offices acquired from UpState. Merger expenses also impacted the year-over-year comparison.

Income Tax Expense

Income tax expense totaled $4,558,000 for an effective tax rate of 20.0% for the nine months ended September 30, 2021 compared to $2,033,000 for an effective tax rate of 17.5% for the nine months ended September 30, 2020. The increase in the effective tax rate in the 2021 period reflects the increased level of taxable income.

‎

50

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates.

Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of September 30, 2021, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decline of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.

Imbalance in repricing opportunities at a given point in time reflects interest-sensitivity gaps measured as the difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL). These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific intervals.

As of September 30, 2021, the Company had a positive 90-day interest sensitivity gap of $190.5 million or 9.3% of total assets, compared to the $106.2 million interest sensitivity gap, or 5.7% of total assets, as of December 31, 2020. Rate-sensitive assets repricing within 90 days increased $83.4 million due to a $98.9 million increase in interest-bearing deposits. Rate-sensitive liabilities repricing within 90 days decreased $952,000 since year end due primarily to a $4.3 million decrease in deposits repricing. A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time interval. This would indicate that in a rising rate environment, yield on interest-earning assets in the 90-day time frame could increase faster than the cost of interest-bearing liabilities. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from an independently prepared non-maturity deposit study for the Bank which addressed the various deposit types and their pricing sensitivity to movements in market interest rates. The process involved analyzing correlations between product rates and market rates over a ten-year period. The Company believes the study provides pertinent data to support the assumptions used in modeling non-maturity deposits.

51

September 30, 2021

Rate Sensitivity Table

(dollars in thousands)

3 Months 3-12 Months 1 to 3 Years Over 3 Years Total
Federal funds sold and interest-bearing deposits $ 191,134 $ 446 $ — $ — $ 191,580
Securities 22,502 48,751 87,678 203,057 361,988
Loans Receivable 209,365 242,561 409,676 509,400 1,371,002
Total RSA $ 423,001 $ 291,758 $ 497,354 $ 712,457 $ 1,924,570
Non-maturity interest-bearing deposits $ 123,275 $ 123,490 $ 328,621 $ 223,599 $ 798,985
Time Deposits 89,292 249,510 119,249 22,952 481,003
Borrowings 19,889 35,392 56,101 — 111,382
Total RSL $ 232,456 $ 408,392 $ 503,971 $ 246,551 $ 1,391,370
Interest Sensitivity Gap $ 190,545 $ (116,634) $ (6,617) $ 465,906 $ 533,200
Cumulative Gap 190,545 73,911 67,294 533,200
RSA/RSL-cumulative 181.97% 111.53% 105.88% 138.32%
December 31, 2020
Interest Sensitivity Gap $ 106,233 $ 26,320 $ 649 $ 314,776 $ 447,978
Cumulative Gap 106,233 132,553 133,202 447,978
RSA/RSL-cumulative 145.5% 122.0% 112.4% 135.0%

‎

52

Item 4. Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “Commission”) rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

‎

53

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Not applicable.

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

(a)    Unregistered Sales of Equity Securities. Not Applicable.

(b)    Use of Proceeds. Not Applicable

(c)    Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the quarter ended September 30, 2021.

Issuer Purchases of Equity Securities
Maximum Number
Total Number of (or Approximate
Total Shares (or Units) Dollar Value) of Shares
Number Average Purchased as Part of (or Units)
of Shares Price Paid Publicly that May Yet Be
(or Units) Per Share Announced Plans Purchased Under the
Purchased (or Unit) or Programs * Plans or Programs
July 1 – 31, 2021 — $ — — 526,093
August 1 – 31, 2021 — — — 526,093
September 1 – 30, 2021 30,000 25.50 30,000 496,093
Total 30,000 $ 25.50 30,000 496,093

*On March 30, 2021, the Company announced a share repurchase program for up to approximately 5% of the Company’s outstanding shares of common stock, or approximately 400,000 shares, in the open market, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended.  On March 19, 2008, the Company announced its intention to repurchase up to 5% of its outstanding common stock (approximately 226,050 split-adjusted shares) in the open market. On November 10, 2011, the Company announced that it had increased the number of shares which may be repurchased under its open-market program to 5% of its currently outstanding shares, or approximately 270,600 split-adjusted shares. Both share repurchase programs are currently in effect.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

‎

54

Item 6. Exhibits

No. Description
3(i) Amended and Restated Articles of Incorporation of Norwood Financial Corp^(1)^
3(ii) Bylaws of Norwood Financial Corp^(2)^
4.0 Specimen Stock Certificate of Norwood Financial Corp^(3)^
10.20 First Amendment to Salary Continuation Agreement with John F. Carmody^(4)^
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
32 Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of Sarbanes Oxley Act of 2002
101 The following materials from the Company’s Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.
101.INS Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document)
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

(1)Incorporated by reference into this document from Exhibit 3(i) to the Company’s Form 10-K filed with the Commission on March 13, 2020.

(2)Incorporated by reference from Exhibit 3(ii) to the Company’s Form 10-Q filed with the Commission on May 8, 2020.

(3)Incorporated herein by reference into this document from the identically numbered Exhibits to the Company’s Form 10, Registration Statement initially filed in paper with the Commission on April 29, 1996, Registration No. 0-28364.

(4)Incorporated by reference from Exhibit 10.20 to the Company’s Form 10-Q filed with the Commission on May 7, 2021.

‎

55

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.

NORWOOD FINANCIAL CORP
Date: November 12, 2021 By: /s/ Lewis J. Critelli
Lewis J. Critelli
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2021 /s/ William S. Lance
William S. Lance
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

56

		Exhibit 311

Exhibit 31.1

CERTIFICATION

I, Lewis J. Critelli, certify that:



1.I have reviewed this quarterly report on Form 10-Q of Norwood Financial Corp;



2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:



(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;



(c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and



5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):



(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and



(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 |  | | | --- | --- | | Date: November 12, 2021 | /s/ Lewis J. Critelli | |  | Lewis J. Critelli | |  | President and Chief Executive Officer | 

		Exhibit 312

Exhibit 31.2

CERTIFICATION



I, William S. Lance, certify that:



1.I have reviewed this quarterly report on Form 10-Q of Norwood Financial Corp;



2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:



(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;



(c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and



5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):



(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and



(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 |  | | | --- | --- | | Date: November 12, 2021 | /s/ William S. Lance | |  | William S. Lance | |  | Executive Vice President and Chief Financial Officer | 

		Exhibit 32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Quarterly Report of Norwood Financial Corp (the Company) on Form 10-Q for the period ending September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the Report), we, Lewis J. Critelli, President and Chief Executive Officer, and William S. Lance, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:



(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 |  | | | --- | --- | | /s/ Lewis J. Critelli | /s/ William S. Lance | | Lewis J. Critelli | William S. Lance | | President and Chief Executive Officer | Executive Vice President and Chief Financial Officer | |  | | | November 12, 2021 | | 

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