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) March 31, December 31, 2023 2022 ASSETS Cash and due from banks $ 25,701 $ 28,847 Interest-bearing deposits with banks 3,314 3,019 Cash and cash equivalents 29,015 31,866 Securities available for sale, at fair value (net of allowance for credit losses of $ 0 ) 418,245 418,927 Loans receivable, net of allowance for credit losses of $ 19,445 and $ 16,999 ) 1,516,198 1,456,946 Regulatory stock, at cost 5,963 5,418 Bank premises and equipment, net 17,660 17,924 Bank owned life insurance 45,577 43,364 Accrued interest receivable 6,633 6,917 Foreclosed real estate owned 346 346 Deferred tax assets, net 22,164 23,549 Goodwill 29,266 29,266 Other intangibles 283 306 Other assets 13,013 12,241 TOTAL ASSETS $ 2,104,363 $ 2,047,070 LIABILITIES Deposits: Non-interest bearing demand $ 419,615 $ 434,529 Interest-bearing 1,336,320 1,293,198 Total deposits 1,755,935 1,727,727 Short-term borrowings 108,555 93,215 Other borrowings 40,189 40,000 Accrued interest payable 4,703 2,653 Other liabilities 18,566 16,390 TOTAL LIABILITIES 1,927,948 1,879,985 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: 2023: 8,291,401 shares, 2022: 8,291,401 shares 829 829 Surplus 97,063 96,897 Retained earnings 131,416 130,020 Treasury stock at cost: 2023: 110,400 shares; 2022: 124,650 shares ( 2,930 ) ( 3,308 ) Accumulated other comprehensive loss ( 49,963 ) ( 57,353 ) TOTAL STOCKHOLDERS’ EQUITY 176,415 167,085 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,104,363 $ 2,047,070 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 March 31, 2023 2022 INTEREST INCOME Loans receivable, including fees $ 19,158 $ 15,375 Securities 2,505 1,894 Other 48 78 Total interest income 21,711 17,347 INTEREST EXPENSE Deposits 4,362 1,059 Short-term borrowings 779 48 Other borrowings 477 139 Total interest expense 5,618 1,246 NET INTEREST INCOME 16,093 16,101 PROVISION FOR CREDIT LOSS EXPENSE 300 300 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 15,793 15,801 OTHER INCOME Service charges and fees 1,313 1,470 Income from fiduciary activities 212 202 Net realized gains on sales of securities 2 — Gain on sales of foreclosed real estate owned — 427 Earnings and proceeds on bank owned life insurance 213 176 Other 172 1,063 Total other income 1,912 3,338 OTHER EXPENSES Salaries and employee benefits 5,969 5,431 Occupancy, furniture & equipment, net 1,262 1,307 Data processing and related operations 768 628 Taxes, other than income 161 294 Professional fees 285 575 Federal Deposit Insurance Corporation insurance 200 183 Foreclosed real estate 29 53 Amortization of intangibles 23 27 Other 1,739 1,659 Total other expenses 10,436 10,157 INCOME BEFORE INCOME TAXES 7,269 8,982 INCOME TAX EXPENSE 1,487 1,854 NET INCOME $ 5,782 $ 7,128 BASIC EARNINGS PER SHARE $ 0.71 $ 0.87 DILUTED EARNINGS PER SHARE $ 0.71 $ 0.87 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 March 31, 2023 2022 Net income $ 5,782 $ 7,128 Other comprehensive income (loss) Investment securities available for sale: Unrealized holding gains (losses) 9,355 ( 29,708 ) Tax effect ( 1,963 ) 6,239 Reclassification of investment securities gains recognized in net income ( 2 ) — Tax effect — — Other comprehensive income (loss) 7,390 ( 23,469 ) Comprehensive Income (Loss) $ 13,172 $ ( 16,341 ) See accompanying notes to the unaudited consolidated financial statements. ‎ 5 NORWOOD FINANCIAL CORP Consolidated Statements of Changes in Stockholders’ Equity (unaudited) Three Months Ended March 31, 2023 and 2022 ( 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, 2022 8,291,401 $ 829 $ 96,897 $ 130,020 124,650 $ ( 3,308 ) $ ( 57,353 ) $ 167,085 Net Income - - - 5,782 - - - 5,782 Other comprehensive income - - - - - - 7,390 7,390 Cash dividends declared ($ 0.29 per share) - - - ( 2,375 ) - - - ( 2,375 ) Cumulative effect of adoption of ASU 2016-13 - - - ( 2,011 ) - - - ( 2,011 ) Compensation expense related to restricted stock - - 114 - - 114 Stock options exercised - - ( 44 ) - ( 14,250 ) 378 - 334 Compensation expense related to stock options - - 96 - - - - 96 Balance, March 31, 2023 8,291,401 $ 829 $ 97,063 $ 131,416 110,400 $ ( 2,930 ) $ ( 49,963 ) $ 176,415 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 - - - 7,128 - - - 7,128 Other comprehensive loss - - - - - - ( 23,469 ) ( 23,469 ) Cash dividends declared ($ 0.28 per share) - - - ( 2,298 ) - - - ( 2,298 ) Acquisition of treasury stock - - - - 511 ( 13 ) - ( 13 ) Compensation expense related to restricted stock - - 82 - - - - 82 Stock options exercised 1,650 - 27 - ( 750 ) 20 - 47 Compensation expense related to stock options - - 67 - - - - 67 Balance, March 31, 2022 8,268,401 $ 827 $ 96,619 $ 114,845 65,089 $ ( 1,760 ) $ ( 23,725 ) $ 186,806 See accompanying notes to the unaudited consolidated financial statements. ‎ 6 NORWOOD FINANCIAL CORP Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) Three Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 5,782 $ 7,128 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 300 300 Depreciation 355 372 Amortization of intangible assets 23 27 Deferred income taxes ( 579 ) 258 Net amortization of securities premiums and discounts 233 395 Net realized gain on sales of securities ( 2 ) — Earnings and proceeds on life insurance policies ( 213 ) ( 176 ) Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net — ( 427 ) Net amortization of loan fees 129 ( 280 ) Compensation expense related to stock options 96 67 Compensation expense related to restricted stock 114 82 Decrease in accrued interest receivable 284 13 Increase (decrease) in accrued interest payable 2,050 ( 43 ) Other, net 1,533 1,671 Net cash provided by operating activities 10,105 9,387 CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Proceeds from sales 1,982 — Proceeds from maturities and principal reductions on mortgage-backed securities 7,824 13,254 Purchases — ( 71,498 ) Purchase of regulatory stock ( 3,685 ) ( 106 ) Redemption of regulatory stock 3,140 610 Net increase in loans ( 61,828 ) ( 16,142 ) Purchase of bank-owned life insurance ( 2,000 ) — Purchase of premises and equipment ( 91 ) ( 105 ) Proceeds from sales of foreclosed real estate owned — 1,579 Net cash used in investing activities ( 54,658 ) ( 72,408 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 28,208 24,984 Net increase in short-term borrowings 15,340 2,800 Repayments of other borrowings ( 9,811 ) ( 3,154 ) Proceeds from other borrowings 10,000 — Stock options exercised 334 47 Purchase of treasury stock — ( 13 ) Cash dividends paid ( 2,369 ) ( 2,298 ) Net cash provided by financing activities 41,702 22,366 Decrease in cash and cash equivalents ( 2,851 ) ( 40,655 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,866 206,681 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,015 $ 166,026 ‎ 7 NORWOOD FINANCIAL CORP Consolidated Statements of Cash Flows (Unaudited) (continued) (dollars in thousands) Three Months Ended March 31, 2023 2022 Supplemental Disclosures of Cash Flow Information Cash payments for: Interest on deposits and borrowings $ 3,568 $ 1,289 Income taxes paid, net of refunds $ 189 $ 106 Supplemental Schedule of Noncash Investing Activities: Transfers of loans to foreclosed real estate and repossession of other assets $ 454 $ 67 Dividends payable $ 2,372 $ 2,298 See accompanying notes to the unaudited consolidated financial statements. ‎ 8 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-months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any other future interim period. Accounting Pronouncements Adopted in 2023 In June 2016, the FASB issued ASU No. 2016-13, " Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent related updates. This ASU replaces the incurred loss methodology for recognizing credit losses and requires the Company to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASC 326 requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell. This guidance became effective on January 1, 2023 for the Bank. The results reported for periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable accounting standards. The Bank adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans, available-for-sale debt securities and unfunded commitments. On January 1, 2023, the Bank recorded a cumulative effect decrease to retained earnings of $ 1,751,000 related to loans, $ 260,000 related to unfunded commitments, and $ 0 related to available-for-sale securities. The Bank adopted the provisions of ASC 326 related to financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30 using the prospective transition approach. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $ 250,000 of the allowance for credit losses (ACL). The Bank adopted the provisions of ASC 326 related to presenting other-than-temporary impairment on available-for-sale debt securities prior to January 1, 2023 using the prospective transition approach, though no such charges had been recorded on the securities held by the Bank as of the date of adoption. 9 The impact of the change from the incurred loss model to the current expected credit loss model is detailed below (in thousands). January 1, 2023 Pre-adoption Adoption Impact As Reported Assets ACL on debt securities available for sale $ - $ - $ - ACL on loans Residential real estate 2,833 ( 1,545 ) 1,288 Commercial real estate 8,293 5,527 13,820 Agricultural 259 ( 200 ) 59 Construction 409 388 797 Commercial loans 2,445 ( 1,156 ) 1,289 Other agricultural loans 124 3 127 Consumer 2,636 ( 551 ) 2,085 Liabilities ACL for unfunded commitments - 329 329 $ 16,999 $ 2,795 $ 19,794 Purchased Credit Deteriorated (“PCD”) Loans The Bank has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. A loan is considered a PCD loan if, at acquisition, it is probable that the Company will be unable to collect all contractually required payments receivable. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through credit loss expense. Allowance for Credit Losses - Loans The allowance for credit losses is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company’s loan portfolio is segmented by loan types that have similar risk characteristics and behave similarly during economic cycles. 10 Historical credit loss experience is the basis for the estimation of expected credit losses. We apply historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on a preferred group of macroeconomic indicators used to create projections of economic conditions, obtained from the St. Louis Federal Reserve economic database. The Company selected nine metrics which was correlated with the bank and its peer group’s historical loss patterns. The adjustments are then weighted for relevance before applying to each pool. Future macroeconomic forecast adjustments are then obtained using and eight-quarter moving average for each metric for the reasonable and supportable period. Each quarter, management reviews the recommended adjustment factors and applies any additional adjustments based on local and current conditions The Bank has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income. The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore, should be individually assessed. We evaluate all commercial loans that meet the following criteria: (1) when it is determined that foreclosure is probable, (2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, (3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Allowance for Credit Losses – Available for Sale Securities The Bank measures expected credit losses on available-for-sale debt securities when the Bank does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Bank considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Economic forecast data is utilized to calculate the present value of expected cash flows. The Bank obtains its forecast data through a subscription to a widely recognized and relied upon company who publishes various forecast scenarios. Management evaluates the various scenarios to determine a reasonable and supportable scenario, and utilizes a single scenario in the model. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. The allowance for credit losses on available-for-sale debt securities is included within Investment securities available-for-sale on the consolidated balance sheet. Changes in the allowance for credit losses are recorded within Provision for credit losses on the consolidated statement of income. Losses are charged against the allowance when the Bank believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met. 11 Accrued interest receivable on available-for-sale debt securities totaled $ 1,762,000 at March 31, 2023 and is included within accrued interest receivable on the consolidated balance sheet. This amount is excluded from the estimate of expected credit losses. Available-for-sale debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed . 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 months ended March 31: Three months ended March 31, (dollars in thousands) Noninterest Income 2023 2022 In-scope of Topic 606: Service charges on deposit accounts $ 103 $ 99 ATM fees 106 105 Overdraft fees 320 288 Safe deposit box rental 26 22 Loan related service fees 153 269 Debit card fees 559 628 Fiduciary activities 212 202 Commissions on mutual funds and annuities 26 41 Gains on sales of other real estate owned — 427 Other income 172 1,063 Noninterest Income ( in-scope of Topic 606 ) 1,677 3,144 Out-of-scope of Topic 606: Net realized gains on sales of securities 2 — Loan servicing fees 20 18 Earnings on and proceeds from bank-owned life insurance 213 176 Noninterest Income ( out-of-scope of Topic 606 ) 235 194 Total Noninterest Income $ 1,912 $ 3,338 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 March 31, 2023 2022 12 Weighted average shares outstanding 8,176 8,203 Less: Unvested restricted shares ( 45 ) ( 32 ) Basic EPS weighted average shares outstanding 8,131 8,171 Basic EPS weighted average shares outstanding 8,131 8,171 Add: Dilutive effect of stock options and restricted shares 17 25 Diluted EPS weighted average shares outstanding 8,148 8,196 For the three month period ended March 31, 2023, there were 110,350 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 $ 29.42 per share as of March 31, 2023. For the three month period ended March 31, 2022, there were 74,350 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 $ 28.59 per share as of March 31, 2022. 4. Stock-Based Compensation During the three-month period ended March 31, 2023, 2,500 stock options were granted. As of March 31, 2023, there was $ 287,000 of total unrecognized compensation cost related to non-vested options granted in 2022 and 2023 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2023. Compensation costs related to stock options amounted to $ 96,000 and $ 67,000 during the three-month periods ended March 31, 2023 and 2022, respectively. A summary of the Company’s stock option activity for the three-month period ended March 31, 2023 is as follows: Weighted Average Exercise Weighted Average Aggregate Price Remaining Intrinsic Value Options Per Share Contractual Term ($000) Outstanding at January 1, 2023 218,975 $ 28.70 6.8 Yrs. $ 1,100 Granted 2,500 29.60 10.0 Exercised ( 14,250 ) 23.39 5.7 Forfeited — - - Outstanding at March 31, 2023 207,225 $ 29.07 6.7 Yrs. $ 528 Exercisable at March 31, 2023 166,725 $ 28.04 5.9 Yrs. $ 528 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 $ 29.42 per share as of March 31, 2023 and $ 33.44 per share as of December 31, 2022. A summary of the Company’s restricted stock activity for the three-month periods ended March 31, 2023 and 2022 is as follows: 2023 2022 Weighted-Average Weighted-Average Number of Grant Date Number of Grant Date Restricted Stock Fair Value Restricted Stock Fair Value Non-vested, January 1, 44,460 $ 30.12 32,030 $ 26.76 Granted — — — — Vested — — — — Forfeited — — — — Non-vested, March 31, 44,460 $ 30.12 32,030 $ 26.76 The expected future compensation expense relating to the 44,460 shares of non-vested restricted stock outstanding as of March 31, 2023 is $ 1,180,000 . This cost will be recognized over the remaining vesting period of 3.5 years. Compensation costs 13 related to restricted stock amounted to $ 114,000 and $ 82,000 during the three-month periods ended March 31, 2023 and 2022, respectively. 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 months ended March 31, 2023 and 2022: Unrealized gains (losses) on available for sale securities (a) Balance as of December 31, 2022 $ ( 57,353 ) Other comprehensive loss before reclassification 7,392 Amount reclassified from accumulated other comprehensive loss ( 2 ) Total other comprehensive loss 7,390 Balance as of March 31, 2023 $ ( 49,963 ) Unrealized gains (losses) on available for sale securities (a) Balance as of December 31, 2021 $ ( 256 ) Other comprehensive loss before reclassification ( 23,469 ) Amount reclassified from accumulated other comprehensive income - Total other comprehensive loss ( 23,469 ) Balance as of March 31, 2022 $ ( 23,725 ) (a) All amounts are net of tax. Amounts in parentheses indicate debits. The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three months ended March 31, 2023 and 2022: Amount Reclassified From Accumulated Other Comprehensive Income (Loss) (a) Affected Line Item in Three months ended Consolidated March 31, Statements Details about other comprehensive income 2023 2022 of Income Unrealized gains on available for sale securities $ 2 $ — Net realized gains on sales of securities Tax effect — — Income tax expense $ 2 $ — 14 (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) March 31, 2023 2022 Commitments to grant loans $ 92,602 $ 82,444 Unfunded commitments under lines of credit 166,507 136,710 Standby letters of credit 15,538 5,606 $ 274,647 $ 224,760 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 required under the corresponding guarantees. The current amount of the liability as of March 31, 2023 for guarantees under standby letters of credit issued is not material. 7 . Securities The amortized cost, gross unrealized gains and losses, approximate fair value, and allowance for credit losses of securities available for sale were as follows: March 31, 2023 Gross Gross Allowance Amortized Unrealized Unrealized for Credit Fair Cost Gains Losses Losses Value (In Thousands) Available for Sale: U.S. Treasury securities $ 45,106 $ - $ ( 2,674 ) $ - $ 42,432 U.S. Government agencies 21,296 - ( 2,656 ) - 18,640 States and political subdivisions 153,899 — ( 24,450 ) - 129,449 Mortgage-backed securities- - government sponsored entities 261,920 — ( 34,196 ) - 227,724 Total debt securities $ 482,221 $ — $ ( 63,976 ) $ - $ 418,245 15 December 31, 2022 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) Available for Sale: U.S. Treasury securities $ 45,066 $ - $ ( 3,212 ) $ 41,854 U.S. Government agencies 21,266 - ( 2,943 ) 18,323 States and political subdivisions 157,524 2 ( 29,674 ) 127,852 Mortgage-backed securities-government - sponsored entities 268,400 - ( 37,502 ) 230,898 Total debt securities $ 492,256 $ 2 $ ( 73,331 ) $ 418,927 The following tables summarize debt securities available for sale in an loss position for which an allowance for credit losses has not been recorded, aggregated by security type and length of time that individual securities have been in a continuous unrealized loss position (in thousands): March 31, 2023 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 $ 23,162 $ ( 449 ) $ 19,270 $ ( 2,225 ) $ 42,432 $ ( 2,674 ) U.S. Government agencies 4,805 ( 91 ) 13,835 ( 2,565 ) 18,640 ( 2,656 ) States and political subdivisions 16,673 ( 508 ) 110,786 ( 23,942 ) 127,459 ( 24,450 ) Mortgage-backed securities-government sponsored entities 31,520 ( 1,675 ) 196,204 ( 32,521 ) 227,724 ( 34,196 ) $ 76,160 $ ( 2,723 ) $ 340,095 $ ( 61,253 ) $ 416,255 $ ( 63,976 ) December 31, 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 $ 25,733 $ ( 849 ) $ 16,121 $ ( 2,363 ) $ 41,854 $ ( 3,212 ) U.S. Government agencies 8,321 ( 885 ) 10,002 ( 2,058 ) 18,323 ( 2,943 ) States and political subdivisions 66,680 ( 11,194 ) 57,367 ( 18,480 ) 124,047 ( 29,674 ) Mortgage-backed securities-government sponsored entities 102,361 ( 10,639 ) 128,537 ( 26,863 ) 230,898 ( 37,502 ) $ 203,095 $ ( 23,567 ) $ 212,027 $ ( 49,764 ) $ 415,122 $ ( 73,331 ) At March 31, 2023, the Company had 62 debt securities in an unrealized loss position in the less than twelve months category and 277 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. The Company concluded that the decline in the value of these securities was not indicative of a credit loss. The Company did not recognize any credit losses on these available for sale debt securities for the three months ended March 31, 2023, or other-than-temporary impairment charges for the three months ended March 31, 2022. 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. 16 The amortized cost and fair value of debt securities as of March 31, 2023 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 $ 8,861 $ 8,760 Due after one year through five years 44,287 41,964 Due after five years through ten years 53,101 44,528 Due after ten years 114,052 95,269 220,301 190,521 Mortgage-backed securities-government sponsored entities 261,920 227,724 $ 482,221 $ 418,245 Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands): Three Months Ended March 31, 2023 2022 Gross realized gains $ 4 $ — Gross realized losses ( 2 ) — Net realized gain $ 2 $ — Proceeds from sales of securities $ 1,982 $ — Securities with a carrying value of $ 373,184,000 and $ 378,472,000 at March 31, 2023 and December 31, 2022, 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): March 31, 2023 December 31, 2022 Real Estate Loans: Residential $ 301,711 19.7 % $ 298,813 20.3 % Commercial 668,386 43.5 651,544 44.2 Agricultural 68,381 4.5 68,915 4.7 Construction 32,391 2.1 32,469 2.2 Commercial loans 207,888 13.5 187,257 12.7 Other agricultural loans 34,033 2.2 35,277 2.4 Consumer loans to individuals 223,247 14.5 200,149 13.5 Total loans 1,536,037 100.0 % 1,474,424 100.0 % Deferred fees, net ( 394 ) ( 479 ) Total loans receivable 1,535,643 1,473,945 Allowance for credit losses ( 19,445 ) ( 16,999 ) Net loans receivable $ 1,516,198 $ 1,456,946 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 March 31, 2023 and December 31, 2022, foreclosed real estate owned totaled $ 346,000 and $ 346,000 , respectively. During the three months ended March 31, 2023, there were no additions or deletions to the foreclosed real estate category. As of March 31, 2023, the Company has initiated formal foreclosure proceedings on four properties classified as consumer residential mortgages with an aggregate carrying value of $ 244,000 . 17 The following table shows the amount of loans in each category that were individually and collectively evaluated for credit loss: Real Estate Loans Commercial Other Consumer Residential Commercial Agricultural Construction Loans Agricultural Loans Total March 31, 2023 (In thousands) Individually evaluated $ — $ 290 $ — $ — $ 65 $ — $ — $ 355 Collectively evaluated 301,711 668,096 68,381 32,391 207,823 34,033 223,247 1,535,682 Total Loans $ 301,711 $ 668,386 $ 68,381 $ 32,391 $ 207,888 $ 34,033 $ 223,247 $ 1,536,037 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 (In thousands) December 31, 2022 Individually evaluated for impairment $ - $ 402 $ — $ - $ 61 $ — $ - $ 463 Loans acquired with deteriorated credit quality 567 2,049 2,034 - 1,640 — - 6,290 Collectively evaluated for impairment 298,246 649,093 66,881 32,469 185,556 35,277 200,149 1,467,671 Total Loans $ 298,813 $ 651,544 $ 68,915 $ 32,469 $ 187,257 $ 35,277 $ 200,149 $ 1,474,424 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 December 31, 2022 (in thousands) With no related allowance recorded: Real Estate Loans: Commercial $ 402 $ 402 $ — Commercial Loans 11 11 — Subtotal 413 413 — With an allowance recorded: Real Estate Loans Commercial 50 50 50 Subtotal 50 50 50 Total: Real Estate Loans: Commercial 402 402 — Commercial Loans 61 61 50 Total Impaired Loans $ 463 $ 463 $ 50 18 The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month period ended March 31, 2022 (in thousands): Average Recorded Interest Income Investment Recognized 2022 2022 Real Estate Loans: Commercial $ 1,650 $ 17 Commercial Loans 16 — Total $ 1,666 $ 17 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. 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 March 31, 2023 and December 31, 2022 (in thousands): Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due and still accruing Non-accrual Total Past Due and Non-Accrual Total Loans March 31, 2023 Real Estate loans Residential $ 300,268 $ 978 $ 28 $ - $ 437 $ 1,443 $ 301,711 Commercial 665,992 453 - - 1,941 2,394 668,386 Agricultural 68,381 - - - - - 68,381 Construction 32,368 23 - - - 23 32,391 Commercial loans 207,466 221 86 - 115 422 207,888 Other agricultural loans 34,033 - - - - 34,033 Consumer loans 222,217 773 36 - 221 1,030 223,247 Total $ 1,530,725 $ 2,448 $ 150 $ - $ 2,714 $ 5,312 $ 1,536,037 19 Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due and still accruing Non-accrual Total Past Due and Non-Accrual Purchased Credit Impaired Loans Total Loans December 31, 2022 Real Estate loans Residential $ 297,350 $ 187 $ 223 $ - $ 486 $ 896 $ 567 $ 298,813 Commercial 648,688 405 - - 402 807 2,049 651,544 Agricultural 66,751 130 - - 130 2,034 68,915 Construction 32,469 - - - - - - 32,469 Commercial loans 185,485 71 - - 61 132 1,640 187,257 Other agricultural loans 35,277 - - - - - 35,277 Consumer loans 198,893 853 239 - 164 1,256 - 200,149 Total $ 1,464,913 $ 1,646 $ 462 $ - $ 1,113 $ 3,221 $ 6,290 $ 1,474,424 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 credit losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance. The following table presents the allowance for credit 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, 2022 $ 2,833 $ 8,293 $ 259 $ 409 $ 2,445 $ 124 $ 2,636 $ 16,999 Impact of adopting ASC 326 ( 1,545 ) 5,527 ( 200 ) 388 ( 1,156 ) 3 ( 551 ) 2,466 Charge Offs — ( 112 ) - - ( 50 ) - ( 202 ) ( 364 ) Recoveries 6 6 - - 6 - 26 44 Provision for credit losses 65 11 62 ( 94 ) ( 87 ) ( 45 ) 388 300 Ending balance, March 31, 2023 $ 1,359 $ 13,725 $ 121 $ 703 $ 1,158 $ 82 $ 2,297 $ 19,445 Ending balance individually evaluated $ - $ — $ - $ - $ 1 $ - $ - $ 1 Ending balance collectively evaluated $ 1,359 $ 13,725 $ 121 $ 703 $ 1,157 $ 82 $ 2,297 $ 19,444 (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 ( 115 ) - - - ( 15 ) - ( 52 ) ( 182 ) Recoveries 2 74 - - 9 - 15 100 Provision for loan losses 264 ( 665 ) 504 1 11 292 ( 107 ) 300 Ending balance, March 31, 2022 $ 2,326 $ 10,287 $ 504 $ 134 $ 1,495 $ 292 $ 1,622 $ 16,660 20 Ending balance individually evaluated ‎ for impairment $ - $ 1,643 $ - $ - $ 16 $ - $ — $ 1,659 Ending balance collectively evaluated ‎ for impairment $ 2,326 $ 8,644 $ 504 $ 134 $ 1,479 $ 292 $ 1,622 $ 15,001 The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience. The Company chose to apply qualitative factors based on “quantitative metrics” which link the quantifiable metrics to historical changes in the qualitative factor categories. The Company also chose to apply economic projections to the model. A select group of economic indicators was utilized which was then correlated to the historical loss experience of the Company and its peers. Based on the correlation results, the economic adjustments are then weighted for relevancy and applied to the individual loan pools. The following table presents the carrying value of loans on nonaccrual status and loans past due over 90 days still accruing interest (in thousands): Nonaccrual Nonaccrual Loans Past Due with no with Total Over 90 Days Total ACL ACL Nonaccrual Still Accruing Nonperforming March 31, 2023 Real Estate loans Residential $ 437 $ - $ 437 $ - $ 437 Commercial 1,941 - 1,941 - 1,941 Agricultural - - - - - Construction - - - - - Commercial loans 100 15 115 - 115 Other agricultural loans - - - - - Consumer loans 221 - 221 - 221 Total $ 2,699 $ 15 $ 2,714 $ - $ 2,714 Based on the most recent analysis performed, the following table presents the recorded investment in non-homogenous pools by internal risk rating systems (in thousands): Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted March 31, 2023 2023 2022 2021 2020 2019 Prior Cost Basis to Term Total Commercial real estate Risk Rating Pass $ 25,867 $ 133,953 $ 116,254 $ 75,366 $ 76,615 $ 217,831 $ 17,673 $ - $ 663,559 Special Mention - - 243 - - 819 - - 1,062 Substandard - - - 1,472 290 2,003 - - 3,765 Doubtful - - - - - - - - - Total $ 25,867 $ 133,953 $ 116,497 $ 76,838 $ 76,905 $ 220,653 $ 17,673 $ - $ 668,386 21 Commercial real estate Current period gross charge-offs $ - $ - $ - $ - $ 112 $ - $ - $ - $ 112 Real Estate - Agriculture Risk Rating Pass $ 1,033 $ 13,433 $ 5,607 $ 9,187 $ 8,579 $ 27,429 $ 580 $ - $ 65,848 Special Mention - - - - - 432 - - 432 Substandard - 524 - 1,064 - 188 325 - 2,101 Doubtful - - - - - - - - - Total $ 1,033 $ 13,957 $ 5,607 $ 10,251 $ 8,579 $ 28,049 $ 905 $ - $ 68,381 Real Estate - Agriculture Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial loans Risk Rating Pass $ 28,394 $ 54,591 $ 30,757 $ 22,901 $ 14,153 $ 23,003 $ 33,754 $ - $ 207,553 Special Mention - - - - - 181 - - 181 Substandard - 32 24 9 - 89 - - 154 Doubtful - - - - - - - - - Total $ 28,394 $ 54,623 $ 30,781 $ 22,910 $ 14,153 $ 23,273 $ 33,754 $ - $ 207,888 Commercial loans Current period gross charge-offs $ - $ - $ - $ 50 $ - $ - $ - $ - $ 50 Other agricultural loans Risk Rating Pass $ 734 $ 6,128 $ 3,389 $ 3,335 $ 3,084 $ 4,948 $ 11,374 $ - $ 32,992 Special Mention - - 4 185 107 - 155 - 451 Substandard - - 471 - 119 - - - 590 Doubtful - - - - - - - - - Total $ 734 $ 6,128 $ 3,864 $ 3,520 $ 3,310 $ 4,948 $ 11,529 $ - $ 34,033 Other agricultural loans Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Total 22 Risk Rating Pass $ 56,028 $ 208,105 $ 156,007 $ 110,789 $ 102,431 $ 273,211 $ 63,381 $ - $ 969,952 Special Mention - - 247 185 107 1,432 155 - 2,126 Substandard - 556 495 2,545 409 2,280 325 - 6,610 Doubtful - - - - - - - - - Total $ 56,028 $ 208,661 $ 156,749 $ 113,519 $ 102,947 $ 276,923 $ 63,861 $ - $ 978,688 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 December 31, 2022 (in thousands): Special Doubtful Pass Mention Substandard or Loss Total December 31, 2022 Commercial real estate loans $ 646,775 $ 1,079 $ 3,690 $ — $ 651,544 Real estate - agricultural 66,444 368 2,103 — 68,915 Commercial loans 186,966 184 107 — 187,257 Other agricultural loans 34,071 556 650 — 35,277 Total $ 934,256 $ 2,187 $ 6,550 $ — $ 942,993 23 The Company monitors the credit risk profile by payment activity for residential and consumer loan classes. Loans past due over 90 days and loans on nonaccrual status are considered nonperforming. Nonperforming loans are reviewed monthly. The following table presents the carrying value of residential and consumer loans based on payment activity (in thousands): 24 Revolving Revolving Term Loans Amortized Costs Basis by Origination Year Loans Loans Amortized Converted March 31, 2023 2023 2022 2021 2020 2019 Prior Cost Basis to Term Total Residential real estate Payment Performance Performing $ 4,363 $ 52,321 $ 61,338 $ 38,029 $ 17,635 $ 99,233 $ 28,355 $ - $ 301,274 Nonperforming - - - - 58 328 51 - 437 Total $ 4,363 $ 52,321 $ 61,338 $ 38,029 $ 17,693 $ 99,561 $ 28,406 $ - $ 301,711 Residential real estate Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Construction Payment Performance Performing $ 636 $ 21,113 $ 6,213 $ 1,340 $ 1,950 $ 832 $ 307 $ - $ 32,391 Nonperforming - - - - - - - - - Total $ 636 $ 21,113 $ 6,213 $ 1,340 $ 1,950 $ 832 $ 307 $ - $ 32,391 Construction Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ - Consumer loans to individuals Payment Performance Performing $ 38,967 $ 98,034 $ 33,172 $ 20,602 $ 16,347 $ 14,845 $ 1,059 $ - $ 223,026 Nonperforming - 121 36 21 40 3 - - 221 Total $ 38,967 $ 98,155 $ 33,208 $ 20,623 $ 16,387 $ 14,848 $ 1,059 $ - $ 223,247 Consumer loans to individuals Current period gross charge-offs $ - $ 91 $ 70 $ 14 $ 10 $ 6 $ 11 $ - $ 202 Total Payment Performance Performing $ 43,966 $ 171,468 $ 100,723 $ 59,971 $ 35,932 $ 114,910 $ 29,721 $ - $ 556,691 Nonperforming - 121 36 21 98 331 51 - 658 Total $ 43,966 $ 171,589 $ 100,759 $ 59,992 $ 36,030 $ 115,241 $ 29,772 $ - $ 557,349 25 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 December 31, 2022 (in thousands): Performing Nonperforming Total December 31, 2022 Residential real estate loans $ 298,327 $ 486 $ 298,813 Construction 32,469 — 32,469 Consumer loans to individuals 199,985 164 200,149 Total $ 530,781 $ 650 $ 531,431 Occasionally, the Bank modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. In some cases, the Bank provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. During the period ended March 31, 2023, there were no modifications made to borrowers experiencing financial difficulty. The Company’s primary business activity as of March 31 2023 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. As of March 31, 2023, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $ 142.3 million of loans outstanding, or 9.3 % of total loans outstanding, and residential rentals with loans outstanding of $ 116.00 million, or 7.6 % of loans outstanding. For the three months ended March 31, 2023, the Company did not recognize any charge offs on loans in the named concentrations. 9 . Operating Leases The Company leases seven 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 three-month periods ended March 31, 2023 and 2022, amounted to $ 176,000 and $ 148,000 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 March 31, 2023. 26 Operating Weighted-average remaining term 9.9 Weighted-average discount rate 2.94 % The following table presents the undiscounted cash flows due related to operating leases as of March 31, 2023, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets: Undiscounted cash flows due (in thousands) Operating 2023 $ 500 2024 664 2025 680 2026 524 2027 401 2028 and thereafter 2,414 Total undiscounted cash flows 5,183 Discount on cash flows ( 776 ) Total lease liabilities $ 4,407 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. 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, 2022. 27 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 March 31, 2023 and December 31, 2022 are as follows: Fair Value Measurement Using Reporting Date Description Total Level 1 Level 2 Level 3 March 31, 2023 (In thousands) ASSETS Available for Sale: U.S. Treasury securities $ 42,432 $ - $ 42,432 $ - U.S. Government agencies 18,640 18,640 States and political subdivisions 129,449 - 129,449 - Mortgage-backed securities-government sponsored entities 227,724 - 227,724 - Interest rate derivatives 1,252 - 1,252 - LIABILITIES Interest rate derivatives 1,252 - 1,252 - Description Total Level 1 Level 2 Level 3 December 31, 2022 (In thousands) ASSETS Available for Sale: U.S. Treasury securities $ 41,854 $ $ 41,854 $ U.S. Government agencies 18,323 - 18,323 - States and political subdivisions 127,852 127,852 Corporate obligations - - - - Mortgage-backed securities-government sponsored entities 230,898 - 230,898 - Interest rate derivatives 1,464 - 1,464 - LIABILITIES Interest rate derivatives 1,464 - 1,464 - 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. Interest Rate Swaps: The fair value of interest rate swaps is based upon the present value of the expected future cash flows using the Secured Overnight Financing Rate (“SOFR”) 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 SOFR 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. 28 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 March 31, 2023 and December 31, 2022 are as follows: Fair Value Measurement Using Reporting Date (In thousands) Description Total Level 1 Level 2 Level 3 March 31, 2023 Individually analyzed loans held for investment $ 354 $ - $ - $ 354 Foreclosed Real Estate Owned 346 - - 346 December 31, 2022 Impaired Loans $ 413 $ - $ - $ 413 Foreclosed Real Estate Owned 346 - - 346 Individually analyzed loans held for investment: 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 March 31, 2023, the fair value of individually analyzed loans held for investment was $ 354,000 which included one loan relationships with a carrying value of $ 15,000 that required an ACL of $ 1,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan, and three loan relationships that did not require an ACL since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of March 31, 2023, the Company has recognized charge-offs against the allowance for credit losses on these individually analyzed loans held for investment in the amount of $ 112,000 . As of December 31, 2022, the fair value investment in impaired loans totaled $ 413,000 which included three loan relationships with a carrying value of $ 413,000 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, 2022, 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, 2022, the fair value investment in impaired loans included one loan relationships with a carrying value of $ 50,000 that required a valuation allowance of $ 50,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan. As of December 31, 2022, 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: 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) March 31, 2023 Individually analyzed loans held for investment $ 354 Appraisal of collateral(1) Appraisal adjustments(2) 10.0 % ( 10.00 %) Foreclosed real estate owned $ 346 Appraisal of collateral(1) Liquidation Expenses(2) 7.00 % ( 7.00 %) 29 Quantitative Information about Level 3 Fair Value Measurements (dollars in thousands) Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average) December 31, 2022 Impaired loans $ 413 Appraisal of collateral(1) Appraisal adjustments(2) 0 %- 10.0 % ( 8.92 %) Foreclosed real estate owned $ 346 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 March 31, 2023 and December 31, 2022. 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. 30 The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at March 31, 2023 and December 31, 2022. (In thousands) Fair Value Measurements at March 31, 2023 Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents (1) $ 29,015 $ 29,015 $ 29,015 $ - $ - Loans receivable, net 1,516,198 1,480,316 - - 1,480,316 Mortgage servicing rights 196 498 - - 498 Regulatory stock (1) 5,963 5,963 5,963 - - Bank owned life insurance (1) 45,577 45,577 45,577 - - Accrued interest receivable (1) 6,633 6,633 6,633 - - Financial liabilities: Deposits 1,755,935 1,754,101 1,174,044 - 580,057 Short-term borrowings (1) 108,555 108,555 108,555 - - Other borrowings 40,189 40,251 - - 40,251 Accrued interest payable (1) 4,703 4,703 4,703 - - Off-balance sheet financial instruments: Commitments to extend credit and ‎ outstanding letters of credit - - - - - Fair Value Measurements at December 31, 2022 Carrying Amount Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents (1) $ 31,866 $ 31,866 $ 31,866 $ - $ - Loans receivable, net 1,456,946 1,418,300 - - 1,418,300 Mortgage servicing rights 213 498 - - 498 Regulatory stock (1) 5,418 5,418 5,418 - - Bank owned life insurance (1) 43,364 43,364 43,364 - - Accrued interest receivable (1) 6,917 6,917 6,917 - - Financial liabilities: Deposits 1,727,727 1,727,184 1,223,958 - 503,226 Short-term borrowings (1) 93,215 93,215 93,215 - - Other borrowings 40,000 40,074 - - 40,074 Accrued interest payable (1) 2,653 2,653 2,653 - - 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. 31 At March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022 was $ 1,252,000 and $ 1,464,000 , respectively. Summary information regarding these derivatives is presented below (Amounts in thousands) Notional Amount Fair Value March 31, 2023 December 31, 2022 Interest Rate Paid Interest Rate Received March 31, 2023 December 31, 2022 Customer interest rate swap Maturing November, 2030 $ 6,422 $ 6,513 Term SOFR + Margin Fixed $ 761 $ 889 Maturing December, 2030 4,231 4,297 Term SOFR + Margin Fixed 491 575 Total $ 10,653 $ 10,810 $ 1,252 $ 1,464 Third party interest rate swap Maturing November, 2030 $ 6,422 $ 6,513 Fixed Term SOFR + Margin $ 761 $ 889 Maturing December, 2030 4,231 4,297 Fixed Term SOFR + Margin 491 575 Total $ 10,653 $ 10,810 $ 1,252 $ 1,464 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 March 31, 2023 Interest rate derivatives Other assets $ 1,252 Other liabilities $ 1,252 December 31, 2022 Interest rate derivatives Other assets 1,464 Other liabilities 1,464 12 . New and Recently Adopted Accounting Pronouncements In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”. The ASU provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The ASU is effective as of March 12, 2020 through December 31, 2022. Furthermore, in December 2022, the FASB issued ASU 2022-06, “Deferral of the Sunset Date of Reference Rate Reform (Topic 848)” . This ASU extends the sunset date of ASC Topic 848 (Reference Rate Reform) to December 31, 2024, in response to the United Kingdom’s Financial Conduct Authority (FCA) extension of the intended cessation date of LIBOR in the United States. The Company evaluated the impact of this standard, and believes that its adoption will not have a material impact on the Company’s consolidated financial condition or results of operations. 32 In March 2023, the FASB issued ASU No. 2023-02, " Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force) ". The ASU allows entities to elect the proportional amortization method, on a tax-credit-program-by-tax-credit-program basis, for all equity investments in tax credit programs meeting the eligibility criteria in Accounting Standards Codification (ASC) 323-740-25-1. While the ASU does not significantly alter the existing eligibility criteria, it does provide clarifications to address existing interpretive issues. It also prescribes specific information reporting entities must disclose about tax credit investments each period. This ASU is effective for reporting periods beginning after December 15, 2023, for public business entities, or January 1, 2024 for the Company. The Company does not expect the adoption of this ASU to have a material impact on the Company's financial statements.