NORWOOD FINANCIAL CORP 10-Q

Item 1. Financial Statements NORWOOD FINANCIAL CORP Consolidated Balance Sheets ( unaudited) (dollars in thousands, except share and per share data) September 30, December 31, 2022 2021 ASSETS Cash and due from banks $ 23,092 $ 21,073 Interest-bearing deposits with banks 17,785 185,608 Cash and cash equivalents 40,877 206,681 Securities available for sale, at fair value 427,287 406,782 Loans receivable 1,432,288 1,354,931 Less: Allowance for loan losses 16,931 16,442 Net loans receivable 1,415,357 1,338,489 Regulatory stock, at cost 2,220 3,927 Bank premises and equipment, net 17,427 17,289 Bank owned life insurance 43,169 40,038 Accrued interest receivable 6,303 5,889 Foreclosed real estate owned 346 1,742 Goodwill 29,266 29,266 Other intangibles 329 407 Other assets 36,289 17,994 TOTAL ASSETS $ 2,018,870 $ 2,068,504 LIABILITIES Deposits: Non-interest bearing demand $ 453,560 $ 440,652 Interest-bearing 1,315,236 1,316,141 Total deposits 1,768,796 1,756,793 Short-term borrowings 71,754 60,822 Other borrowings — 29,998 Accrued interest payable 1,425 1,203 Other liabilities 18,046 14,426 TOTAL LIABILITIES 1,860,021 1,863,242 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: 2022: 8,275,901 shares, 2021: 8,266,751 shares 828 827 Surplus 96,785 96,443 Retained earnings 125,243 110,015 Treasury stock at cost: 2022: 130,046 shares; 2021: 65,328 shares ( 3,442 ) ( 1,767 ) Accumulated other comprehensive loss ( 60,565 ) ( 256 ) TOTAL STOCKHOLDERS’ EQUITY 158,849 205,262 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,018,870 $ 2,068,504 See accompanying notes to the unaudited consolidated financial statements. ‎ 3 NORWOOD FINANCIAL CORP Consolidated Statements of Income ( unaudited) (dollars in thousan ds, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 INTEREST INCOME Loans receivable, including fees $ 17,114 $ 16,859 $ 48,203 $ 49,107 Securities 2,473 1,468 6,564 3,936 Other 245 72 504 174 Total interest income 19,832 18,399 55,271 53,217 INTEREST EXPENSE Deposits 1,557 1,167 3,699 3,627 Short-term borrowings 88 71 196 214 Other borrowings 17 172 212 559 Total interest expense 1,662 1,410 4,107 4,400 NET INTEREST INCOME 18,170 16,989 51,164 48,817 PROVISION FOR LOAN LOSSES — 750 600 3,750 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,170 16,239 50,564 45,067 OTHER INCOME Service charges and fees 1,346 1,485 4,292 4,268 Income from fiduciary activities 219 209 634 550 Net realized gains on sales of securities — 35 — 56 Gain on sale of loans, net 1 39 1 177 Gain on sales of foreclosed real estate owned — 31 427 31 Earnings and proceeds on bank owned life insurance 267 200 892 767 Other 345 160 1,760 486 Total other income 2,178 2,159 8,006 6,335 OTHER EXPENSES Salaries and employee benefits 5,553 5,491 16,824 15,616 Occupancy, furniture & equipment, net 1,191 1,163 3,704 3,568 Data processing and related operations 736 594 2,031 1,760 Taxes, other than income 240 229 773 763 Professional fees 354 189 1,336 1,072 Federal Deposit Insurance Corporation insurance 143 177 468 512 Foreclosed real estate 4 16 66 58 Amortization of intangibles 24 28 78 96 Other 1,894 1,736 5,488 5,122 Total other expenses 10,139 9,623 30,768 28,567 INCOME BEFORE INCOME TAXES 10,209 8,775 27,802 22,835 INCOME TAX EXPENSE 2,100 1,794 5,709 4,558 NET INCOME $ 8,109 $ 6,981 $ 22,093 $ 18,277 BASIC EARNINGS PER SHARE $ 1.00 $ 0.85 $ 2.71 $ 2.23 DILUTED EARNINGS PER SHARE $ 1.00 $ 0.85 $ 2.71 $ 2.23 See accompanying notes to the unaudited consolidated financial statements. ‎ 4 NORWOOD FINANCIAL CORP Consolidated Statements of Comprehensive Income (Loss) (unaudited) (dollars in thousands) Three Months Ended September 30, 2022 2021 Net income $ 8,109 $ 6,981 Other comprehensive (loss) income Investment securities available for sale: Unrealized holding loss ( 25,739 ) ( 2,652 ) Tax effect 5,404 557 Reclassification of investment securities gains recognized in net income — ( 35 ) Tax effect — 7 Other comprehensive (loss) ( 20,335 ) ( 2,123 ) Comprehensive (Loss) Income $ ( 12,226 ) $ 4,858 Nine Months Ended September 30, 2022 2021 Net income $ 22,093 $ 18,277 Other comprehensive (loss) income Investment securities available for sale: Unrealized holding (loss) gain ( 76,340 ) ( 4,604 ) Tax effect 16,031 967 Reclassification of investment securities gains recognized in net income — ( 56 ) Tax effect — 12 Other comprehensive (loss) ( 60,309 ) ( 3,681 ) Comprehensive (Loss) Income $ ( 38,216 ) $ 14,596 See accompanying notes to the unaudited consolidated financial statements. ‎ 5 NORWOOD FINANCIAL CORP Consolidated Statements of Changes in Stockholders’ Equity (unaudited) Nine Months Ended September 30, 2022 and 2021 ( dollars in thousands, except share and per share data) Accumulated Other Common Stock Retained Treasury Stock Comprehensive Shares Amount Surplus Earnings Shares Amount Income (Loss) Total Balance, December 31, 2021 8,266,751 $ 827 $ 96,443 $ 110,015 65,328 $ ( 1,767 ) $ ( 256 ) $ 205,262 Net Income - - - 22,093 - - - 22,093 Other comprehensive loss - - - - - - ( 60,309 ) ( 60,309 ) Cash dividends declared ($ 0.84 per share) - - - ( 6,865 ) - - - ( 6,865 ) Acquisition of treasury stock - - - - 84,668 ( 2,204 ) - ( 2,204 ) Compensation expense related to restricted stock 7,500 1 271 - - 272 Stock options exercised 1,650 - ( 130 ) - ( 19,950 ) 529 - 399 Compensation expense related to stock options - - 201 - - - - 201 Balance, September 30, 2022 8,275,901 $ 828 $ 96,785 $ 125,243 130,046 $ ( 3,442 ) $ ( 60,565 ) $ 158,849 Accumulated Other Common Stock Retained Treasury Stock Comprehensive Shares Amount Surplus Earnings Shares Amount Income (Loss) 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 6 NORWOOD FINANCIAL CORP Consolidated Statements of Changes in Stockholders’ Equity (unaudited) Three Months Ended September 30, 2022 and 2021 ( dollars in thousands, except share and per share data) Accumulated Other Common Stock Retained Treasury Stock Comprehensive Shares Amount Surplus Earnings Shares Amount Income (Loss) Total Balance, June 30, 2022 8,275,901 $ 828 $ 96,752 $ 119,414 110,084 $ ( 2,933 ) $ ( 40,230 ) $ 173,831 Net Income - - - 8,109 - - - 8,109 Other comprehensive loss - - - - - - ( 20,335 ) ( 20,335 ) Cash dividends declared ($ 0.28 per share) - - - ( 2,280 ) - - - ( 2,280 ) Acquisition of treasury stock - - - - 36,687 ( 952 ) - ( 952 ) Compensation expense related to restricted stock - - 101 - - - - 101 Stock options exercised - - ( 135 ) - ( 16,725 ) 443 - 308 Compensation expense related to stock options - - 67 - - - - 67 Balance, September 30, 2022 8,275,901 $ 828 $ 96,785 $ 125,243 130,046 $ ( 3,442 ) $ ( 60,565 ) $ 158,849 Accumulated Other Common Stock Retained Treasury Stock Comprehensive Shares Amount Surplus Earnings Shares Amount Income 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 See accompanying notes to the unaudited consolidated financial statements. ‎ 7 NORWOOD FINANCIAL CORP Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 22,093 $ 18,277 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 600 3,750 Depreciation 1,109 1,117 Amortization of intangible assets 78 96 Deferred income taxes 417 497 Net amortization of securities premiums and discounts 1,038 1,133 Net realized gain on sales of securities — ( 56 ) Earnings and proceeds on life insurance policies ( 892 ) ( 767 ) Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net ( 379 ) ( 52 ) Net amortization of loan fees ( 281 ) ( 2,734 ) Net gain on sale of loans ( 1 ) ( 177 ) Loans originated for sale ( 435 ) ( 8,616 ) Proceeds from sale of loans originated for sale 437 8,793 Compensation expense related to stock options 201 160 Compensation expense related to restricted stock 272 251 (Increase) decrease in accrued interest receivable ( 414 ) 183 Increase (decrease) in accrued interest payable 222 ( 260 ) Other, net 319 1,407 Net cash provided by operating activities 24,384 23,002 CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales — 3,841 Proceeds from maturities and principal reductions on mortgage-backed securities 32,945 52,770 Purchases ( 130,828 ) ( 197,750 ) Purchase of regulatory stock ( 1,019 ) ( 3,327 ) Redemption of regulatory stock 2,726 3,410 Net (increase) decrease in loans ( 76,553 ) 40,969 Proceeds from bank-owned life insurance policies 761 511 Purchase of bank-owned life insurance ( 3,000 ) — Purchase of premises and equipment ( 1,295 ) ( 809 ) Proceeds from sales of bank premises and fixed assets — 157 Proceeds from sales of foreclosed real estate owned 1,823 158 Net cash used in investing activities ( 174,440 ) ( 100,070 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 12,003 186,880 Net increase in short-term borrowings 10,932 14,943 Repayments of other borrowings ( 29,998 ) ( 9,323 ) Stock options exercised 399 182 Purchase of treasury stock ( 2,204 ) ( 961 ) Cash dividends paid ( 6,880 ) ( 6,413 ) Net cash (used in) provided by financing activities ( 15,748 ) 185,308 (Decrease) increase in cash and cash equivalents ( 165,804 ) 108,240 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 206,681 111,693 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 40,877 $ 219,933 ‎ 8 NORWOOD FINANCIAL CORP Consolidated Statements of Cash Flows (Unaudited) (continued) (dollars in thousands) Nine Months Ended September 30, 2022 2021 Supplemental Disclosures of Cash Flow Information Cash payments for: Interest on deposits and borrowings $ 3,885 $ 4,660 Income taxes paid, net of refunds $ 5,372 $ 4,214 Supplemental Schedule of Noncash Investing Activities: Transfers of loans to foreclosed real estate and repossession of other assets $ 161 $ 1,638 Dividends payable $ 2,281 $ 2,131 See accompanying notes to the unaudited consolidated financial statements. ‎ 9 Notes to the Unaudited Consolidated Financial Statements 1. Basis of Presentation The unaudited consolidated financial statements include the accounts of Norwood Financial Corp (the “Company”) and its wholly-owned subsidiary, Wayne Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., and WTRO Properties, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the consolidated financial position and results of operations of the Company. The operating results for the three-month and nine-month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 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 2022 2021 In-scope of Topic 606: Service charges on deposit accounts $ 107 $ 99 ATM fees 127 125 Overdraft fees 305 275 Safe deposit box rental 24 24 Loan related service fees 104 314 Debit card fees 624 584 Fiduciary activities 219 209 Commissions on mutual funds and annuities 31 34 Gains on sales of other real estate owned — 31 Other income 345 160 Noninterest Income ( in-scope of Topic 606 ) 1,886 1,855 Out-of-scope of Topic 606: Net realized gains on sales of securities — 35 Loan servicing fees 24 30 Gains on sales of loans 1 39 Earnings on and proceeds from bank-owned life insurance 267 200 Noninterest Income ( out-of-scope of Topic 606 ) 292 304 Total Noninterest Income $ 2,178 $ 2,159 10 Nine months ended September 30, (dollars in thousands) Noninterest Income 2022 2021 In-scope of Topic 606: Service charges on deposit accounts $ 312 $ 294 ATM fees 340 333 Overdraft fees 909 733 Safe deposit box rental 70 77 Loan related service fees 626 963 Debit card fees 1,879 1,661 Fiduciary activities 634 550 Commissions on mutual funds and annuities 98 98 Gains on sales of other real estate owned 427 31 Other income 1,760 486 Noninterest Income ( in-scope of Topic 606 ) 7,055 5,226 Out-of-scope of Topic 606: Net realized gains on sales of securities — 56 Loan servicing fees 58 109 Gains on sales of loans 1 177 Earnings on and proceeds from bank-owned life insurance 892 767 Noninterest Income ( out-of-scope of Topic 606 ) 951 1,109 Total Noninterest Income $ 8,006 $ 6,335 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, 2022 2021 2022 2021 Weighted average shares outstanding 8,158 8,223 8,187 8,223 Less: Unvested restricted shares ( 40 ) ( 35 ) ( 38 ) ( 36 ) Basic EPS weighted average shares outstanding 8,118 8,188 8,149 8,187 Basic EPS weighted average shares outstanding 8,118 8,188 8,149 8,187 Add: Dilutive effect of stock options and restricted shares 16 19 17 19 Diluted EPS weighted average shares outstanding 8,134 8,207 8,166 8,206 For the three and nine month periods ended September 30, 2022, there were 108,100 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 $ 26.58 per share as of September 30, 2022. 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 Norwood common stock of $ 25.50 per share as of September 30, 2021. 11 4. Stock-Based Compensation During the nine-month period ended September 30, 2022, no stock options were granted. As of September 30, 2022, there was $ 67,000 of total unrecognized compensation cost related to non-vested options granted in 2021 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2022. Compensation costs related to stock options amounted to $ 201,000 and $ 160,000 during the nine-month periods ended September 30, 2022 and 2021, respectively. A summary of the Company’s stock option activity for the nine-month period ended September 30, 2022 is as follows: Weighted Average Exercise Weighted Average Aggregate Price Remaining Intrinsic Value Options Per Share Contractual Term ($000) Outstanding at January 1, 2022 226,075 $ 26.37 6.4 Yrs. $ 520 Granted — - - Exercised ( 21,600 ) 18.49 1.0 Forfeited — - - Outstanding at September 30, 2022 204,475 $ 27.20 6.1 Yrs. $ 380 Exercisable at September 30, 2022 162,975 $ 27.56 5.3 Yrs. $ 380 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 $ 26.58 per share as of September 30, 2022 and $ 25.99 per share as of December 31, 2021. A summary of the Company’s restricted stock activity for the nine-month periods ended September 30, 2022 and 2021 is as follows: 2022 2021 Weighted-Average Weighted-Average Number of Grant Date Number of Grant Date Restricted Stock Fair Value Restricted Stock Fair Value Non-vested, January 1, 32,030 $ 29.76 39,135 $ 30.72 Granted 7,500 25.71 — — Vested — — — — Forfeited — — ( 3,900 ) 30.86 Non-vested, September 30, 39,530 $ 28.99 35,235 $ 30.71 The expected future compensation expense relating to the 39,530 shares of non-vested restricted stock outstanding as of September 30, 2022 is $ 875,000 . This cost will be recognized over the remaining vesting period of 4.25 years. Compensation costs related to restricted stock amounted to $ 272,000 and $ 251,000 during the nine-month periods ended September 30, 2022 and 2021, respectively. 12 5. Accumulated Other Comprehensive Income (Loss) The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three and nine months ended September 30, 2022 and 2021: Unrealized gains (losses) on available for sale securities (a) Balance as of December 31, 2021 $ ( 256 ) Other comprehensive loss before reclassification ( 60,309 ) Amount reclassified from accumulated other comprehensive loss — Total other comprehensive loss ( 60,309 ) Balance as of September 30, 2022 $ ( 60,565 ) 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 June 30, 2022 $ ( 40,230 ) Other comprehensive loss before reclassification ( 20,335 ) Amount reclassified from accumulated other comprehensive loss - Total other comprehensive loss ( 20,335 ) Balance as of September 30, 2022 $ ( 60,565 ) Unrealized gains (losses) on available for sale securities (a) Balance as of June 30, 2021 $ 3,561 Other comprehensive income before reclassification ( 2,095 ) Amount reclassified from accumulated other comprehensive loss ( 28 ) Total other comprehensive income ( 2,123 ) Balance as of September 30, 2021 $ 1,438 (a) All amounts are net of tax. Amounts in parentheses indicate debits. 13 The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three and nine months ended September 30, 2022 and 2021: 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 2022 2021 of Income Unrealized gains on available for sale securities $ — $ 35 Net realized gains on sales of securities Tax effect — ( 7 ) Income tax expense $ — $ 28 Nine months ended September 30, 2022 2021 Unrealized gains on available for sale securities $ — $ 56 Net realized gains on sales of securities Tax effect — ( 12 ) Income tax expense $ — $ 44 (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, 2022 2021 Commitments to grant loans $ 101,466 $ 91,186 Unfunded commitments under lines of credit 145,636 136,168 Standby letters of credit 12,934 8,335 $ 260,036 $ 235,689 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 liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments 14 required under the corresponding guarantees. The current amount of the liability as of September 30, 2022 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, 2022 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) Available for Sale: U.S. Treasury securities $ 45,026 $ - $ ( 3,382 ) $ 41,644 U.S. Government agencies 21,236 - ( 3,059 ) 18,177 States and political subdivisions 163,416 18 ( 32,962 ) 130,472 Mortgage-backed securities- government sponsored entities 275,788 — ( 38,794 ) 236,994 Total debt securities $ 505,466 $ 18 $ ( 78,197 ) $ 427,287 December 31, 2021 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) Available for Sale: U.S. Government agencies $ 19,550 $ 6 $ ( 205 ) $ 19,351 States and political subdivisions 16,251 24 ( 264 ) 16,011 Corporate obligations 145,107 2,155 ( 1,395 ) 145,867 Mortgage-backed securities-government sponsored entities 227,712 766 ( 2,925 ) 225,553 Total debt securities $ 408,620 $ 2,951 $ ( 4,789 ) $ 406,782 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, 2022 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 $ 30,007 $ ( 1,450 ) $ 11,637 $ ( 1,932 ) $ 41,644 $ ( 3,382 ) U.S. Government agencies 12,463 ( 1,722 ) 5,714 ( 1,337 ) 18,177 ( 3,059 ) States and political subdivisions 93,501 ( 21,935 ) 32,126 ( 11,027 ) 125,627 ( 32,962 ) Mortgage-backed securities-government sponsored entities 155,314 ( 20,224 ) 81,680 ( 18,570 ) 236,994 ( 38,794 ) $ 291,285 $ ( 45,331 ) $ 131,157 $ ( 32,866 ) $ 422,442 $ ( 78,197 ) December 31, 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 $ 18,361 $ ( 205 ) $ - $ - $ 18,361 $ ( 205 ) U.S. Government agencies 7,912 ( 109 ) 3,843 ( 155 ) 11,755 ( 264 ) States and political subdivisions 74,658 ( 1,395 ) - - 74,658 ( 1,395 ) Mortgage-backed securities-government sponsored entities 170,647 ( 2,856 ) 2,919 ( 69 ) 173,566 ( 2,925 ) $ 271,578 $ ( 4,565 ) $ 6,762 $ ( 224 ) $ 278,340 $ ( 4,789 ) 15 At September 30, 2022, the Company had 270 debt securities in an unrealized loss position in the less than twelve months category and 86 debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2022. 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, 2022 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties. Available for Sale Amortized Cost Fair Value (In Thousands) Due in one year or less $ 4,814 $ 4,802 Due after one year through five years 43,088 41,170 Due after five years through ten years 57,805 47,887 Due after ten years 123,971 96,434 229,678 190,293 Mortgage-backed securities-government sponsored entities 275,788 236,994 $ 505,466 $ 427,287 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, 2022 2021 2022 2021 Gross realized gains $ — $ 35 $ — $ 56 Gross realized losses — — — — Net realized gain $ — $ 35 $ — $ 56 Proceeds from sales of securities $ — $ 2,714 $ — $ 3,841 Securities with a carrying value of $ 365,210,000 and $ 339,769,000 at September 30, 2022 and December 31, 2021, 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, 2022 December 31, 2021 Real Estate Loans: Residential $ 295,125 20.6 % $ 273,040 20.1 % Commercial 644,607 45.0 628,724 46.4 Agricultural 69,356 4.8 61,925 4.6 Construction 26,637 1.9 21,990 1.6 Commercial loans 184,729 12.9 186,031 13.7 Other agricultural loans 35,733 2.5 37,930 2.8 Consumer loans to individuals 176,680 12.3 146,400 10.8 Total loans 1,432,867 100.0 % 1,356,040 100.0 % Deferred fees, net ( 579 ) ( 1,109 ) Total loans receivable 1,432,288 1,354,931 Allowance for loan losses ( 16,931 ) ( 16,442 ) Net loans receivable $ 1,415,357 $ 1,338,489 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 16 conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of September 30, 2022 and December 31, 2021, the Company had outstanding principal balances of $ 755,000 and $ 15.2 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. 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 $ 5.1 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. As of September 30, 2022, the carrying value of these unamortized loan fees was $ 20,000 . The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): September 30, 2022 December 31, 2021 Outstanding Balance $ 9,272 $ 12,862 Carrying Amount $ 6,614 $ 8,304 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, 2022 and 2021, were as follows (in thousands): 2022 2021 Balance at beginning of period $ 1,884 $ 1,365 Additions — — Accretion ( 558 ) ( 523 ) Reclassification and other 523 993 Balance at end of period $ 1,849 $ 1,835 Loans acquired with credit deterioration of $ 15,410,000 and accounted for in accordance with ASC 310-30 were individually evaluated to estimate credit losses and a net recovery amount for each loan. The net cash flows for each loan were then discounted to present value using a risk-adjusted market rate. The table below presents the components of the purchase accounting adjustments: (In Thousands) July 7, 2020 Contractually required principal and interest $ 15,410 Non-accretable discount ( 5,213 ) Expected cash flows 10,197 Accretable discount ( 1,724 ) Estimated fair value $ 8,473 The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. 17 Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring. Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, foreclosed real estate owned totaled $ 346,000 and $ 1,742,000 , respectively. During the nine months ended September 30, 2022, there were no additions to the foreclosed real estate category. The Co mpany disposed of a parcel of one property that was previously transferred to foreclosed real estate owned with a carrying value of $ 364,000 , and disposed of another property with a carrying value of $ 1,032,000 through the sale of the property. As of September 30, 2022, the Company has initiated formal foreclosure proceedings on four properties classified as consumer residential mortgages with an aggregate carrying value of $ 160,000 . 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, 2022 (In thousands) Individually evaluated for impairment $ — $ — $ — $ — $ 12 $ — $ — $ 12 Loans acquired with deteriorated credit quality 571 2,284 2,336 — — 1,423 — 6,614 Collectively evaluated for impairment 294,554 642,323 67,020 26,637 184,717 34,310 176,680 1,426,241 Total Loans $ 295,125 $ 644,607 $ 69,356 $ 26,637 $ 184,729 $ 35,733 $ 176,680 $ 1,432,867 Real Estate Loans Commercial Other Consumer Residential Commercial Agricultural Construction Loans Agricultural Loans Total (In thousands) December 31, 2021 Individually evaluated for impairment $ - $ 1,658 $ — $ - $ 16 $ — $ - $ 1,674 Loans acquired with deteriorated credit quality 784 3,285 1,918 - 198 2,119 - 8,304 Collectively evaluated for impairment 272,256 623,781 60,007 21,990 185,817 35,811 146,400 1,346,062 Total Loans $ 273,040 $ 628,724 $ 61,925 $ 21,990 $ 186,031 $ 37,930 $ 146,400 $ 1,356,040 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, 2022 (in thousands) With no related allowance recorded: Commercial Loans $ 12 $ 12 — Subtotal $ 12 $ 12 $ — Total: Commercial Loans $ 12 $ 12 — Total Impaired Loans $ 12 $ 12 $ — 18 Unpaid Recorded Principal Associated Investment Balance Allowance December 31, 2021 (in thousands) With no related allowance recorded: Real Estate Loans: Commercial $ 141 $ 141 $ — Commercial Loans 16 16 — Subtotal 157 157 — With an allowance recorded: Real Estate Loans Commercial 1,517 1,517 272 Subtotal 1,517 1,517 272 Total: Real Estate Loans: Commercial 1,658 1,658 272 Commercial Loans 16 16 — Total Impaired Loans $ 1,674 $ 1,674 $ 272 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, 2022 and 2021, respectively (in thousands): Average Recorded Interest Income Investment Recognized 2022 2021 2022 2021 Real Estate Loans: Commercial $ — $ 1,405 $ 18 $ 55 Agriculture — 858 — — Commercial Loans 13 19 — — Other agricultural loans — 125 — — Total $ 13 $ 2,407 $ 18 $ 55 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, 2022 and 2021, respectively (in thousands): Average Recorded Interest Income Investment Recognized 2022 2021 2022 2021 Real Estate Loans: Commercial $ 825 $ 1,560 $ 55 $ 56 Agriculture — 858 — — Commercial Loans 14 19 3 — Other agricultural loans — 114 — — Total $ 839 $ 2,551 $ 58 $ 56 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, 2022 and December 31, 2021, the Company had no troubled debt restructured loans to report. For the nine-month period ended September 30, 2022 and 2021, there were no new loans identified as troubled debt restructurings. 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 19 distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $ 1,500,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance. The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of September 30, 2022 and December 31, 2021 (in thousands): Special Doubtful Pass Mention Substandard or Loss Total September 30, 2022 Commercial real estate loans $ 639,609 $ 1,284 $ 3,714 $ — $ 644,607 Real estate - agricultural 66,813 2,543 — — 69,356 Commercial loans 184,474 187 68 — 184,729 Other agricultural loans 34,433 708 592 — 35,733 Total $ 925,329 $ 4,722 $ 4,374 $ — $ 934,425 Special Doubtful Pass Mention Substandard or Loss Total December 31, 2021 Commercial real estate loans $ 618,541 $ 5,146 $ 4,765 $ 272 $ 628,724 Real estate - agricultural 60,193 — 1,732 — 61,925 Commercial loans 185,729 199 103 — 186,031 Other agricultural loans 35,573 210 2,147 — 37,930 Total $ 900,036 $ 5,555 $ 8,747 $ 272 $ 914,610 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, 2022 and December 31, 2021 (in thousands): Performing Nonperforming Total September 30, 2022 Residential real estate loans $ 294,684 $ 441 $ 295,125 Construction 26,637 — 26,637 Consumer loans to individuals 176,515 165 176,680 Total $ 497,836 $ 606 $ 498,442 Performing Nonperforming Total December 31, 2021 Residential real estate loans $ 272,571 $ 469 $ 273,040 Construction 21,990 — 21,990 Consumer loans to individuals 146,345 55 146,400 Total $ 440,906 $ 524 $ 441,430 20 Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2022 and December 31, 2021 (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, 2022 Real Estate loans Residential $ 293,400 $ 649 $ 64 $ - $ 441 $ 1,154 $ 571 $ 295,125 Commercial 641,958 365 - - - 365 2,284 644,607 Agricultural 67,020 - - - - - 2,336 69,356 Construction 26,611 - 26 - - 26 - 26,637 Commercial loans 184,716 1 - - 12 13 - 184,729 Other agricultural loans 34,310 - - - - 1,423 35,733 Consumer loans 175,722 663 130 - 165 958 - 176,680 Total $ 1,423,737 $ 1,678 $ 220 $ - $ 618 $ 2,516 $ 6,614 $ 1,432,867 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, 2021 Real Estate loans Residential $ 271,622 $ 155 $ 10 $ - $ 469 $ 634 - $ 784 $ 273,040 Commercial 625,336 - - - 103 103 - 3,285 628,724 Agricultural 59,982 25 - - 25 1,918 61,925 Construction 21,990 - - - - - - - 21,990 Commercial loans 185,801 3 13 91 16 32 - 198 186,031 Other agricultural loans 35,811 - - - - 2,119 37,930 Consumer loans 145,986 248 111 - 55 414 - - 146,400 Total $ 1,346,528 $ 431 $ 134 $ 91 $ 643 $ 1,208 - $ 8,304 $ 1,356,040 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, 2022, the allocation of the allowance includes an allocation for loans secured by farmland and other agricultural loans. As of September 30 2022, the Company has also continued to incorporate qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries, although the factor has been reduced from the December 31, 2021 level. The qualitative factor related to the deferral of payments due to COVID-19 has been eliminated. At September 30, 2022, the allowance for loan losses includes $ 583,000 of COVID related factors, compared to $ 2.3 million at December 31, 2021. The 2022 allowance for loan losses excludes 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. 21 The following table presents the allowance for loan losses by the classes of the loan portfolio: (In thousands) Residential Real Estate Commercial Real Estate Agricultural Construction Commercial Other Agricultural Consumer Total Beginning balance, December 31, 2021 $ 2,175 $ 10,878 $ - $ 133 $ 1,490 $ - $ 1,766 $ 16,442 Charge Offs ( 120 ) ( 1 ) - - ( 16 ) - ( 249 ) ( 386 ) Recoveries 122 80 - - 36 - 37 275 Provision for loan losses 736 ( 2,354 ) 220 186 910 123 779 600 Ending balance, September 30, 2022 $ 2,913 $ 8,603 $ 220 $ 319 $ 2,420 $ 123 $ 2,333 $ 16,931 Ending balance individually evaluated ‎ for impairment $ - $ — $ - $ - $ — $ - $ - $ — Ending balance collectively evaluated ‎ for impairment $ 2,913 $ 8,603 $ 220 $ 319 $ 2,420 $ 123 $ 2,333 $ 16,931 (In thousands) Residential Real Estate Commercial Real Estate Farmland Construction Commercial Other Agricultural Consumer Total Beginning balance, June 30, 2022 $ 2,740 $ 9,155 $ 218 $ 242 $ 2,504 $ 112 $ 2,046 $ 17,017 Charge Offs - ( 1 ) - - ( 1 ) - ( 115 ) ( 117 ) Recoveries 4 - - - 13 - 14 31 Provision for loan losses 169 ( 551 ) 2 77 ( 96 ) 11 388 — Ending balance, September 30, 2022 $ 2,913 $ 8,603 $ 220 $ 319 $ 2,420 $ 123 $ 2,333 $ 16,931 (In thousands) Residential Real Estate Commercial Real Estate Agricultural Construction Commercial Other Agricultural 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 ‎ for impairment $ - $ 275 $ - $ - $ — $ - $ — $ 275 Ending balance collectively evaluated ‎ for impairment $ 2,443 $ 9,616 $ — $ 163 $ 1,605 $ — $ 2,001 $ 15,828 (In thousands) Residential Real Estate Commercial Real Estate Farmland Construction Commercial Other Agricultural 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 The Company’s primary business activity as of September 30, 2022 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. 22 As of September 30, 2022, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $ 152.4 million of loans outstanding, or 10.6 % of total loans outstanding, and residential rentals with loans outstanding of $ 121.4 million, or 8.5 % of loans outstanding. For the nine months ended September 30, 2022, 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, 2022 and 2021, amounted to $ 454,000 and $ 441,000 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, 2022. Operating Weighted-average remaining term 10.8 years Weighted-average discount rate 2.78 % The following table presents the undiscounted cash flows due related to operating leases as of September 30, 2022, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets: Undiscounted cash flows due (in thousands) Operating 2022 $ 147 2023 557 2024 544 2025 561 2026 504 2027 and thereafter 2,815 Total undiscounted cash flows 5,128 Discount on cash flows ( 820 ) Total lease liabilities $ 4,308 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. 23 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, 2021. 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, 2022 and December 31, 2021 are as follows: Fair Value Measurement Using Reporting Date Description Total Level 1 Level 2 Level 3 September 30, 2022 (In thousands) ASSETS Available for Sale: U.S. Treasury securities $ 41,644 $ - $ 41,644 $ - U.S. Government agencies 18,177 18,177 States and political subdivisions 130,472 - 130,472 - Mortgage-backed securities-government sponsored entities 236,994 - 236,994 - Interest rate derivatives 1,548 - 1,548 - LIABILITIES Interest rate derivatives 1,548 - 1,548 - Description Total Level 1 Level 2 Level 3 December 31, 2021 (In thousands) ASSETS Available for Sale: U.S. Treasury securities $ 19,351 $ $ 19,351 $ U.S. Government agencies 16,011 - 16,011 - States and political subdivisions 145,867 145,867 Corporate obligations - - - - Mortgage-backed securities-government sponsored entities 225,553 - 225,553 - Interest rate derivatives 235 - 235 - LIABILITIES Interest rate derivatives 235 - 235 - Securities: The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable. 24 Interest Rate Swaps: The fair value of interest rate swaps is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable. 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, 2022 and December 31, 2021 are as follows: Fair Value Measurement Using Reporting Date (In thousands) Description Total Level 1 Level 2 Level 3 September 30, 2022 Impaired Loans $ 12 $ - $ - $ 12 Foreclosed Real Estate Owned 346 - - 346 December 31, 2021 Impaired Loans $ 1,402 $ - $ - $ 1,402 Foreclosed Real Estate Owned 1,742 - - 1,742 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, 2022, the fair value investment in impaired loans was $ 12,000 which included one loan relationship that did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of September 30, 2022, the Company has not recognized charge-offs against the allowance for loan losses on any of these impaired loans. As of December 31, 2021, the fair value investment in impaired loans totaled $ 1,402,000 which included three loan relationships with a carrying value of $ 157,000 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, 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, 2021, the fair value investment in impaired loans included one loan relationships with a carrying value of $ 1,517,000 that required a valuation allowance of $ 272,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan. As of December 31, 2021, the Company has recognized charge-offs against the allowance for loan losses on this impaired loan in the amount of $ 0 over the life of the loan. 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. 25 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, 2022 Impaired loans $ 12 Appraisal of collateral(1) Appraisal adjustments(2) 10.00 % ( 10.00 %) Foreclosed real estate owned $ 346 Appraisal of collateral(1) Liquidation Expenses(2) 7.00 % ( 7.00 %) Quantitative Information about Level 3 Fair Value Measurements (dollars in thousands) Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average) December 31, 2021 Impaired loans $ 1,402 Appraisal of collateral(1) Appraisal adjustments(2) 0 %- 10.0 % ( 1.12 %) Foreclosed real estate owned $ 1,742 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, 2022 and December 31, 2021. 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. 26 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. 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, 2022 and December 31, 2021. (In thousands) Fair Value Measurements at September 30, 2022 Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents (1) $ 40,877 $ 40,877 $ 40,877 $ - $ - Loans receivable, net 1,415,357 1,375,138 - - 1,375,138 Mortgage servicing rights 229 500 - - 500 Regulatory stock (1) 2,220 2,220 2,220 - - Bank owned life insurance (1) 43,169 43,169 43,169 - - Accrued interest receivable (1) 6,303 6,303 6,303 - - Financial liabilities: Deposits 1,768,796 1,767,180 1,301,333 - 465,847 Short-term borrowings (1) 71,754 71,754 71,754 - - Other borrowings - - - - - Accrued interest payable (1) 1,425 1,425 1,425 - - Off-balance sheet financial instruments: Commitments to extend credit and ‎ outstanding letters of credit - - - - - Fair Value Measurements at December 31, 2021 Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents (1) $ 206,681 $ 206,681 $ 206,681 $ - $ - Loans receivable, net 1,338,489 1,389,870 - - 1,389,870 Mortgage servicing rights 289 500 - - 500 Regulatory stock (1) 3,927 3,927 3,927 - - Bank owned life insurance (1) 40,038 40,038 40,038 - - Accrued interest receivable (1) 5,889 5,889 5,889 - - Financial liabilities: Deposits 1,756,793 1,759,722 1,228,091 - 531,631 Short-term borrowings (1) 60,822 60,822 60,822 - - Other borrowings 29,998 30,221 - - 30,221 Accrued interest payable (1) 1,203 1,203 1,203 - - Off-balance sheet financial instruments: Commitments to extend credit and ‎ outstanding letters of credit - - - - - (1) This financial instrument is carried at cost, which approximates the fair value of the instrument . 11 . 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. 27 At September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021 was $ 1,548,000 and $ 235,000 , respectively. Summary information regarding these derivatives is presented below (Amounts in thousands) Notional Amount Fair Value September 30, 2022 December 31, 2021 Interest Rate Paid Interest Rate Received September 30, 2022 December 31, 2021 Customer interest rate swap Maturing November, 2030 $ 6,604 $ 6,873 Term SOFR + Margin Fixed $ 940 $ 144 Maturing December, 2030 4,362 4,553 Term SOFR + Margin Fixed 608 91 Total $ 10,966 $ 11,426 $ 1,548 $ 235 Third party interest rate swap Maturing November, 2030 $ 6,604 $ 6,873 Fixed Term SOFR + Margin $ 940 $ 144 Maturing December, 2030 4,362 4,553 Fixed Term SOFR + Margin 608 91 Total $ 10,966 $ 11,426 $ 1,548 $ 235 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, 2022 Interest rate derivatives Other assets $ 1,548 Other liabilities $ 1,548 December 31, 2021 Interest rate derivatives Other assets 235 Other liabilities 235 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 28 of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment . To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives, and Hedging (Topic 815); and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-04 makes clarifying amendments to certain financial instrument standards. For entities that have not yet adopted ASU 2016-13, the effective dates for the amendments related to ASU 2016-13 are the same as the effective dates in ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2017-12 as of April 25, 2019, the effective dates for the amendments to Topic 815 are the same as the effective dates in ASU 2017-12. For entities that have adopted ASU 2017-12 as of April 25, 2019, the effective date is as of the beginning of the first annual period beginning after April 25, 2019. The amendments related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326) , which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted the credit losses standard, the ASU is effective when they implement the credit losses standard. For entities that already have adopted the credit losses standard, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses , to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these 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 29 are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations. In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020 , to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements. In 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 March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures . The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.