UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, ~~2022~~2023


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

For the transition period from __________ to __________

Commission file number 0-28364

Norwood Financial Corp

(Exact name of registrant as specified in its charter)


Pennsylvania		23-2828306
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

717 Main Street, Honesdale, Pennsylvania		18431
(Address of principal executive offices)		(Zip Code)

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

N/A

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

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



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

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

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

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


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

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

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

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


Class		Outstanding as of August 1, ~~2022~~2023
Common stock, par value $0.10 per share		~~8,165,279~~8,069,350

NORWOOD FINANCIAL CORP

FORM 10-Q

FOR THE QUARTER ENDED ~~JUNE~~June 30, ~~2022~~2023


		Page Number

PART I -	CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD FINANCIAL CORP	3

Item 1.	Financial Statements (unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3034
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4447
Item 4.	Controls and Procedures	4649

PART II -	OTHER INFORMATION	4750

Item 1.	Legal Proceedings	4750
Item 1A.	Risk Factors	4750
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4750
Item 3.	Defaults Upon Senior Securities	4750
Item 4.	Mine Safety Disclosures	4750
Item 5.	Other Information	4750
Item 6.	Exhibits	4851

Signatures		4952

‎

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NORWOOD FINANCIAL CORP

Consolidated Balance Sheets (unaudited)

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



	June 30,		December 31,		June 30,		December 31,
	2022		2021		2023		2022
ASSETS
Cash and due from banks	$	29,931	$	21,073	$	30,053	$	28,847
Interest-bearing deposits with banks		79,735		185,608		3,036		3,019
Cash and cash equivalents		109,666		206,681		33,089		31,866
Securities available for sale, at fair value		440,877		406,782
Loans receivable		1,404,317		1,354,931
Less: Allowance for loan losses		17,017		16,442
Net loans receivable		1,387,300		1,338,489
Securities available for sale, at fair value (net of allowance for credit losses of $0)						403,621		418,927
Loans receivable, net of allowance for credit losses of $17,483 and $16,999)						1,560,216		1,456,946
Regulatory stock, at cost		2,396		3,927		7,924		5,418
Bank premises and equipment, net		17,032		17,289		17,363		17,924
Bank owned life insurance		43,167		40,038		45,806		43,364
Accrued interest receivable		6,085		5,889		7,276		6,917
Foreclosed real estate owned		346		1,742		387		346
Deferred tax assets, net						23,301		23,549
Goodwill		29,266		29,266		29,266		29,266
Other intangibles		353		407		260		306
Other assets		29,896		17,994		13,256		12,241
TOTAL ASSETS	$	2,066,384	$	2,068,504	$	2,141,765	$	2,047,070
LIABILITIES
Deposits:
Non-interest bearing demand	$	442,991	$	440,652	$	425,757	$	434,529
Interest-bearing		1,356,839		1,316,141		1,306,240		1,293,198
Total deposits		1,799,830		1,756,793		1,731,997		1,727,727
Short-term borrowings		70,427		60,822		112,290		93,215
Other borrowings		4,412		29,998		99,687		40,000
Accrued interest payable		1,138		1,203		7,101		2,653
Other liabilities		16,746		14,426		17,266		16,390
TOTAL LIABILITIES		1,892,553		1,863,242		1,968,341		1,879,985
STOCKHOLDERS’ EQUITY
Preferred stock, no par value per share,
authorized: 5,000,000 shares; issued: NaN		—		—
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
issued: 2023: 8,291,401 shares, 2022: 8,291,401 shares						829		829
Surplus		96,752		96,443		97,268		96,897
Retained earnings		119,414		110,015		135,583		130,020
Treasury stock at cost: 2022: 110,084 shares; 2021: 65,328 shares		(2,933)		(1,767)
Treasury stock at cost: 2023: 223,926 shares; 2022: 124,650 shares						(6,007)		(3,308)
Accumulated other comprehensive loss		(40,230)		(256)		(54,249)		(57,353)
TOTAL STOCKHOLDERS’ EQUITY		173,831		205,262		173,424		167,085
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,066,384	$	2,068,504	$	2,141,765	$	2,047,070

See accompanying notes to the unaudited consolidated financial statements.
‎

NORWOOD FINANCIAL CORP

Consolidated Statements of Income (unaudited)

(dollars in thousan ds, except per share data)

Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
INTEREST INCOME
Loans receivable, including fees
$
15,714
$
16,102
$
31,089
$
32,248
Securities
2,197
1,356
4,091
2,468
Other
182
59
260
102
Total interest income
18,093
17,517
35,440
34,818
INTEREST EXPENSE
Deposits
1,083
1,205
2,142
2,459
Short-term borrowings
60
73
108
142
Other borrowings
56
186
195
388
Total interest expense
1,199
1,464
2,445
2,989
NET INTEREST INCOME
16,894
16,053
32,995
31,829
PROVISION FOR LOAN LOSSES
300
1,500
600
3,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
16,594
14,553
32,395
28,829
OTHER INCOME
Service charges and fees
1,475
1,532
2,946
2,782
Income from fiduciary activities
214
181
416
341
Net realized gains on sales of securities
—
—
—
21
Gain on sale of loans, net
—
109
—
138
Gain on sales of foreclosed real estate owned
—
—
427
—
Earnings and proceeds on bank owned life insurance
449
194
625
568
Other
351
171
1,414
326
Total other income
2,489
2,187
5,828
4,176
OTHER EXPENSES
Salaries and employee benefits
5,840
5,171
11,271
10,125
Occupancy, furniture & equipment, net
1,206
1,186
2,513
2,406
Data processing and related operations
666
562
1,295
1,166
Taxes, other than income
240
229
533
534
Professional fees
406
343
981
883
Federal Deposit Insurance Corporation insurance
142
154
326
335
Foreclosed real estate
10
13
63
42
Amortization of intangibles
27
34
54
69
Other
1,935
1,800
3,594
3,384
Total other expenses
10,472
9,492
20,630
18,944
INCOME BEFORE INCOME TAXES
8,611
7,248
17,593
14,061
INCOME TAX EXPENSE
1,756
1,493
3,610
2,765
NET INCOME
$
6,855
$
5,755
$
13,983
$
11,296
BASIC EARNINGS PER SHARE
$
0.84
$
0.70
$
1.71
$
1.38
DILUTED EARNINGS PER SHARE
$
0.84
$
0.70
$
1.71
$
1.38




	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
INTEREST INCOME
Loans receivable, including fees	$	20,702	$	15,714	$	39,860	$	31,089
Securities		2,481		2,197		4,986		4,091
Other		53		182		101		260
Total interest income		23,236		18,093		44,947		35,440
INTEREST EXPENSE
Deposits		5,740		1,083		10,102		2,142
Short-term borrowings		797		60		1,576		108
Other borrowings		1,057		56		1,534		195
Total interest expense		7,594		1,199		13,212		2,445
NET INTEREST INCOME		15,642		16,894		31,735		32,995
(RELEASE OF) PROVISION FOR
CREDIT LOSS EXPENSE		(1,750)		300		(1,450)		600
NET INTEREST INCOME AFTER
(RELEASE OF) PROVISION FOR CREDIT LOSSES		17,392		16,594		33,185		32,395
OTHER INCOME
Service charges and fees		1,353		1,475		2,665		2,946
Income from fiduciary activities		229		214		441		416
Net realized (losses) gains on sales of securities		(212)		—		(209)		—
Gains on sales of loans, net		10		—		10		—
Gain on sales of foreclosed real estate owned		—		—		—		427
Earnings and proceeds on bank owned life insurance		229		449		442		625
Other		174		351		346		1,414
Total other income		1,783		2,489		3,695		5,828
OTHER EXPENSES
Salaries and employee benefits		5,842		5,840		11,810		11,271
Occupancy, furniture & equipment, net		1,314		1,206		2,576		2,513
Data processing and related operations		822		666		1,590		1,295
Taxes, other than income		162		240		323		533
Professional fees		323		406		608		981
Federal Deposit Insurance Corporation insurance		244		142		445		326
Foreclosed real estate		74		10		103		63
Amortization of intangibles		23		27		46		54
Other		2,134		1,935		3,873		3,594
Total other expenses		10,938		10,472		21,374		20,630
INCOME BEFORE INCOME TAXES		8,237		8,611		15,506		17,593
INCOME TAX EXPENSE		1,734		1,756		3,221		3,610
NET INCOME	$	6,503	$	6,855	$	12,285	$	13,983
BASIC EARNINGS PER SHARE	$	0.81	$	0.84	$	1.52	$	1.71
DILUTED EARNINGS PER SHARE	$	0.81	$	0.84	$	1.51	$	1.71

See accompanying notes to the unaudited consolidated financial statements.

‎

NORWOOD FINANCIAL CORP

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(dollars in thousands)

Three Months Ended
June 30,
2022
2021
Net income
$
6,855
$
5,755
Other comprehensive income (loss)
Investment securities available for sale:
Unrealized holding loss
(20,893)
1,949
Tax effect
4,388
(409)
Reclassification of investment securities gains
recognized in net income
—
—
Tax effect
—
—
Other comprehensive (loss) income
(16,505)
1,540
Comprehensive Income (Loss)
$
(9,650)
$
7,295



	Six Months Ended				Three Months Ended
	June 30,				June 30,
	2022		2021		2023		2022
Net income	$	13,983	$	11,296	$	6,503	$	6,855
Other comprehensive income (loss)
Investment securities available for sale:
Unrealized holding (loss) gain		(50,602)		(1,952)
Unrealized holding gains (losses)						(5,636)		(20,893)
Tax effect		10,628		411		1,183		4,388
Reclassification of investment securities gains
Reclassification of investment securities losses
recognized in net income		—		(21)		212		—
Tax effect		—		4		(45)		—
Other comprehensive (loss)		(39,974)		(1,558)
Other comprehensive income (loss)						(4,286)		(16,505)
Comprehensive Income (Loss)	$	(25,991)	$	9,738	$	2,217	$	(9,650)



	Six Months Ended
	June 30,
	2023		2022
Net income	$	12,285	$	13,983
Other comprehensive (loss) income
Investment securities available for sale:
Unrealized holding (loss) gain		3,719		(50,602)
Tax effect		(780)		10,628
Reclassification of investment securities gains
recognized in net income		209		—
Tax effect		(44)		—
Other comprehensive (loss)		3,104		(39,974)
Comprehensive (Loss) Income	$	15,389	$	(25,991)

See accompanying notes to the unaudited consolidated financial statements.

‎

NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Six Months Ended June 30, ~~2022~~2023 and ~~2021~~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																		-		-		-		12,285		-		-		-		12,285
Other comprehensive income																		-		-		-		-		-		-		3,104		3,104
Cash dividends declared ($0.58 per share)																		-		-		-		(4,711)		-		-		-		(4,711)
Acquisition of treasury stock																										113,526		(3,077)				(3,077)
Cumulative effect of adoption of ASU 2016-13																		-		-		-		(2,011)		-		-		-		(2,011)
Compensation expense related to restricted stock																		-		-		224		-						-		224
Stock options exercised																		-		-		(44)		-		(14,250)		378		-		334
Compensation expense related to stock options																		-		-		191		-		-		-		-		191
Balance, June 30, 2023																		8,291,401	$	829	$	97,268	$	135,583		223,926	$	(6,007)	$	(54,249)	$	173,424


													Accumulated																Accumulated
													Other																Other
	Common Stock						Retained		Treasury Stock				Comprehensive				Common Stock						Retained		Treasury Stock				Comprehensive
	Shares		Amount		Surplus		Earnings		Shares		Amount		Income (Loss)		Total		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		8,266,751	$	827	$	96,443	$	110,015		65,328	$	(1,767)	$	(256)	$	205,262
Net Income		-		-		-		13,983		-		-		-		13,983		-		-		-		13,983		-		-		-		13,983
Other comprehensive loss		-		-		-		-		-		-		(39,974)		(39,974)		-		-		-		-		-		-		(39,974)		(39,974)
Cash dividends declared ($0.56 per share)		-		-		-		(4,584)		-		-		-		(4,584)		-		-		-		(4,584)		-		-		-		(4,584)
Acquisition of treasury stock		-		-		-		-		47,981		(1,252)		-		(1,252)		-		-		-		-		47,981		(1,252)		-		(1,252)
Compensation expense related to restricted stock		7,500		1		170		-						-		171		7,500		1		170		-		-		-		-		171
Stock options exercised		1,650				5		-		(3,225)		86		-		91		1,650		-		5		-		(3,225)		86		-		91
Compensation expense related to stock options		-		-		134		-		-		-		-		134		-		-		134		-		-		-		-		134
Balance, June 30, 2022		8,275,901	$	828	$	96,752	$	119,414		110,084	$	(2,933)	$	(40,230)	$	173,831		8,275,901	$	828	$	96,752	$	119,414		110,084	$	(2,933)	$	(40,230)	$	173,831


													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		-		-		-		11,296		-		-		-		11,296
Other comprehensive loss		-		-		-		-		-		-		(1,558)		(1,558)
Cash dividends declared ($0.52 per share)		-		-		-		(4,274)		-		-		-		(4,274)
Acquisition of treasury stock		-		-		-		-		7,405		(194)		-		(194)
Compensation expense related to restricted stock		-		-		287		-		3,900		(120)		-		167
Stock options exercised		8,970		1		169		-		-		-		-		170
Compensation expense related to stock options		-		-		107		-		-		-		-		107
Balance, June 30, 2021		8,245,301	$	825	$	95,951	$	100,818		21,568	$	(656)	$	3,561	$	200,499

‎

NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Three Months Ended June 30, ~~2022~~2023 and ~~2021~~2022

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


P
																													Accumulated
																													Other
																	Common Stock						Retained		Treasury Stock				Comprehensive
																	Shares		Amount		Surplus		Earnings		Shares		Amount		Income (Loss)		Total
Balance, March 31, 2023																		8,291,401	$	829	$	97,063	$	131,416		110,400	$	(2,930)	$	(49,963)	$	176,415
Net Income																		-		-		-		6,503		-		-		-		6,503
Other comprehensive loss																		-		-		-		-		-		-		(4,286)		(4,286)
Cash dividends declared ($0.29 per share)																		-		-		-		(2,336)		-		-		-		(2,336)
Acquisition of treasury stock																		-		-		-		-		113,526		(3,077)		-		(3,077)
Compensation expense related to restricted stock																		-		-		110		-		-		-		-		110
Stock options exercised																		-		-		-		-		-		-		-		-
Compensation expense related to stock options																		-		-		95		-		-		-		-		95
Balance, June 30, 2023																		8,291,401	$	829	$	97,268	$	135,583		223,926	$	(6,007)	$	(54,249)	$	173,424


													Accumulated																Accumulated
													Other																Other
	Common Stock						Retained		Treasury Stock				Comprehensive				Common Stock						Retained		Treasury Stock				Comprehensive
	Shares		Amount		Surplus		Earnings		Shares		Amount		Income (Loss)		Total		Shares		Amount		Surplus		Earnings		Shares		Amount		Income (Loss)		Total
Balance, March 31, 2022		8,268,401	$	827	$	96,619	$	114,845		65,089	$	(1,760)	$	(23,725)	$	186,806		8,268,401	$	827	$	96,619	$	114,845		65,089	$	(1,760)	$	(23,725)	$	186,806
Net Income		-		-		-		6,855		-		-		-		6,855		-		-		-		6,855		-		-		-		6,855
Other comprehensive loss		-		-		-		-		-		-		(16,505)		(16,505)		-		-		-		-		-		-		(16,505)		(16,505)
Cash dividends declared ($0.28 per share)		-		-		-		(2,286)		-		-		-		(2,286)		-		-		-		(2,286)		-		-		-		(2,286)
Acquisition of treasury stock		-		-		-		-		47,470		(1,239)		-		(1,239)										47,470		(1,239)				(1,239)
Compensation expense related to restricted stock		7,500		1		88		-		-		-		-		89		7,500		1		88		-		-		-		-		89
Stock options exercised		-		-		(22)		-		(2,475)		66		-		44		-		-		(22)				(2,475)		66				44
Compensation expense related to stock options		-		-		67		-		-		-		-		67		-		-		67		-		-		-		-		67
Balance, June 30, 2022		8,275,901	$	828	$	96,752	$	119,414		110,084	$	(2,933)	$	(40,230)	$	173,831		8,275,901	$	828	$	96,752	$	119,414		110,084	$	(2,933)	$	(40,230)	$	173,831


													Accumulated
													Other
	Common Stock						Retained		Treasury Stock				Comprehensive
	Shares		Amount		Surplus		Earnings		Shares		Amount		Income		Total
Balance, March 31, 2021		8,240,081	$	824	$	95,717	$	97,201		21,568	$	(656)	$	2,021	$	195,107
Net Income		-		-		-		5,755		-		-		-		5,755
Other comprehensive gain		-		-		-		-		-		-		1,540		1,540
Cash dividends declared ($0.26 per share)		-		-		-		(2,138)		-		-		-		(2,138)
Compensation expense related to restricted stock		-		-		84		-		-		-		-		84
Stock options exercised		5,220		1		97										98
Compensation expense related to stock options		-		-		53		-		-		-		-		53
Balance, June 30, 2021		8,245,301	$	825	$	95,951	$	100,818		21,568	$	(656)	$	3,561	$	200,499

See accompanying notes to the unaudited consolidated financial statements.
‎

NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited)



(dollars in thousands)
	Six Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	13,983	$	11,296	$	12,285	$	13,983
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		600		3,000
(Release of) Provision for credit losses						(1,450)		600
Depreciation		746		748		706		746
Amortization of intangible assets		54		69		46		54
Deferred income taxes		283		362		(577)		283
Net amortization of securities premiums and discounts		747		749		457		747
Net realized gain on sales of securities		—		(21)		209		—
Earnings and proceeds on life insurance policies		(625)		(568)		(442)		(625)
Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net		(379)		(21)		177		(379)
Net amortization of loan fees		(340)		(1,448)		272		(340)
Net gain on sale of loans		—		(138)		(10)		—
Loans originated for sale		—		(7,316)
Mortgage loans originated for sale						1,234		—
Proceeds from sale of loans originated for sale		—		7,454		(1,224)		—
Compensation expense related to stock options		134		107		191		134
Compensation expense related to restricted stock		171		167		224		171
(Increase) decrease in accrued interest receivable		(196)		42
Decrease in accrued interest payable		(65)		(139)
Increase in accrued interest receivable						(359)		(196)
Increase (decrease) in accrued interest payable						4,448		(65)
Other, net		351		489		38		351
Net cash provided by operating activities		15,464		14,832		16,225		15,464
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales		—		1,127		3,345		—
Proceeds from maturities and principal reductions on mortgage-backed securities		23,754		35,057		15,223		23,754
Purchases		(109,196)		(145,935)		—		(109,196)
Purchase of regulatory stock		(528)		(2,188)		(11,168)		(528)
Redemption of regulatory stock		2,059		2,085		8,662		2,059
Net (decrease) increase in loans		(48,651)		24,984
Proceeds from bank-owned life insurance policies		496		511
Net increase in loans						(104,543)		(48,651)
Proceeds of bank-owned life insurance						—		496
Purchase of bank-owned life insurance		(3,000)		—		(2,000)		(3,000)
Purchase of premises and equipment		(537)		(374)		(268)		(537)
Proceeds from sales of bank premises and fixed assets		—		158
Proceeds from sales of foreclosed real estate owned		1,823		126		195		1,823
Net cash used in investing activities		(133,780)		(84,449)		(90,554)		(133,780)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		43,037		153,299		4,270		43,037
Net increase in short-term borrowings		9,605		20,296		19,075		9,605
Repayments of other borrowings		(25,586)		(6,200)		(20,313)		(25,586)
Proceeds from other borrowings						80,000		—
Stock options exercised		91		170		334		91
Purchase of treasury stock		(1,252)		(194)		(3,077)		(1,252)
Cash dividends paid		(4,594)		(4,274)		(4,737)		(4,594)
Net cash provided by financing activities		21,301		163,097		75,552		21,301
(Decrease) increase in cash and cash equivalents		(97,015)		93,480
Increase (decrease) in cash and cash equivalents						1,223		(97,015)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		206,681		111,693		31,866		206,681
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	109,666	$	205,173	$	33,089	$	109,666

‎

NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited) (continued)




(dollars in thousands)
	Six Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2023		2022
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest on deposits and borrowings	$	2,510	$	3,128	$	8,764	$	2,510
Income taxes paid, net of refunds	$	4,147	$	3,441	$	3,502	$	4,147
Supplemental Schedule of Noncash Investing Activities:
Transfers of loans to foreclosed real estate and repossession of other assets	$	161	$	408	$	988	$	161
Dividends payable	$	2,286	$	2,138	$	2,340	$	2,286

Right of use for operating leases	$	4,344	$	4,726
Lease liability for operating leases	$	4,420	$	4,782

See accompanying notes to the unaudited consolidated financial statements.

‎

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 six-month periods ended June 30, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022~~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, $260,000related 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.

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.

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.

Accrued interest receivable on available-for-sale debt securities totaled $1,950,000 at June 30, 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 and six months ended June 30:



	Three months ended				Three months ended
	June 30,				June 30,
(dollars in thousands)
Noninterest Income	2022		2021		2023		2022
In-scope of Topic 606:
Service charges on deposit accounts	$	106	$	98	$	110	$	106
ATM fees		108		107		106		108
Overdraft fees		316		230		342		316
Safe deposit box rental		23		25		22		23
Loan related service fees		252		404		131		252
Debit card fees		627		586		576		627
Fiduciary activities		214		181		229		214
Commissions on mutual funds and annuities		26		29		36		26
Gains on sales of other real estate owned		—		—		—		—
Other income		351		171		174		351
Noninterest Income (in-scope of Topic 606)		2,023		1,831		1,726		2,023
Out-of-scope of Topic 606:
Net realized gains on sales of securities		—		—
Net realized gains (losses) on sales of securities						(212)		—
Loan servicing fees		17		53		30		17
Gains on sales of loans		—		109		10		—
Earnings on and proceeds from bank-owned life insurance		449		194		229		449
Noninterest Income (out-of-scope of Topic 606)		466		356		57		466
Total Noninterest Income	$	2,489	$	2,187	$	1,783	$	2,489



	Six months ended
	June 30,
(dollars in thousands)
Noninterest Income	2023		2022
In-scope of Topic 606:
Service charges on deposit accounts	$	214	$	205
ATM fees		212		213
Overdraft fees		661		604
Safe deposit box rental		48		46
Loan related service fees		284		522
Debit card fees		1,135		1,255
Fiduciary activities		441		416
Commissions on mutual funds and annuities		61		66
Gains on sales of other real estate owned		—		427
Other income		346		1,414
Noninterest Income (in-scope of Topic 606)		3,402		5,168
Out-of-scope of Topic 606:
Net realized gains (losses) on sales of securities		(209)		—
Loan servicing fees		50		35
Gains on sales of loans		10		—
Earnings on and proceeds from bank-owned life insurance		442		625
Noninterest Income (out-of-scope of Topic 606)		293		660
Total Noninterest Income	$	3,695	$	5,828

1013

Six months ended
June 30,
(dollars in thousands)
Noninterest Income
2022
2021
In-scope of Topic 606:
Service charges on deposit accounts
$
205
$
195
ATM fees
213
207
Overdraft fees
604
458
Safe deposit box rental
46
53
Loan related service fees
522
649
Debit card fees
1,255
1,078
Fiduciary activities
416
341
Commissions on mutual funds and annuities
66
64
Gains on sales of other real estate owned
427
—
Other income
1,414
326
Noninterest Income (in-scope of Topic 606)
5,168
3,371
Out-of-scope of Topic 606:
Net realized gains on sales of securities
—
21
Loan servicing fees
35
78
Gains on sales of loans
—
138
Earnings on and proceeds from bank-owned life insurance
625
568
Noninterest Income (out-of-scope of Topic 606)
660
805
Total Noninterest Income
$
5,828
$
4,176

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		Six Months Ended		Three Months Ended		Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022	2021	2022	2021	2023	2022	2023	2022
Weighted average shares outstanding	8,192	8,219	8,197	8,223	8,101	8,192	8,138	8,197
Less: Unvested restricted shares	(36)	(35)	(34)	(37)	(42)	(36)	(43)	(34)
Basic EPS weighted average shares outstanding	8,156	8,184	8,163	8,186	8,059	8,156	8,095	8,163
Basic EPS weighted average shares outstanding	8,156	8,184	8,163	8,186	8,059	8,156	8,095	8,163
Add: Dilutive effect of stock options and restricted shares	12	21	12	22	16	12	17	12
Diluted EPS weighted average shares outstanding	8,168	8,205	8,175	8,208	8,075	8,168	8,112	8,175

For the three and six month periods ended June 30, 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 $29.53 per share as of June 30, 2023.

For the three and six month periods ended June 30, 2022, there were 151,600 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of ~~the Company’s~~Norwood common stock of $24.26 per share as of June 30, 2022.

For the three and six month periods ended June 30, 2021, there were 115,100 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 $26.00 per share as of June 30, 2021.

4. Stock-Based Compensation

During the six-month period ended June 30, ~~2022, no~~2023, 2,500 stock options were granted. As of June 30, ~~2022,~~2023, there was ~~$135,000~~$191,000 of total unrecognized compensation cost related to non-vested options granted in ~~2021~~2022 and 2023 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, ~~2022.~~2023. Compensation costs related to stock options amounted to ~~$134,000~~$191,000 and ~~$107,000~~$134,000 during the six-month periods ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

A summary of the Company’s stock option activity for the six-month period ended June 30, ~~2022~~2023 is as follows:



		Weighted							Weighted
		Average Exercise		Weighted Average		Aggregate			Average Exercise		Weighted Average		Aggregate
		Price		Remaining		Intrinsic Value			Price		Remaining		Intrinsic Value
	Options	Per Share		Contractual Term		($000)		Options	Per Share		Contractual Term		($000)
Outstanding at January 1, 2022	226,075	$	26.37	6.4	Yrs.	$	520
Outstanding at January 1, 2023								218,975	$	28.70	6.8	Yrs.	$	1,100
Granted	—		-	-				2,500		29.60	9.8
Exercised	(4,875)		18.81	1.2				(14,250)		23.39	5.7
Forfeited	—		-	-				—		-	-
Outstanding at June 30, 2022	221,200	$	26.53	6.0	Yrs.	$	359
Exercisable at June 30, 2022	178,700	$	26.71	5.2	Yrs.	$	359
Outstanding at June 30, 2023								207,225	$	29.07	6.4	Yrs.	$	539
Exercisable at June 30, 2023								166,725	$	28.04	5.7	Yrs.	$	539

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The market price was ~~$24.26~~$29.53 per share as of June 30, ~~2022~~2023 and ~~$25.99~~$33.44 per share as of December 31, ~~2021.~~2022.

A summary of the Company’s restricted stock activity for the six-month periods ended June 30, ~~2022~~2023 and ~~2021~~2022 is as follows:



	2022			2021			2023			2022
		Weighted-Average				Weighted-Average		Weighted-Average				Weighted-Average
	Number of	Grant Date		Number of	Grant Date		Number of	Grant Date		Number of	Grant Date
	Restricted Stock	Fair Value		Restricted Stock	Fair Value		Restricted Stock	Fair Value		Restricted Stock	Fair Value
Non-vested, January 1,	32,030	$	29.76	39,135	$	30.72	44,460	$	30.12	32,030	$	26.76
Granted	7,500		25.71	—		—	—		—	7,500		25.71
Vested	—		—	—		—	(3,000)		25.71	—		—
Forfeited	—		—	(3,900)		30.86	—		—	—		—
Non-vested, June 30,	39,530	$	28.99	35,235	$	30.71	41,460	$	30.44	39,530	$	28.99

The expected future compensation expense relating to the ~~39,530~~41,460 shares of non-vested restricted stock outstanding as of June 30, ~~2022~~2023 is ~~$976,000.~~$1,070,000. This cost will be recognized over the remaining vesting period of 4.5 years. Compensation costs related to restricted stock amounted to ~~$171,000~~$224,000 and ~~$167,000~~$171,000 during the six-month periods ended June 30, ~~2022~~2023 and ~~2021,~~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 and six months ended June 30, ~~2022~~2023 and ~~2021:~~2022:




	Unrealized gains (losses) on
	available for sale
	securities (a)
Balance as of December 31, 2022	$	(57,353)
Other comprehensive income before reclassification		2,939
Amount reclassified from accumulated other comprehensive loss		165
Total other comprehensive loss		3,104
Balance as of June 30, 2023	$	(54,249)


	Unrealized gains (losses) on
	available for sale
	securities (a)
Balance as of December 31, 2021	$	(256)
Other comprehensive loss before reclassification		(39,974)
Amount reclassified from accumulated other comprehensive income		—-
Total other comprehensive loss		(39,974)
Balance as of June 30, 2022	$	(40,230)



	Unrealized gains (losses) on
	available for sale
	securities (a)
Balance as of ~~December~~March 31, ~~2020~~2023	$	~~5,119~~(49,963)
Other comprehensive loss before reclassification		~~(1,541)~~(4,453)
Amount reclassified from accumulated other comprehensive ~~income~~loss		~~(17)~~167
Total other comprehensive loss		~~(1,558)~~(4,286)
Balance as of June 30, ~~2021~~2023	$	~~3,561~~(54,249)



	Unrealized gains (losses) on
	available for sale
	securities (a)
Balance as of March 31, 2022	$	(23,725)
Other comprehensive loss before reclassification		(16,505)
Amount reclassified from accumulated other comprehensive loss		-
Total other comprehensive loss		(16,505)
Balance as of June 30, 2022	$	(40,230)



	~~Unrealized gains (losses) on~~
	~~available for sale~~
	~~securities (a)~~
~~Balance as of March 31, 2021~~	$	~~2,021~~
~~Other comprehensive income before reclassification~~		~~1,540~~
~~Amount reclassified from accumulated other comprehensive income~~		-
~~Total other comprehensive income~~		~~1,540~~
~~Balance as of June 30, 2021~~	$	~~3,561~~

(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 and six months ended June 30, ~~2022~~2023 and ~~2021:~~2022:

Amount Reclassified
From Accumulated
Other
Comprehensive
Income (Loss) (a)
Affected Line Item in
Three months ended
Consolidated
June 30,
Statements
Details about other comprehensive income
2022
2021
of Income
Unrealized gains on available for sale securities
$
—
$
—
Net realized gains on sales of securities
Tax effect
—
—
Income tax expense
$
—
$
—
Six months ended
June 30,
2022
2021
Unrealized gains on available for sale securities
$
—
$
21
Net realized gains on sales of securities
Tax effect
—
(4)
Income tax expense
$
—
$
17



	Amount Reclassified
	From Accumulated
	Other
	Comprehensive
	Income (Loss) (a)				Affected Line Item in
	Three months ended				Consolidated
	June 30,				Statements
Details about other comprehensive income	2023		2022		of Income
Unrealized losses on available for sale securities	$	(212)	$	—	Net realized (losses) gains on sales of securities
Tax effect		45		—	Income tax expense
	$	(167)	$	—

	Six months ended
	June 30,
	2023		2022
Unrealized losses on available for sale securities	$	(209)	$	—	Net realized (losses) gains on sales of securities
Tax effect		44		—	Income tax expense
	$	(165)	$	—

(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)	June 30,				June 30,
	2022		2021		2023		2022
Commitments to grant loans	$	93,304	$	80,647	$	96,514	$	93,304
Unfunded commitments under lines of credit		146,921		131,309		162,256		146,921
Standby letters of credit		12,995		5,820		13,809		12,995
	$	253,220	$	217,776	$	272,579	$	253,220

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 June 30, ~~2022~~2023 for guarantees under standby letters of credit issued is not material.

7. Securities

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



	June 30, 2022								June 30, 2023
			Gross		Gross						Gross		Gross			Allowance
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized			for Credit	Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses			Losses	Value
	(In Thousands)								(In Thousands)
Available for Sale:
U.S. Treasury securities	$	33,273	$	14	$	(1,987)	$	31,300	$	45,147	$	-	$	(3,178)	$	-	$	41,969
U.S. Government agencies		18,302		-		(2,066)		16,236		21,325		-		(2,818)		-		18,507
States and political subdivisions		163,642		97		(23,471)		140,268		152,140		-		(25,621)		-		126,519
Mortgage-backed securities-
government sponsored entities		278,100		—		(25,027)		253,073		254,410		-		(37,784)		-		216,626
Total debt securities	$	493,317	$	111	$	(52,551)	$	440,877	$	473,022	$	-	$	(69,401)	$	-	$	403,621




	December 31, 2021								December 31, 2022
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses			Value
	(In Thousands)								(In Thousands)
Available for Sale:
U.S. Treasury securities									$	45,066	$	-	$	(3,212)	$	41,854
U.S. Government agencies	$	19,550	$	6	$	(205)	$	19,351		21,266		-		(2,943)		18,323
States and political subdivisions		16,251		24		(264)		16,011		157,524		2		(29,674)		127,852
Corporate obligations		145,107		2,155		(1,395)		145,867
Mortgage-backed securities-government
sponsored entities		227,712		766		(2,925)		225,553		268,400		-		(37,502)		230,898
Total debt securities	$	408,620	$	2,951	$	(4,789)	$	406,782	$	492,256	$	2	$	(73,331)	$	418,927

The following tables ~~show the Company’s investments’ gross unrealized~~summarize debt securities available for sale in a loss position for which an allowance for credit losses ~~and fair value~~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):




	June 30, 2022												June 30, 2023
	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities	$	27,432	$	(1,987)	$	-	$	-	$	27,432	$	(1,987)	$	17,350	$	(415)	$	24,619	$	(2,763)	$	41,969	$	(3,178)
U.S. Government agencies		14,015		(1,600)		2,221		(466)		16,236		(2,066)		4,783		(112)		13,724		(2,706)		18,507		(2,818)
States and political subdivisions		118,022		(20,704)		10,246		(2,767)		128,268		(23,471)		8,013		(253)		118,016		(25,368)		126,029		(25,621)
Mortgage-backed securities-government sponsored entities		205,855		(17,585)		47,205		(7,442)		253,060		(25,027)		24,147		(1,630)		192,479		(36,154)		216,626		(37,784)
	$	365,324	$	(41,876)	$	59,672	$	(10,675)	$	424,996	$	(52,551)	$	54,293	$	(2,410)	$	348,838	$	(66,991)	$	403,131	$	(69,401)



	December 31, 2021												December 31, 2022
	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities	$	18,361	$	(205)	$	-	$	-	$	18,361	$	(205)	$	25,733	$	(849)	$	16,121	$	(2,363)	$	41,854	$	(3,212)
U.S. Government agencies		7,912		(109)		3,843		(155)		11,755		(264)		8,321		(885)		10,002		(2,058)		18,323		(2,943)
States and political subdivisions		74,658		(1,395)		-		-		74,658		(1,395)		66,680		(11,194)		57,367		(18,480)		124,047		(29,674)
Mortgage-backed securities-government sponsored entities		170,647		(2,856)		2,919		(69)		173,566		(2,925)		102,361		(10,639)		128,537		(26,863)		230,898		(37,502)
	$	271,578	$	(4,565)	$	6,762	$	(224)	$	278,340	$	(4,789)	$	203,095	$	(23,567)	$	212,027	$	(49,764)	$	415,122	$	(73,331)

At June 30, ~~2022,~~2023, the Company had ~~292~~39 debt securities in an unrealized loss position in the less than twelve months category and 33302 debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. ~~NaN other-than-temporary-impairment~~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 six months ended June 30, 2023, or other-than-temporary impairment charges ~~were recorded in~~for the six months ended June 30, 2022. ~~Management believes that all unrealized losses represent temporary impairment of the securities as the~~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 June 30, ~~2022~~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				Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(In Thousands)				(In Thousands)
Due in one year or less	$	1,836	$	1,848	$	11,727	$	11,588
Due after one year through five years		28,426		27,986		43,492		40,448
Due after five years through ten years		60,282		53,167		54,494		44,947
Due after ten years		124,673		104,803		108,899		90,012
		215,217		187,804		218,612		186,995
Mortgage-backed securities-government sponsored entities		278,100		253,073		254,410		216,626
	$	493,317	$	440,877	$	473,022	$	403,621

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



	Three Months				Six Months				Three Months				Six Months
	Ended June 30,				Ended June 30,				Ended June 30,				Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Gross realized gains	$	—	$	—	$	—	$	21	$	—	$	—	$	4	$	—
Gross realized losses		—		—		—		—		(212)		—		(213)		—
Net realized gain	$	—	$	—	$	—	$	21
Net realized gains (losses)									$	(212)	$	—	$	(209)	$	—
Proceeds from sales of securities	$	—	$	—	$	—	$	1,127	$	1,363	$	—	$	3,345	$	—

Securities with a carrying value of ~~$378,696,000~~$362,977,000 and ~~$339,769,000~~$378,472,000 at June 30, ~~2022~~2023 and December 31, ~~2021,~~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):



	June 30, 2022				December 31, 2021				June 30, 2023				December 31, 2022
Real Estate Loans:
Residential	$	289,157	20.6	%	$	273,040	20.1	%	$	307,462	19.5	%	$	298,813	20.3	%
Commercial		645,404	45.9			628,724	46.4			670,353	42.5			651,544	44.2
Agricultural		65,334	4.6			61,925	4.6			67,729	4.3			68,915	4.7
Construction		21,856	1.6			21,990	1.6			38,245	2.4			32,469	2.2
Commercial loans		187,206	13.3			186,031	13.7			211,714	13.4			187,257	12.7
Other agricultural loans		36,092	2.6			37,930	2.8			34,722	2.2			35,277	2.4
Consumer loans to individuals		159,968	11.4			146,400	10.8			247,758	15.7			200,149	13.5
Total loans		1,405,017	100.0	%		1,356,040	100.0	%		1,577,983	100.0	%		1,474,424	100.0	%
Deferred fees, net		(700)				(1,109)				(284)				(479)
Total loans receivable		1,404,317				1,354,931				1,577,699				1,473,945
Allowance for loan losses		(17,017)				(16,442)
Allowance for credit losses										(17,483)				(16,999)
Net loans receivable	$	1,387,300			$	1,338,489			$	1,560,216			$	1,456,946

During 2020 and 2021 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the United States Small Business Administration (“SBA”). The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of June 30, 2022 and December 31, 2021, the Company had outstanding principal balances of $983,000 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. As of June 30, 2022, $150.5 million of PPP loans have been forgiven. PPP loans are included in the commercial loan category.

~~In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $5.1 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 June 30, 2022, the carrying value of these unamortized loan fees was $30,000.

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

June 30, 2022
December 31, 2021
Outstanding Balance
$
9,701
$
12,862
Carrying Amount
$
6,631
$
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 six-months ended June 30, 2022 and 2021, were as follows (in thousands):~~

2022
2021
Balance at beginning of period
$
1,884
$
1,365
Additions
—
—
Accretion
(420)
(357)
Reclassification and other
(395)
11
Balance at end of period
$
1,069
$
1,019

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



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

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

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

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 June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, foreclosed real estate owned totaled ~~$346,000~~$387,000 and ~~$1,742,000,~~$346,000, respectively. During the six months ended June 30, ~~2022,~~2023, there ~~were 0 additions~~was one addition to the foreclosed real estate ~~category. The Company disposed of a parcel of 1 property that was previously transferred to foreclosed real estate owned~~category, with a carrying value of ~~$364,000,~~$290,000, and ~~disposed~~two sales of ~~another property~~properties with a carrying value of ~~$1,032,000 through~~$195,000. Additionally, the ~~sale~~company recognized a write-down on one property in the amount of $54,000 based on the realizable value of the property. As of June 30, ~~2022,~~2023, the Company has initiated formal foreclosure proceedings on 4three properties classified as consumer residential mortgages with an aggregate carrying value of ~~$180,000.~~$168,000.

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
June 30, 2023	(In thousands)
Individually evaluated	$	—	$	423	$	—	$	—	$	67	$	—	$	—	$	490
Collectively evaluated		307,462		669,930		67,729		38,245		211,647		34,722		247,758		1,577,493
Total Loans	$	307,462	$	670,353	$	67,729	$	38,245	$	211,714	$	34,722	$	247,758	$	1,577,983

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
June 30, 2022
(In thousands)
Individually evaluated for impairment
$
—
$
—
$
—
$
—
$
13
$
—
$
—
$
13
Loans acquired with deteriorated credit quality
577
2,685
1,971
—
—
1,398
—
6,631
Collectively evaluated for impairment
288,580
642,719
63,363
21,856
187,193
34,694
159,968
1,398,373
Total Loans
$
289,157
$
645,404
$
65,334
$
21,856
$
187,206
$
36,092
$
159,968
$
1,405,017



	Real Estate Loans																Real Estate Loans
									Commercial			Other	Consumer												Commercial			Other	Consumer
	Residential		Commercial			Agricultural	Construction		Loans			Agricultural	Loans		Total		Residential		Commercial			Agricultural	Construction		Loans			Agricultural	Loans		Total
	(In thousands)																(In thousands)
December 31, 2021
December 31, 2022
Individually evaluated for impairment	$	-	$	1,658	$	—	$	-	$	16	$	—	$	-	$	1,674	$	-	$	402	$	—	$	-	$	61	$	—	$	-	$	463
Loans acquired with deteriorated credit quality		784		3,285		1,918		-		198		2,119		-		8,304		567		2,049		2,034		-		1,640		—		-		6,290
Collectively evaluated for impairment		272,256		623,781		60,007		21,990		185,817		35,811		146,400		1,346,062		298,246		649,093		66,881		32,469		185,556		35,277		200,149		1,467,671
Total Loans	$	273,040	$	628,724	$	61,925	$	21,990	$	186,031	$	37,930	$	146,400	$	1,356,040	$	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
June 30, 2022
(in thousands)
With no related allowance recorded:
Commercial Loans
$
13
$
13
—
Subtotal
$
13
$
13
$
—
Total:
Commercial Loans
$
13
$
13
—
Total Impaired Loans
$
13
$
13
$
—



			Unpaid						Unpaid
	Recorded		Principal		Associated		Recorded		Principal		Associated
	Investment		Balance		Allowance		Investment		Balance		Allowance
December 31, 2021				(in thousands)
December 31, 2022										(in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial	$	141	$	141	$	—	$	402	$	402	$	—
Commercial Loans		16		16		—		11		11		—
Subtotal		157		157		—		413		413		—

With an allowance recorded:
Real Estate Loans
Commercial		1,517		1,517		272
Commercial Loans								50		50		50
Subtotal		1,517		1,517		272		50		50		50
Total:
Real Estate Loans:
Commercial		1,658		1,658		272		402		402		—
Commercial Loans		16		16		—		61		61		50
Total Impaired Loans	$	1,674	$	1,674	$	272	$	463	$	463	$	50

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month ~~periods~~period ended June 30, 2022 ~~and 2021, respectively~~ (in thousands):

Average Recorded
Interest Income
Investment
Recognized
2022
2021
2022
2021
Real Estate Loans:
Commercial
$
822
$
1,467
$
20
$
—
Agriculture
—
858
—
—
Commercial Loans
13
29
3
—
Other agricultural loans
—
125
—
—
Total
$
835
$
2,479
$
23
$
—

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the six-month periods ended June 30, 2022 and 2021, respectively (in thousands):




	Average Recorded				Interest Income					Average Recorded		Interest Income
	Investment				Recognized					Investment		Recognized
	2022		2021		2022		2021		2022		2022
Real Estate Loans:
Commercial	$	1,100	$	1,541	$	37	$	1	$	822	$	20
Agriculture		—		858		—		—
Commercial Loans		15		19		3		—		13		3
Other agricultural loans		—		110		—		—
Total	$	1,115	$	2,528	$	40	$	1	$	835	$	23

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 June 30, 2022 and December 31, 2021, the Company had no troubled debt restructured loans to report. For the six-month period ended June 30, 2022 and 2021, there were 0 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

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, in conjunction with a third-party consultant, also annually reviews all criticized credits and 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 June 30, 2022 and December 31, 2021 (in thousands):

Special
Doubtful
Pass
Mention
Substandard
or Loss
Total
June 30, 2022
Commercial real estate loans
$
640,130
$
1,141
$
4,133
$
—
$
645,404
Real estate - agricultural
62,599
155
2,580
—
65,334
Commercial loans
186,935
190
81
—
187,206
Other agricultural loans
34,013
884
1,195
—
36,092
Total
$
923,677
$
2,370
$
7,989
$
—
$
934,036

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 June 30, 2022 and December 31, 2021 (in thousands):

Performing
Nonperforming
Total
June 30, 2022
Residential real estate loans
$
288,701
$
456
$
289,157
Construction
21,856
—
21,856
Consumer loans to individuals
159,814
154
159,968
Total
$
470,371
$
610
$
470,981

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

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 June 30, ~~2022~~2023 and December 31, ~~2021~~2022 (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		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
June 30, 2022
June 30, 2023
Real Estate loans
Residential	$	287,483	$	574	$	67	$	-	$	456	$	1,097	$	577	$	289,157	$	306,101	$	741	$	48	$	-	$	572	$	1,361	$	307,462
Commercial		642,634		36		-		-		49		85		2,685		645,404		668,321		60		26		-		1,946		2,032		670,353
Agricultural		63,339		24		-		-		-		24		1,971		65,334		67,729		-		-		-		-		-		67,729
Construction		21,829		27		-		-		-		27		-		21,856		38,245		-		-		-		-		-		38,245
Commercial loans		187,184		9		-		-		13		22		-		187,206		211,168		430		-		-		116		546		211,714
Other agricultural loans		34,694		-				-		-		-		1,398		36,092		34,468		254				-		-		254		34,722
Consumer loans		159,289		449		76		-		154		679		-		159,968		246,219		770		180		-		589		1,539		247,758
Total	$	1,396,452	$	1,119	$	143	$	-	$	672	$	1,934	$	6,631	$	1,405,017	$	1,572,251	$	2,255	$	254	$	-	$	3,223	$	5,732	$	1,577,983



	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		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, 2021
December 31, 2022
Real Estate loans
Residential	$	271,622	$	155	$	10	$	-	$	469	$	634	-	$	784	$	273,040	$	297,350	$	187	$	223	$	-	$	486	$	896	$	567	$	298,813
Commercial		625,336		-		-		-		103		103	-		3,285		628,724		648,688		405		-		-		402		807		2,049		651,544
Agricultural		59,982		25		-				-		25			1,918		61,925		66,751		130		-				-		130		2,034		68,915
Construction		21,990		-		-		-		-		-	-		-		21,990		32,469		-		-		-		-		-		-		32,469
Commercial loans		185,801		3		13		91		16		32	-		198		186,031		185,485		71		-		-		61		132		1,640		187,257
Other agricultural loans		35,811		-		-				-		-			2,119		37,930		35,277		-		-				-		-		-		35,277
Consumer loans		145,986		248		111		-		55		414	-		-		146,400		198,893		853		239		-		164		1,256		-		200,149
Total	$	1,346,528	$	431	$	134	$	91	$	643	$	1,208	-	$	8,304	$	1,356,040	$	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 ~~loan~~credit losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance.

As of June 30, 2022, the allocation of the allowance pertaining to each major category of loans includes an allocation for loans secured by farmland and other agricultural loans. As of June 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 June 30, 2022, the allowance for loan losses includes $1.2 million 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.

The following table presents the allowance for ~~loan~~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		(6)		(154)		-		-		(147)		-		(308)		(615)
Recoveries		6		9		-		-		6		-		46		67
(Release of) Provision for credit losses		(24)		(2,422)		(4)		22		133		(41)		902		(1,434)
Ending balance, June 30, 2023	$	1,264	$	11,253	$	55	$	819	$	1,281	$	86	$	2,725	$	17,483
Ending balance individually evaluated	$	-	$	—	$	-	$	-	$	—	$	-	$	-	$	—
Ending balance collectively evaluated	$	1,264	$	11,253	$	55	$	819	$	1,281	$	86	$	2,725	$	17,483



(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)		-		-		-		(15)		-		(134)		(269)
Recoveries		118		80		-		-		23		-		23		244
Provision for loan losses		567		(1,803)		218		109		1,006		112		391		600
Ending balance, June 30, 2022	$	2,740	$	9,155	$	218	$	242	$	2,504	$	112	$	2,046	$	17,017
Ending balance individually evaluated ‎for impairment	$	-	$	-	$	-	$	-	$	—	$	-	$	—	$	—
Ending balance collectively evaluated ‎for impairment	$	2,740	$	9,155	$	218	$	242	$	2,504	$	112	$	2,046	$	17,017

(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)
-
-
-
(15)
-
(134)
(269)
Recoveries
118
80
-
-
23
-
23
244
Provision for loan losses
567
(1,803)
218
109
1,006
112
391
600
Ending balance, June 30, 2022
$
2,740
$
9,155
$
218
$
242
$
2,504
$
112
$
2,046
$
17,017
Ending balance individually evaluated
‎for impairment
$
-
$
—
$
-
$
-
$
—
$
-
$
-
$
—
Ending balance collectively evaluated
‎for impairment
$
2,740
$
9,155
$
218
$
242
$
2,504
$
112
$
2,046
$
17,017


(In thousands)	Residential Real Estate		Commercial Real Estate			Farmland		Construction	Commercial			Other Agricultural	Consumer		Total
Beginning balance, March 31, 2023	$	1,359	$	13,725	$	121	$	703	$	1,158	$	82	$	2,297	$	19,445
Charge Offs		(6)		(42)		-		-		(97)		-		(106)		(251)
Recoveries		-		3		-		-		-		-		20		23
(Release of) Provision for credit losses		(89)		(2,433)		(66)		116		220		4		514		(1,734)
Ending balance, June 30, 2023	$	1,264	$	11,253	$	55	$	819	$	1,281	$	86	$	2,725	$	17,483



(In thousands)	Residential Real Estate		Commercial Real Estate			Farmland		Construction	Commercial			Other Agricultural	Consumer		Total		Residential Real Estate		Commercial Real Estate			Farmland		Construction	Commercial			Other Agricultural	Consumer		Total
Beginning balance, March 31, 2022	$	2,326	$	10,287	$	504	$	134	$	1,495	$	292	$	1,622	$	16,660	$	2,326	$	10,287	$	504	$	134	$	1,495	$	292	$	1,622	$	16,660
Charge Offs		(5)		-		-		-		-		-		(82)		(87)		(5)		—		-		—		—		-		(82)		(87)
Recoveries		116		6		-		-		14		-		8		144		116		6		-		—		14		-		8		144
Provision for loan losses		303		(1,138)		(286)		108		995		(180)		498		300		303		(1,138)		(286)		108		995		(180)		498		300
Ending balance, June 30, 2022	$	2,740	$	9,155	$	218	$	242	$	2,504	$	112	$	2,046	$	17,017	$	2,740	$	9,155	$	218	$	242	$	2,504	$	112	$	2,046	$	17,017

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):

(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)
(439)
-
-
(174)
-
(261)
(879)
Recoveries
5
10
-
-
24
-
30
69
Provision for loan losses
273
2,005
-
(13)
293
-
442
3,000
Ending balance, June 30, 2021
$
2,233
$
9,580
$
—
$
137
$
1,503
$
—
$
1,887
$
15,340
Ending balance individually evaluated
‎for impairment
$
-
$
-
$
-
$
-
$
—
$
-
$
—
$
—
Ending balance collectively evaluated
‎for impairment
$
2,233
$
9,580
$
—
$
137
$
1,503
$
—
$
1,887
$
15,340


		Nonaccrual		Nonaccrual				Loans Past Due
		with no		with		Total		Over 90 Days		Total
	ACL		ACL		Nonaccrual		Still Accruing		Nonperforming
June 30, 2023
Real Estate loans
Residential	$	572	$	-	$	572	$	-	$	572
Commercial		1,946		-		1,946		-		1,946
Agricultural		-		-		-		-		-
Construction		-		-		-		-		-
Commercial loans		116		-		116		-		116
Other agricultural loans		-		-		-		-		-
Consumer loans		589		-		589		-		589
Total	$	3,223	$	-	$	3,223	$	-	$	3,223

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
June 30, 2023		2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Commercial real estate
Risk Rating
Pass	$	42,820	$	132,576	$	115,797	$	71,807	$	75,625	$	204,184	$	16,172	$	-	$	658,981
Special Mention		1,000		417		243		1,351		-		4,486		-		-		7,497
Substandard		-		-		59		1,471		-		2,345		-		-		3,875
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	43,820	$	132,993	$	116,099	$	74,629	$	75,625	$	211,015	$	16,172	$	-	$	670,353

Commercial real estate
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	112	$	42	$	-	$	-	$	154

Real Estate - Agriculture
Risk Rating
Pass	$	1,343	$	13,045	$	5,655	$	9,078	$	8,493	$	26,877	$	616	$	-	$	65,107
Special Mention		-		-		-		-		-		496		-		-		496
Substandard		-		541		-		1,067		-		193		325		-		2,126
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	1,343	$	13,586	$	5,655	$	10,145	$	8,493	$	27,566	$	941	$	-	$	67,729

Real Estate - Agriculture
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial loans
Risk Rating
Pass	$	41,554	$	49,515	$	27,604	$	21,117	$	13,043	$	20,061	$	34,156	$	-	$	207,050
Special Mention		601		1,528		315		186		49		211		1,344		-		4,234
Substandard		-		-		-		-		-		430		-		-		430
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	42,155	$	51,043	$	27,919	$	21,303	$	13,092	$	20,702	$	35,500	$	-	$	211,714

Commercial loans
Current period gross charge-offs	$	-	$	32	$	24	$	50	$	-	$	41	$	-	$	-	$	147

Other agricultural loans
Risk Rating
Pass	$	1,507	$	5,868	$	3,599	$	3,133	$	2,640	$	4,768	$	12,351	$	-	$	33,866
Special Mention		-		-		3		185		100		-		155		-		443
Substandard		-		-		-		-		413		-		-		-		413
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	1,507	$	5,868	$	3,602	$	3,318	$	3,153	$	4,768	$	12,506	$	-	$	34,722

Other agricultural loans
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Total
Risk Rating
Pass	$	87,224	$	201,004	$	152,655	$	105,135	$	99,801	$	255,890	$	63,295	$	-	$	965,004
Special Mention		1,601		1,945		561		1,722		149		5,193		1,499		-		12,670
Substandard		-		541		59		2,538		413		2,968		325		-		6,844
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	88,825	$	203,490	$	153,275	$	109,395	$	100,363	$	264,051	$	65,119	$	-	$	984,518



			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

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):


														Revolving		Revolving
	Term Loans Amortized Costs Basis by Origination Year													Loans		Loans
														Amortized		Converted
June 30, 2023		2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Residential real estate
Payment Performance
Performing	$	13,560	$	55,863	$	59,707	$	37,220	$	17,375	$	94,858	$	28,307	$	-	$	306,890
Nonperforming		-		-		-		-		58		463		51		-		572
Total	$	13,560	$	55,863	$	59,707	$	37,220	$	17,433	$	95,321	$	28,358	$	-	$	307,462

Residential real estate
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	6	$	-	$	-	$	6

Construction										-
Payment Performance
Performing	$	5,220	$	21,705	$	6,786	$	1,528	$	1,911	$	788	$	307	$	-	$	38,245
Nonperforming		-		-		-		-		-		-		-		-		-
Total	$	5,220	$	21,705	$	6,786	$	1,528	$	1,911	$	788	$	307	$	-	$	38,245

Construction
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer loans to individuals										-
Payment Performance
Performing	$	81,233	$	89,832	$	30,125	$	18,044	$	14,013	$	12,800	$	1,122	$	-	$	247,169
Nonperforming		-		461		41		21		63		3		-		-		589
Total	$	81,233	$	90,293	$	30,166	$	18,065	$	14,076	$	12,803	$	1,122	$	-	$	247,758

Consumer loans to individuals
Current period gross charge-offs	$	3	$	146	$	98	$	28	$	15	$	7	$	11	$	-	$	308

Total										-
Payment Performance
Performing	$	100,013	$	167,400	$	96,618	$	56,792	$	33,299	$	108,446	$	29,736	$	-	$	592,304
Nonperforming		-		461		41		21		121		466		51		-		1,161
Total	$	100,013	$	167,861	$	96,659	$	56,813	$	33,420	$	108,912	$	29,787	$	-	$	593,465

(In thousands)
Residential Real Estate
Commercial Real Estate
Farmland
Construction
Commercial
Other Agricultural
Consumer
Total
Beginning balance, March 31, 2021
$
2,124
$
9,084
$
-
$
122
$
1,405
$
-
$
1,774
$
14,509
Charge Offs
—
(439)
-
—
(114)
-
(158)
(711)
Recoveries
3
6
-
—
16
-
17
42
Provision for loan losses
106
929
-
15
196
-
254
1,500
Ending balance, June 30, 2021
$
2,233
$
9,580
$
—
$
137
$
1,503
$
—
$
1,887
$
15,340



	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 June 30, 2023, there were no modifications made to borrowers experiencing financial difficulty.

The Company’s primary business activity as of June 30 ~~2022~~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 June 30, ~~2022,~~2023, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with ~~$145.0~~$146.5 million of loans outstanding, or ~~10.3 %~~9.3% of total loans outstanding, and residential rentals with loans outstanding of ~~$115.5~~$121.8 million, or ~~8.2%~~7.7% of loans outstanding. For the six months ended June 30, ~~2022,~~2023, the Company did not recognize any charge offs on loans in the named concentrations.

9. Operating Leases

The Company leases 8seven office locations and one back-office facility 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 six-month periods ended June 30, ~~2022~~2023 and ~~2021,~~2022, amounted to ~~$299,000~~$362,000 and ~~$294,000~~$299,000 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 June 30, ~~2022.~~2023.


	Operating
Weighted-average remaining term		~~11 years~~9.8
Weighted-average discount rate		~~2.84%~~2.85%

The following table presents the undiscounted cash flows due related to operating leases as of June 30, ~~2022,~~2023, along with a reconciliation to the discounted amount recorded on the Consolidated Balance Sheets:


Undiscounted cash flows due (in thousands)		Operating		Operating

2021	$	294
2022		557
2023		544	$	327
2024		561		664
2025		504		680
2026 and thereafter		2,815
2026				524
2027				401
2028 and thereafter				2,414
Total undiscounted cash flows		5,275		5,010
Discount on cash flows		(855)		739
Total lease liabilities	$	4,420	$	4,271

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, ~~2021.~~2022.

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 June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:



	Fair Value Measurement Using								Fair Value Measurement Using
	Reporting Date								Reporting Date
Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
June 30, 2022	(In thousands)
June 30, 2023									(In thousands)
ASSETS
Available for Sale:
U.S. Treasury securities	$	31,300	$	-	$	31,300	$	-	$	41,969	$	-	$	41,969	$	-
U.S. Government agencies		16,236				16,236				18,507		-		18,507		-
States and political subdivisions		140,268		-		140,268		-		126,519		-		126,519		-
Mortgage-backed securities-government
sponsored entities		253,073		-		253,073		-		216,626		-		216,626		-
Interest rate derivatives		1,167		-		1,167		-		1,447		-		1,447		-

LIABILITIES
Interest rate derivatives		1,167		-		1,167		-		1,447		-		1,447		-

Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
December 31, 2021	(In thousands)
December 31, 2022									(In thousands)
ASSETS
Available for Sale:
U.S. Treasury securities	$	19,351	$		$	19,351	$		$	41,854	$	-	$	41,854	$	-
U.S. Government agencies		16,011		-		16,011		-		18,323		-		18,323		-
States and political subdivisions		145,867				145,867				127,852		-		127,852		-
Corporate obligations		-		-		-		-
Mortgage-backed securities-government
sponsored entities		225,553		-		225,553		-		230,898		-		230,898		-
Interest rate derivatives		235		-		235		-		1,464		-		1,464		-

LIABILITIES
Interest rate derivatives		235		-		235		-		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 ~~LIBOR~~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 ~~LIBOR~~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.

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 June 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:



			Fair Value Measurement Using Reporting Date								Fair Value Measurement Using Reporting Date

(In thousands)

Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
June 30, 2022
June 30, 2023
Individually analyzed loans held for investment									$	490	$	-	$	-	$	490
Foreclosed Real Estate Owned										387		-		-		387
December 31, 2022
Impaired Loans	$	13	$	-	$	-	$	13	$	413	$	-	$	-	$	413
Foreclosed Real Estate Owned		346		-		-		346		346		-		-		346
December 31, 2021
Impaired Loans	$	1,402	$	-	$	-	$	1,402
Foreclosed Real Estate Owned		1,742		-		-		1,742

~~Impaired~~Individually analyzed loans ~~(generally carried at fair value):~~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 June 30, ~~2022,~~2023, the fair value of individually analyzed loans held for investment ~~in impaired loans~~ was ~~$13,000~~$490,000 which included 1three loan ~~relationship~~relationships that did not require ~~a valuation allowance~~an ACL since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of June 30, ~~2022,~~2023, the Company has ~~not~~ recognized charge-offs against the allowance for ~~loan~~credit losses on ~~any~~these individually analyzed loans held for investment in the amount of ~~these impaired loans.~~$0.

As of December 31, ~~2021,~~2022, the fair value investment in impaired loans totaled ~~$1,402,000~~$413,000 which included 3three 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,~~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, ~~2021,~~2022, the fair value investment in impaired loans included 1one loan relationships with a carrying value of ~~$1,517,000~~$50,000 that required a valuation allowance of ~~$272,000~~$50,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan. As of December 31, ~~2021,~~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 (carried at fair value):~~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)
June 30, ~~2022~~2023
~~Impaired~~Individually analyzed loans held for investment	$	13490	Appraisal of collateral(1)	Appraisal adjustments(2)	10.0% ~~(10.00%~~-10.0% (10.0%)
Foreclosed real estate owned	$	~~346~~387	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~~2022
Impaired loans	$	~~1,402~~413	Appraisal of collateral(1)	Appraisal adjustments(2)	0%-10.0% ~~(1.12%~~(8.92%)

Foreclosed real estate owned	$	~~1,742~~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 June 30, ~~2022~~2023 and December 31, ~~2021.~~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.

The estimated fair values of the Bank’s financial instruments not required to be measured or reported at fair value were as follows at June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. (In thousands)



	Fair Value Measurements at June 30, 2022										Fair Value Measurements at June 30, 2023
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents (1)	$	109,666	$	109,666	$	109,666	$	-	$	-	$	33,089	$	33,089	$	33,089	$	-	$	-
Loans receivable, net		1,387,300		1,386,920		-		-		1,386,920		1,560,216		1,504,798		-		-		1,504,798
Mortgage servicing rights		245		539		-		-		539		189		497		-		-		497
Regulatory stock (1)		2,396		2,396		2,396		-		-		7,924		7,924		7,924		-		-
Bank owned life insurance (1)		43,167		43,167		43,167		-		-		45,806		45,806		45,806		-		-
Accrued interest receivable (1)		6,085		6,085		6,085		-		-		7,276		7,276		7,276		-		-
Financial liabilities:
Deposits		1,799,830		1,800,622		1,306,678		-		493,944		1,731,997		1,730,506		1,120,024		-		610,482
Short-term borrowings (1)		70,427		70,427		70,427		-		-		112,290		112,290		112,290		-		-
Other borrowings		4,412		4,404		-		-		4,404		99,687		98,689		-		-		98,689
Accrued interest payable (1)		1,138		1,138		1,138		-		-		7,101		7,101		7,101		-		-
Off-balance sheet financial instruments:
Commitments to extend credit and ‎outstanding letters of credit		-		-		-		-		-		-		-		-		-		-



	Fair Value Measurements at December 31, 2021										Fair Value Measurements at December 31, 2022
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents (1)	$	206,681	$	206,681	$	206,681	$	-	$	-	$	31,866	$	31,866	$	31,866	$	-	$	-
Loans receivable, net		1,338,489		1,389,870		-		-		1,389,870		1,456,946		1,418,300		-		-		1,418,300
Mortgage servicing rights		289		500		-		-		500		213		498		-		-		498
Regulatory stock (1)		3,927		3,927		3,927		-		-		5,418		5,418		5,418		-		-
Bank owned life insurance (1)		40,038		40,038		40,038		-		-		43,364		43,364		43,364		-		-
Accrued interest receivable (1)		5,889		5,889		5,889		-		-		6,917		6,917		6,917		-		-
Financial liabilities:
Deposits		1,756,793		1,759,722		1,228,091		-		531,631		1,727,727		1,727,184		1,223,958		-		503,226
Short-term borrowings (1)		60,822		60,822		60,822		-		-		93,215		93,215		93,215		-		-
Other borrowings		29,998		30,221		-		-		30,221		40,000		40,074		-		-		40,074
Accrued interest payable (1)		1,203		1,203		1,203		-		-		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. At June 30, ~~2022~~2023 and December 31, ~~2021,~~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 June 30, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$1,167,000~~$1,447,000 and ~~$235,000,~~$1,464,000, respectively.

Summary information regarding these derivatives is presented ~~below:~~below


(Amounts in thousands)	(Amounts in thousands)													(Amounts in thousands)
		Notional Amount								Fair Value					Notional Amount								Fair Value
			June 30, 2022		December 31, 2021		Interest Rate Paid		Interest Rate Received		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022		Interest Rate Paid		Interest Rate Received		June 30, 2023		December 31, 2022
Customer interest rate swap	Customer interest rate swap													Customer interest rate swap

Maturing November, 2030	Maturing November, 2030	$	6,694	$	6,873	1 month LIBOR + Margin			Fixed	$	709	$	144	Maturing November, 2030	$	6,330	$	6,513	Term SOFR + Margin			Fixed	$	880	$	889
Maturing December, 2030	Maturing December, 2030		4,426		4,553	1 month LIBOR + Margin			Fixed		458		91	Maturing December, 2030		4,166		4,297	Term SOFR + Margin			Fixed		567		575

Total		$	11,120	$	11,426					$	1,167	$	235		$	10,496	$	10,810					$	1,447	$	1,464


Third party interest rate swap	Third party interest rate swap													Third party interest rate swap

Maturing November, 2030	Maturing November, 2030	$	6,694	$	6,873		Fixed	1 month LIBOR + Margin		$	709	$	144	Maturing November, 2030	$	6,330	$	6,513		Fixed	Term SOFR + Margin		$	880	$	889
Maturing December, 2030	Maturing December, 2030		4,426		4,553		Fixed	1 month LIBOR + Margin			458		91	Maturing December, 2030		4,166		4,297		Fixed	Term SOFR + Margin			567		575

Total		$	11,120	$	11,426					$	1,167	$	235		$	10,496	$	10,810					$	1,447	$	1,464

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

(Amounts in thousands)

Assets

Liabilities

Assets

Liabilities

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

June 30, 2022

June 30, 2023

Interest rate derivatives

Other assets

1,167

Other liabilities

1,167

Other assets

1,447

Other liabilities

1,447

December 31, 2021

December 31, 2022

Interest rate derivatives

Other assets

235

Other liabilities

235

Other assets

1,464

Other liabilities

1,464

12. New and Recently Adopted Accounting Pronouncements

~~New Accounting Pronouncements Not Yet Adopted~~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.

In ~~June 2016,~~March 2023, the FASB issued ASU ~~2016-13,~~ No. 2023-02, "~~Financial Instruments –~~Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit ~~Losses: Measurement of Credit Losses on Financial Instruments, which changes~~Structures Using 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 premiseProportional Amortization Method (a consensus of the ~~Update is that financial assets measured at amortized cost should be presented at~~Emerging Issues Task Force)". The ASU allows entities to elect the ~~net amount expected~~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 ~~be collected, through an allowance for~~address existing interpretive issues. It also prescribes specific information reporting entities must disclose about tax 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 theinvestments each 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~~ASU is effective for ~~SEC filers that are eligible to be smaller~~ reporting ~~companies, non-SEC filers, and all other companies, to fiscal years~~periods beginning after December 15, ~~2022, including interim periods within those fiscal years. We~~2023, for public business entities, or January 1, 2024 for the Company. The Company does not expect the adoption of this ASU to ~~recognize~~have a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overallmaterial impact ~~of the new guidance~~ on the ~~consolidated~~Company's financial statements.

2833

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment~~. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements

~~In April 2019, the FASB issued ASU 2019-04,~~ ~~Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives, and Hedging (Topic 815); and Financial Instruments (Topic 825),~~ which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. ASU 2019-04 makes clarifying amendments to certain financial instrument standards. For entities that have not yet adopted ASU 2016-13, the effective dates for the amendments related to ASU 2016-13 are the same as the effective dates in ASU 2016-13. For entities that have adopted ASU 2016-13, the amendments related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2017-12 as of April 25, 2019, the effective dates for the amendments to Topic 815 are the same as the effective dates in ASU 2017-12. For entities that have adopted ASU 2017-12 as of April 25, 2019, the effective date is as of the beginning of the first annual period beginning after April 25, 2019. The amendments related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.~~The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.~~

~~In May 2019, the FASB issued ASU 2019-05,~~ ~~Financial Instruments – Credit Losses (Topic 326)~~, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted the credit losses standard, the ASU is effective when they implement the credit losses standard. For entities that already have adopted the credit losses standard, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

~~In November 2019, the FASB issued ASU 2019-11,~~ ~~Codification Improvements to Topic 326, Financial Instruments – Credit Losses~~, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.~~The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.~~

~~In March 2020, the FASB issued ASU 2020-03~~,~~Codification Improvements to Financial Instruments.~~ This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, ~~Financial Instruments~~, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The

~~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.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may”, “will”, “believe”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations. This includes statements regarding general economic conditions, public health crisis such as the governmental, social and economic effects of the ~~novel coronavirus,~~COVID 19 pandemic, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses. Additional potential factors include changes in interest rates, the rate of inflation, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and ~~prices.~~prices, instability in the banking system, the potential for a recessionary economy and any adverse impact resulting from the COVID 19 pandemic. Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.

~~In addition,~~During 2022, the ~~COVID-19 pandemic has had,~~Federal Reserve took unprecedented action during the year to restrain inflation and ~~may continue to have, an adverse impact on~~improve the ~~Company and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact~~stability of the ~~COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including whether~~economy by raising the ~~coronavirus can continue to be controlled and abated. As~~target federal funds rate several times from 25 basis points in the ~~result~~beginning of the ~~COVID-19 pandemic and~~year to 75 basis points toward the ~~related adverse local and national economic consequences, we could be subject to any~~end of the ~~following risks, any~~year and brought the benchmark interest rates up by a collective 4.50 percent. During the first quarter 2023, the Federal Reserve increased the target federal funds rate another 0.25 percent and further increased the target federal funds rate another 0.25 percent in May 2023. At its June 2023 meeting, the Federal Reserve left interest rates unchanged for the first time since March 2022, in order to give themselves time to assess the still developing effects of ~~which~~previous increases in interest rates and borrowing costs. However, on July 26, 2023, the Federal Reserve increased the target funds rate another 0.25 percent. The Federal Reserve has indicated that it may further increase the target federal funds rate in 2023 in an attempt to reduce inflation. Any substantial or unexpected change in market interest rates could have a material adverse effect on ~~our business,~~the Company’s financial condition ~~liquidity,~~ and results of ~~operations:~~operations. As inflation increases and market interest rates rise, the ~~demand~~value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for ~~our products~~floating rate instruments. In addition, inflation generally increases the cost of goods and services ~~may decline, making it difficult to grow assets~~we use in our business operations, such as electricity and ~~income; if~~other utilities, which increases our non-interest expenses. Furthermore, our customers are also affected by inflation and the ~~economy worsens, loan delinquencies, problem assets,~~rising costs of goods and ~~foreclosures may increase, resulting~~services used in ~~increased charges~~their households and ~~reduced income; collateral for loans, especially real estate, may decline in value,~~businesses, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairinghave a negative impact on their ability to ~~honor commitments to us; due~~repay their loans with us. In addition, recent bank failures have led to a ~~decline in~~greater focus by institutions, investors and regulators on the on-balance sheet liquidity of and funding sources for financial institutions, the composition of its deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management. If we are unable to adequately manage our ~~stock price or other factors, goodwill~~liquidity, deposits, capital levels and interest rate risk, it may ~~become impaired~~have a material adverse effect on our financial condition and ~~be required to be written down; and our cyber security risks are increased as the result~~results of ~~an increase in the number of employees working remotely.~~operations.

The majority of the assets and liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.

Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

Note 2 to the Company’s consolidated financial statements for the fiscal year ended December 31, ~~2021~~2022 (included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021)~~2022) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations. See Note 1, "Basis of Presentation" for additional information on the adoption of ASC 326, which changes the methodology under which management calculates its reserve for loans and investment securities, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for ~~loan~~credit losses, the valuation of deferred tax assets, the fair value of financial instruments, ~~the determination of other-than-temporary impairment on securities~~ and the determination of goodwill impairment. Please refer to the discussion of the allowance for ~~loan~~credit losses calculation under ~~“Loans” in the~~ “Changes in Financial ~~Condition” section.~~

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

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

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

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

Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, the Company considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the securities and whether it is more likely than not that it will not have to sell the

securities before recovery of their cost basis. The Company believes that all unrealized losses on securities at June 30, 2022 and December 31, 2021 represent temporary impairment of the securities, related to changes in interest rates.

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

Changes in Financial Condition

General

Total assets as of June 30, ~~2022~~2023 were ~~$2.066~~$2.142 billion compared to ~~$2.069~~$2.047 billion as of December 31, ~~2021.~~2022. The ~~decrease~~increase was due primarily to a $105.9 million decrease in interest-bearing deposits with banks. Interest-bearing balances with banks decreased as overnight liquidity was utilized to fund growth in loans and securities, and to pay off long-term borrowings. The decrease was partially offset by a 34.1 million increase in securities available for sale, and a $49.4$103.3 million increase in loans receivable.

Securities

The fair value of securities available for sale as of June 30, ~~2022~~2023 was ~~$440.9~~$403.6 million compared to ~~$406.8~~$418.9 million as of December 31, ~~2021. The increase in the securities portfolio is the result of purchases executed to invest excess liquidity and to provide pledging for public deposits.~~

~~The Company has securities in an unrealized loss position.~~2022. In ~~management’s~~Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. ~~Management believes~~The Company concluded that the ~~unrealized~~decline in the value of these securities was not indicative of a credit loss. The Company did not recognize any credit losses on ~~all holdings represent temporary~~these available for sale debt securities for the six months ended June 30, 2023, or other-than-temporary impairment ofcharges for the six months ended June 30, 2022. The Company does not have the intent to sell the securities asand it is more likely than not that it will not have to sell the ~~Company has the intent and ability to hold these investments until maturity or market price recovery.~~securities before recovery of its cost basis.

Loans

Loans receivable totaled ~~$1.404~~$1.560 billion at June 30, ~~2022~~2023 compared to ~~$1.355~~$1.457 billion as of December 31, ~~2021.~~2022. The ~~$49.4~~$103.3 million increase in loans receivable during the six months ended June 30, ~~2022~~2023, was due primarily to ~~a $16.7~~an $18.8 million increase in commercial real estate loans, a ~~$16.1~~$24.5 million increase in ~~residential mortgage~~commercial loans and a ~~$13.6~~$47.6 million increase in consumer loans.

The allowance for ~~loan~~credit losses totaled ~~$17,017,000~~$17,483,000 as of June 30, ~~2022,~~2023, and represented ~~1.21%~~1.11% of total loans outstanding, compared to ~~$16,442,000,~~$16,999,000, or ~~1.21%~~1.15% of total loans outstanding, at December 31, ~~2021.~~2022. The Company had net charge-offs for the six months ended June 30, ~~2022~~2023 of ~~$25,000,~~$548,000, compared to ~~$810,000~~$25,000 in the corresponding period in ~~2021.~~2022, primarily due to a $286,000

increase in commercial loan charge-offs and a $173,000 increase in consumer loan charge-offs. The Company’s management assesses the adequacy of the allowance for ~~loan~~credit losses on a quarterly basis. ~~The process includes an analysis of~~Based on management’s best judgement, the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. In addition, management has included qualitative factors ~~during 2022 which~~ are ~~specifically related~~applied to the ~~economic impact of the COVID-19 pandemic.~~final adjusted loss rate each quarter. Management considers the allowance for ~~loan~~credit losses adequate at June 30, ~~2022~~2023 based on the Company’s criteria. However, there can be no assurance that the allowance for ~~loan~~credit losses will be adequate to cover significant losses, if any, which might be incurred in the future.

As of June 30, ~~2022,~~2023, non-performing loans totaled ~~$672,000~~$3,223,000 or ~~0.05%~~0.20% of total loans compared to ~~$734,000,~~$1,113,000, or ~~0.05%~~0.08%, of total loans at December 31, ~~2021.~~2022. The increase in non-performing loans as of June 30, 2023, is due primarily to the inclusion of approximately $1.5 million of previously classified purchased credit-impaired loans in conjunction with the adoption of “CECL”, and a $425,000 increase in consumer loans. At June 30, ~~2022,~~2023, non-performing assets totaled ~~$1,018,000,~~$3,610,000, or ~~0.05%~~0.17%, of total assets, compared to ~~$2,476,000,~~$1,459,000, or ~~0.12%~~0.07%, of total assets at December 31, ~~2021. The decrease in non-performing assets during the six month period ended June 30, 2022, was due to sales of properties included in foreclosed real estate.~~2022.

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



(dollars in thousands)	June 30, 2022			December 31, 2021			June 30, 2023			December 31, 2022
Loans accounted for on a non-accrual basis:
Real Estate
Residential	$	456		$	469		$	572		$	486
Commercial		49			103			1,946			402
Agricultural		—			—			—			—
Construction		—			—			—			—
Commercial and financial loans		13			16			116			61
Other agricultural loans		—			—			—			—
Consumer loans to individuals		154			55			589			164
Total non-accrual loans		672			643			3,223			1,113
Accruing loans which are contractually
past due 90 days or more		—			91			—			—
Total non-performing loans		672			734			3,223			1,113
Foreclosed real estate		346			1,742			387			346
Total non-performing assets	$	1,018		$	2,476		$	3,610		$	1,459

Purchased credit impaired loans (a)	$	6,631		$	8,304		$	N/A		$	6,290

Allowance for loans losses	$	17,017		$	16,442
Allowance for credit losses							$	17,483		$	16,999

Coverage of non-performing loans (a) (b)		2,532%	%		2,240%	%		542%	%		1,527%	%
Non-performing loans to total loans(a)		0.05	%		0.05	%		0.20	%		0.08	%
Non-performing loans to total assets(a)		0.03	%		0.03	%		0.15	%		0.05	%
Non-performing assets to total assets(a)		0.05	%		0.12	%		0.17	%		0.07	%

(a) Purchased impaired loans are loans obtained in acquisition transactions that as of the acquisition date were specifically identified as displaying signs of credit deterioration and for which the Company did not expect to collect all contractually required principal and interest payments. ~~Those~~Prior to 2023, those loans were impaired at the date of acquisition, were recorded at estimated fair value and were generally delinquent in payments. The Company estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount on the acquisition date relating to these impaired loans that is recognized in interest income.

(b) ~~For~~Prior to 2023, loans acquired with specific evidence of deterioration in credit quality, a specific credit fair value adjustment is established at the date of acquisition and will not impact the allowance for loan losses unless actual losses exceed the established fair value adjustment.

Deposits

During the ~~six-month period~~six-months ended June 30, ~~2022,~~2023, total deposits increased ~~$43.0~~$4.3 million due primarily to ~~growth~~a $108.2 million increase in ~~interest-bearing demand deposits.~~certificates of deposit. The increase in certificates of deposit was due to a migration from lower costing non-maturity deposit balances, as well as new money resulting from deposit promotions. All other deposit categories decreased $103.9 million, net.

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



(dollars in thousands)	June 30, 2022		December 31, 2021		June 30, 2023		December 31, 2022
Non-interest bearing demand	$	442,991	$	440,652	$	425,757	$	434,529
Interest-bearing demand		248,298		196,786		212,760		237,891
Money market deposit accounts		314,457		309,439		237,002		273,165
Savings		300,932		281,214		244,505		278,372
Time deposits <$250,000		282,381		271,464		390,176		290,147
Time deposits >$250,000		210,771		257,238		221,797		213,623
Total	$	1,799,830	$	1,756,793	$	1,731,997	$	1,727,727

Borrowings

Short-term borrowings increased $19.1 million to $112.3 million at June 30, 2023, compared to $93.2 million at December 31, 2022, due primarily to an increase in overnight borrowings to fund liquidity needs.

Other borrowings as of June 30, ~~2022, totaled $4.4~~2023, were $99.7 million compared to ~~$30.0~~$40.0 million as of December 31, ~~2021. The decrease reflects the early payoff of $21.1 million~~2022. Federal Home Loan Bank ~~term borrowings. A prepayment fee of $3,000 was~~

~~recognized in other expense~~borrowings increased $49.7 million during the ~~six months ended June 30, 2022. Short-term borrowings, which consist of securities sold~~period due primarily as a source to fund loan growth. A new $10.0 million term borrowing that was initiated under ~~agreements~~the Federal Reserve Long-Term Funding Program also contributed to ~~repurchase and overnight borrowings from~~ the ~~FHLB, increased $9.6 million due to growth in repurchase agreements.~~increase.

Other borrowings consisted of the following:

(dollars in thousands)
June 30, 2022
December 31, 2021
Notes with the FHLB:
Amortizing fixed rate borrowing due March 2022 at 1.75%
$
—
$
227
Amortizing fixed rate borrowing due August 2022 at 1.94%
—
1,364
Amortizing fixed rate borrowing due October 2022 at 1.88%
—
1,386
Amortizing fixed rate borrowing due October 2023 at 3.24%
2,827
3,856
Amortizing fixed rate borrowing due December 2023 at 3.22%
1,585
2,097
Fixed rate term borrowing due December 2023 at 1.95%
—
10,000
Amortizing fixed rate borrowing due December 2023 at 1.73%
—
5,190
Amortizing fixed rate borrowing due April 2024 at 0.91%
—
5,878
$
4,412
$
29,998



(dollars in thousands)	June 30, 2023		December 31, 2022
Notes with the FHLB:
Amortizing fixed rate borrowing due December 2023 at 5.08%	$	20,253	$	40,000
Fixed rate borrowing due April 2025 at 4.26%		20,000		—
Fixed rate borrowing due April 2026 at 4.04%		20,000		—
Amortizing fixed rate borrowing due May 2027 at 4.37%		29,434		—
	$	89,687	$	40,000

Notes with the Federal Reserve Bank
Fixed rate borrowing due March 2024 at 4.83%		10,000		—
	$	10,000	$	—

Stockholders’ Equity and Capital Ratios

As of June 30, ~~2022,~~2023, total stockholders’ equity ~~totaled $173.8~~was $173.4 million, compared to ~~$205.3~~$167.1 million as of December 31, ~~2021. The net change in~~2022. Total stockholders’ equity ~~included $14.0~~increased $12.3 million ofdue to net income, ~~which was~~offset partially ~~offset~~ by ~~$4.6~~$4.7 million of dividends declared. ~~In addition, total~~Stockholders” equity ~~decreased $40.0~~increased $3.1 million due to ~~a decrease~~an increase in the fair value of securities in the ~~available for sale~~available-for-sale portfolio, net of tax. ~~This decrease~~The increase in fair value of securities is the result of a change in interest rates and spreads, which may impact the value of the securities. Because of interest rate volatility, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

Regulatory Capital Requirements. The Federal Reserve has adopted regulatory capital rules pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve’s capital rules are similar to those imposed on the Bank by the FDIC. The Federal Reserve’s Small Bank Holding Company Policy Statement, however, exempts from the regulatory capital requirements bank holding companies with less than $3.0 billion in consolidated assets that are not engaged in significant non-banking or off-balance sheet activities and that do not have a material amount of debt or equity securities registered with the SEC. As long as their bank subsidiaries are well capitalized, such bank holding companies need only maintain a pro forma debt to equity ratio of less than 1.0 in order to pay dividends and repurchase stock and to be eligible for expedited treatment on applications.

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



	June 30, 2022	December 31, 2021	June 30, 2023	December 31, 2022
Tier 1 Capital
(To average assets)	8.93%	8.51%	9.21%	9.36%
Tier 1 Capital
(To risk-weighted assets)	12.34%	12.49%	12.05%	12.49%
Common Equity Tier 1 Capital
(To risk-weighted assets)	12.34%	12.49%	12.05%	12.49%
Total Capital
(To risk-weighted assets)	13.49%	13.66%	13.04%	13.58%

~~Effective January 1, 2015,~~The Bank is required to comply with applicable capital adequacy rules adopted by the ~~Company~~FDIC and ~~the Bank became~~other federal bank regulatory agencies (the “Basel III Capital Rules”). The Basel III Capital Rules apply to all depository institutions as well as to all top-tier bank and savings and loan holding companies that are not subject to ~~new regulatory~~the Federal Reserve Small Bank Holding Company Policy Statement.

Under the Basel III Capital Rules, banks are required to meet four minimum capital ~~rules, which, among other things, impose~~standards: (1) a ~~new~~“Tier 1” or “core” capital leverage ratio equal to at least 4% of total adjusted assets; (2) a common equity Tier 1 ~~minimum~~ capital ~~requirement (4.5%~~ratio equal to 4.5% of risk-weighted ~~assets), set the minimum leverage ratio for all banking organizations at~~assets; (3) a ~~uniform 4% of total assets, increase the minimum~~ Tier 1 ~~capital to~~ risk-based ~~assets requirement (from 4%~~ratio equal to 6% of risk-weighted ~~assets)~~assets; and ~~assign~~(4) a ~~higher~~total capital ratio equal to 8% of total risk-weighted assets. Common equity Tier 1 capital is defined as common stock instruments, retained earnings, any common equity Tier 1 minority interest and, unless the bank has made an “opt-out” election, accumulated other comprehensive income, net of goodwill and certain other intangible assets. Tier 1 or core capital is defined as common equity Tier 1 capital plus certain qualifying subordinated interests and grandfathered capital instruments. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, qualifying subordinated instruments and certain grandfathered capital instruments. An institution’s risk-based capital requirements are measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk ~~weight (150%)~~weight. Risk weightings range from 0% for cash to 100% for property acquired through foreclosure, commercial loans, and certain other assets to 150% for exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. ~~The new rules also~~

In addition to the above minimum requirements, the Basel III Capital Rules require ~~unrealized gains~~banks and ~~losses~~covered financial institution holding companies to maintain a capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on ~~certain “available-for-sale” securities holdings to~~the percentage of earnings that can be ~~included~~paid out in dividends or used for ~~purposes of calculating regulatory capital requirements unless a one-time opt out is exercised which the Company and the Bank have done. The final rule limits a banking organization’s dividends,~~ stock repurchases and ~~other~~on the payment of discretionary bonuses to senior executive management. The capital ~~distributions, and certain discretionary bonus payments~~buffer requirement effectively raises the minimum required risk-based capital ratios to ~~executive officers, if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity~~7% for Common Equity Tier 1 ~~capital to risk-weighted assets above regulatory minimum risk-based requirements. The capital conservation buffer requirement was phased in beginning January~~Capital, 8.5% for Tier 1 ~~2016~~Capital and ~~ending January 1, 2019, when the full capital conservation buffer requirement became effective.~~10.5% for Total Capital on a fully phased-in basis. The Company and the Bank ~~are~~were in compliance with ~~their respective new~~all applicable regulatory capital requirements ~~including the capital conservation buffer,~~ as of June 30, ~~2022.~~2023.

In December 2018, the Federal Reserve announced that a banking organization that experiences a reduction in retained earnings due to the CECL adoption as of the beginning of the fiscal year in which CECL is adopted may elect to phase in the regulatory capital impact of adopting CECL. Transitional amounts are calculated for the following items: retained earnings, temporary difference deferred tax assets and credit loss allowances eligible for inclusion in regulatory capital. When calculating regulatory capital ratios, 25% of the transitional amounts are phased in during the first year. An additional 25% of the transitional amounts are phased in over each of the next two years and at the beginning of the fourth year, the day-one effects of CECL are completely reflected in regulatory capital.

The Company adopted the transition guidance applied these effects to regulatory capital in the first quarter of 2023 upon adoption of CECL. See Note 1, "Basis of Presentation" for additional information on the adoption of CECL.

Liquidity

As of June 30, ~~2022,~~2023, the Company had cash and cash equivalents of ~~$109.7~~$33.1 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of ~~$440.9~~$403.6 million which could be used for liquidity needs. Total liquidity of ~~$550.5~~$436.7 million as of June 30, ~~2022,~~2023, represents ~~26.6%~~20.4% of total assets compared to ~~$613.5~~$450.8 million and ~~29.7%~~22.0% of total assets as of December 31, ~~2021.~~2022. The Company also monitors other liquidity measures, all of which

were within the Company’s policy guidelines as of June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. Based upon these measures, the Company believes its liquidity is adequate.

Capital Resources

The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, ~~2023.~~2024. There were no borrowings under this line as of June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $16,000,000. There were no borrowings under this line as of June 30, ~~2022~~2023 and December 31, ~~2021.~~

The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000. There were no borrowings under this line as of June 30, 2022 and December 31, 2021.2022.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately ~~$640,650,000~~$672,270,000 as of June 30, ~~2022,~~2023, of which ~~$4,412,000~~$137,399,000 was outstanding in the form of borrowings as of June 30, ~~2022.~~2023. As of December 31, ~~2021,~~2022, the maximum borrowing capacity was ~~$607,092,000,~~$655,344,000, of which ~~$29,998,000~~$82,264,000 of borrowings was outstanding as of December 31, ~~2021.~~

2022. Additionally, as of June 30, ~~2022,~~2023, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of ~~$104,050,000~~$61,500,000 as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. As of December 31, ~~2021,~~2022, there was ~~$127,850,000~~$92,900,000 outstanding in the form of Letters of Credit. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

Non-GAAP Financial Measures

This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on ~~page 38.~~pages 41 and 45. Fully taxable equivalent interest income and net interest income is also reflected in the table on ~~page 39.~~pages 42 and 46. Although the Company believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.

‎

3539

Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates



(Tax-Equivalent Basis,	Three Months Ended June 30,												Three Months Ended June 30,
dollars in thousands)	2022						2021						2023						2022
	Average				Average		Average				Average		Average				Average		Average				Average
	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate
	(2)		(1)		(3)		(2)		(1)		(3)		(2)		(1)		(3)		(2)		(1)		(3)
Assets
Interest-earning assets:
Interest-bearing deposits with banks	$	86,793	$	182		0.84%	$	176,530	$	59		0.13%	$	3,868	$	53		5.48%	$	86,793	$	182		0.84%
Securities available for sale:
Taxable		404,764		1,739		1.72		247,611		966		1.56		415,642		2,097		2.02		404,764		1,739		1.72
Tax-exempt (1)		80,002		580		2.90		64,084		494		3.08		70,427		485		2.75		80,002		580		2.90
Total securities available for sale (1)		484,766		2,319		1.91		311,695		1,460		1.87		486,069		2,582		2.12		484,766		2,319		1.91
Loans receivable (1) (4) (5)		1,385,679		15,780		4.56		1,401,890		16,208		4.62		1,559,252		20,788		5.33		1,385,679		15,780		4.56
Total interest-earning assets		1,957,238		18,281		3.74		1,890,115		17,727		3.75		2,049,189		23,423		4.57		1,957,238		18,281		3.74
Non-interest earning assets:
Cash and due from banks		24,720						22,455						24,815						24,720
Allowance for loan losses		(16,802)						(15,143)
Allowance for credit losses														(19,524)						(16,802)
Other assets		78,339						114,023						69,867						78,339
Total non-interest earning assets		86,257						121,335						75,158						86,257
Total Assets	$	2,043,495					$	2,011,450					$	2,124,347					$	2,043,495
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market	$	539,946	$	226		0.17	$	461,221	$	214		0.19	$	462,566	$	1,159		1.00	$	539,946	$	226		0.17
Savings		306,086		52		0.07		266,832		41		0.06		254,471		77		0.12		306,086		52		0.07
Time		481,885		805		0.67		532,939		950		0.71		604,425		4,504		2.98		481,885		805		0.67
Total interest-bearing deposits		1,327,917		1,083		0.33		1,260,992		1,205		0.38		1,321,462		5,740		1.74		1,327,917		1,083		0.33
Short-term borrowings		68,901		60		0.35		77,592		73		0.38		95,930		797		3.32		68,901		60		0.35
Other borrowings		8,836		56		2.54		37,787		186		1.98		93,144		1,057		4.54		8,836		56		2.54
Total interest-bearing liabilities		1,405,654		1,199		0.34		1,376,371		1,464		0.43		1,510,536		7,594		2.01		1,405,654		1,199		0.34
Non-interest bearing liabilities:
Demand deposits		440,996						421,499						414,709						440,996
Other liabilities		15,801						14,459						21,861						15,801
Total non-interest bearing liabilities		456,797						435,958						436,570						456,797
Stockholders' equity		181,044						199,121						177,241						181,044
Total Liabilities and Stockholders' Equity	$	2,043,495					$	2,011,450					$	2,124,347					$	2,043,495
Net interest income/spread (tax equivalent basis)				17,082		3.40%				16,263		3.32%				15,829		2.56%				17,082		3.40%
Tax-equivalent basis adjustment				(188)						(210)						(187)						(188)
Net interest income			$	16,894					$	16,053					$	15,642					$	16,894
Net interest margin (tax equivalent basis)						3.49%						3.44%						3.09%						3.49%

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

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

(3)Annualized

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

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

‎

3640

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


	Increase/(Decrease)						Increase/(Decrease)
	Three months ended June 30, 2022 Compared to						Three months ended June 30, 2023 Compared to
	Three months ended June 30, 2021						Three months ended June 30, 2022
	Variance due to						Variance due to
	Volume		Rate		Net		Volume		Rate		Net

	(dollars in thousands)						(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks	$	(104)	$	227	$	123	$	(211)	$	82	$	(129)
Securities available for sale:
Taxable		624		149		773		54		304		358
Tax-exempt securities		120		(34)		86		(68)		(27)		(95)
Total securities		744		115		859		(14)		277		263
Loans receivable		(201)		(227)		(428)		2,179		2,829		5,008
Total interest-earning assets		439		115		554		1,954		3,188		5,142
Interest-bearing liabilities:
Interest-bearing demand and money market		36		(24)		12		(165)		1,098		933
Savings		5		6		11		(12)		37		25
Time		(93)		(52)		(145)		767		2,932		3,699
Total interest-bearing deposits		(52)		(70)		(122)		590		4,067		4,657
Short-term borrowings		(8)		(5)		(13)		177		560		737
Other borrowings		(144)		14		(130)		673		328		1,001
Total interest-bearing liabilities		(204)		(61)		(265)		1,440		4,955		6,395
Net interest income (tax-equivalent basis)	$	643	$	176	$	819	$	514	$	(1,767)	$	(1,253)

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

‎

3741

Comparison of Operating Results for the Three Months Ended June 30, ~~2022~~2023 to June 30, ~~2021~~2022

General

For the three months ended June 30, ~~2022,~~2023, net income totaled ~~$6,855,000~~$6,503,000 compared to ~~$5,755,000~~$6,855,000 earned in the ~~similar period in 2021.~~three months ended June 30, 2022. The ~~increase~~decrease in net income for the three months ended June 30, ~~2022~~2023 was due primarily to ~~an $841,000 increase~~a $1,252,000 decrease in net interest income and a ~~$1,200,000~~$706,000 decrease total other income, net. A $2,050,000 reduction in the provision for ~~loan losses.~~credit losses offset the decreased income. Earnings per share for the three-months ended June 30, ~~2022~~2023 were ~~$0.84~~$0.81 per share for basic shares and fully diluted shares, compared to ~~$0.70~~$0.84 per share for basic shares and for fully diluted shares for the three months ended June 30, ~~2021.~~2022. The resulting annualized return on average assets and annualized return on average equity for the three months ended June 30, ~~2022~~2023 were ~~1.35%~~1.23% and ~~15.19%~~14.72%, respectively, compared to ~~1.15%~~1.35% and ~~11.59%~~15.19%, respectively, for the same period in ~~2021.~~2022.

The following table sets forth changes in net income:



(dollars in thousands)	Three months ended		Three months ended
	June 30, 2022 to June 30, 2021		June 30, 2023 to June 30, 2022
Net income three months ended June 30, 2021	$	5,755
Net income three months ended June 30, 2022			$	6,855
Change due to:
Net interest income		841		(1,252)
Provision for loan losses		1,200
Provision for credit losses				2,050
Net gains on sales of securities and loans		(109)		(202)
Service charges and fees		(57)		(122)
Earnings and proceeds on bank-owned life insurance		255		(220)
Other income		213		(162)
Salaries and employee benefits		(669)		(2)
Occupancy, furniture and equipment		(20)		(108)
All other expenses		(291)		(356)
Income tax expense		(263)		22
Net income three months ended June 30, 2022	$	6,855
Net income three months ended June 30, 2023			$	6,503

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, ~~2022~~2023 totaled ~~$17,082,000~~$15,829,000 which was ~~$819,000 higher~~$1,253,000 lower than the comparable period in ~~2021.~~2022. The ~~increase~~decrease in net interest income was due primarily to ~~an $859,000~~a $6,395,000 increase in total interest expense, which was slightly offset by a $5,142,000 increase in in total interest income (fte) ~~on securities due to purchases of securities.~~. The fte net interest spread and net interest margin were ~~3.40%~~2.56% and ~~3.49%~~3.09%, respectively, for the three months ended June 30, ~~2022~~2023 compared to ~~3.32%~~3.40% and ~~3.44%~~3.49%, respectively, for the same period in ~~2021.~~2022. See “Non-GAAP Financial Measures” described above on page ~~37.~~40.

For the three-months ended June 30, ~~2022,~~2023, interest income (fte) totaled ~~$18,281,000~~$23,423,000 with a yield on average earning assets of ~~3.74%~~4.57% compared to ~~$17,727,000~~$18,281,000 and ~~3.75%~~3.74% for the ~~2021~~2022 period. Average loans ~~decreased $16.2~~increased $173.6 million during the three-months ended June 30, ~~2022,~~2023, over the comparable period of ~~2021,~~2022, while average securities increased ~~$173.1~~$1.3 million. Average earning assets totaled ~~$1.957~~$2.049 billion for the three months ended June 30, ~~2022,~~2023, an increase of ~~$67.1~~$92.0 million, over the average for the same period in ~~2021.~~2022. See “Non-GAAP Financial Measures” described above on page ~~37.~~40.

Interest expense for the three months ended June 30, ~~2022~~2023 totaled ~~$1,199,000~~$7,594,000 at an average cost of ~~0.34%~~2.01% compared to ~~$1,464,000~~$1,199,000 and ~~0.43%~~0.34%, respectively, for the same period in ~~2021.~~2022. The ~~decrease~~increase in interest expense during the three-months ended June 30, ~~2022~~2023 reflects the overall ~~lower~~higher level of market interest rates. ~~The~~During the three months ended June 30, 2023, the average cost of time deposits, which is the most significant component of funding costs, ~~decreased 0.04%~~increased 2.31% compared to the same three-month period of last year, while short-term borrowing costs increased 2.97% and other borrowing costs increased 2.00% compared to the same three-month period of last year.

Provision for ~~Loan~~Credit Losses

The ~~Company’s~~Company released a portion of the allowance for credit losses during the three months ended June 30, 2023, which resulted in a negative provision ~~for loan losses~~expense of $1,750,000, compared to $300,000 of provision expense for the three months ended June 30, ~~2022 was $300,000, compared to $1,500,000 for the three months ended June 30, 2021. The decreased provision reflects a reduction in certain qualitative factors related to the COVID-19 pandemic.~~2022. The Company makes provisions for ~~loan~~or releases of credit losses in an amount necessary to maintain the allowance for ~~loan~~credit losses at an acceptable ~~level.~~level under the current expected credit loss methodology analysis. The Company recorded a net recovery of $57,000 for the quarter ended June 30, 2022, compared to a net charge-off of $669,000 for the similar period in 2021. At June 30, 2022, the allowance for loan losses represented 1.21% of loans receivable. Additionally, the allowance for loan losses represented 2,532% of non-performing loans, excluding loans acquired with credit quality deterioration.charge-

3842

off of $228,000 for the quarter ended June 30, 2023, compared to a net recovery of $57,000 for the similar period in 2022. At June 30, 2023, the allowance for credit losses related to loans receivable represented 1.11% of loans receivable. Additionally, at June 30, 2023, the allowance for credit losses related to loans receivable represented 542% of non-performing loans.

Other Income

Other income totaled ~~$2,489,000~~$1,783,000 for the three months ended June 30, ~~2022,~~2023, compared to ~~$2,187,000~~$2,489,000 for the same period in ~~2021.~~2022. The ~~increase~~decrease was due primarily to a ~~$255,000 increase~~lower level of service charges and fees, a reduction in earnings and proceeds on bank-owned life insurance, ~~policies,~~ and ~~an $180,000 increase~~income recognized in ~~other income. Gains~~2022 on ~~sales~~payoffs of purchased impaired loans ~~decreased $109,000, while all~~that were carried at a discount. All other categories of other income decreased ~~$24,000,~~$152,000, net.

Other Expense

Other expense for the three months ended June 30, ~~2022~~2023 totaled ~~$10,472,000~~$10,938,000 which was ~~$980,000~~$466,000, or 4.5%, higher than the same period of ~~2021,~~2022, due primarily to a ~~$669,000~~$156,000 increase in ~~salaries~~data processing expenses, and ~~employee benefits~~a $108,000 increase in occupancy and equipment costs. All other categories of other expense increased $202,000, net.

Income Tax Expense

Income tax expense totaled $1,734,000 for an effective tax rate of 21.0% for the three months ended June 30, 2023 compared to $1,756,000 for an effective tax rate of 20.4% for the three months ended June 30, 2022 compared to $1,493,000 for an effective tax rate of 20.6% for the three months ended June 30, 2021. The decrease in the effective tax rate in the 2022 period reflects the increased level of tax-exempt income related to bank-owned life insurance.2022.

3943

Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis,
Six Months Ended June 30,
dollars in thousands)
2022
2021
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
(2)
(1)
(3)
(2)
(1)
(3)
Assets
Interest-earning assets:
Interest bearing deposits with banks
$
127,175
$
260
0.41%
$
146,574
$
102
0.14%
Securities available for sale:
Taxable
384,364
3,205
1.67
219,807
1,735
1.58
Tax-exempt (1)
77,556
1,122
2.89
58,934
928
3.15
Total securities available for sale (1)
461,920
4,327
1.87
278,741
2,663
1.91
Loans receivable (1) (4) (5)
1,370,534
31,223
4.56
1,410,160
32,468
4.60
Total interest-earning assets
1,959,629
35,810
3.65
1,835,475
35,233
3.84
Non-interest earning assets:
Cash and due from banks
24,001
21,698
Allowance for loan losses
(16,688)
(14,509)
Other assets
91,031
114,954
Total non-interest earning assets
98,344
122,143
Total Assets
$
2,057,973
$
1,957,618
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market
$
530,451
$
428
0.16
$
442,601
$
434
0.20
Savings
307,221
115
0.07
256,803
76
0.06
Time
491,079
1,599
0.65
533,068
1,949
0.73
Total interest-bearing deposits
1,328,751
2,142
0.32
1,232,472
2,459
0.40
Short-term borrowings
65,724
108
0.33
70,971
142
0.40
Other borrowings
18,567
195
2.10
39,330
388
1.97
Total interest-bearing liabilities
1,413,042
2,445
0.35
1,342,773
2,989
0.45
Non-interest bearing liabilities:
Demand deposits
437,430
402,024
Other liabilities
15,411
14,634
Total non-interest bearing liabilities
452,841
416,658
Stockholders' equity
192,090
198,187
Total Liabilities and Stockholders' Equity
$
2,057,973
$
1,957,618
Net interest income/spread (tax equivalent basis)
33,365
3.30%
32,244
3.39%
Tax-equivalent basis adjustment
(370)
(415)
Net interest income
$
32,995
$
31,829
Net interest margin (tax equivalent basis)
3.41%
3.51%

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

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

~~(3)Annualized~~

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

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



(Tax-Equivalent Basis,	Six Months Ended June 30,
dollars in thousands)	2023						2022
	Average				Average		Average				Average
	Balance		Interest		Rate		Balance		Interest		Rate
	(2)		(1)		(3)		(2)		(1)		(3)
Assets
Interest-earning assets:
Interest bearing deposits with banks	$	4,039	$	101		5.00%	$	127,175	$	260		0.41%
Securities available for sale:
Taxable		418,372		4,212		2.01		384,364		3,205		1.67
Tax-exempt (1)		71,069		979		2.76		77,556		1,122		2.89
Total securities available for sale (1)		489,441		5,191		2.12		461,920		4,327		1.87
Loans receivable (1) (4) (5)		1,533,318		40,024		5.22		1,370,534		31,223		4.56
Total interest-earning assets		2,026,798		45,316		4.47		1,959,629		35,810		3.65
Non-interest earning assets:
Cash and due from banks		25,395						24,001
Allowance for loan losses		(19,267)						(16,688)
Other assets		67,247						91,031
Total non-interest earning assets		73,375						98,344
Total Assets	$	2,100,173					$	2,057,973
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and money market	$	481,381	$	2,118		0.88	$	530,451	$	428		0.16
Savings		264,871		182		0.14		307,221		115		0.07
Time		575,277		7,802		2.71		491,079		1,599		0.65
Total interest-bearing deposits		1,321,529		10,102		1.53		1,328,751		2,142		0.32
Short-term borrowings		98,846		1,576		3.19		65,724		108		0.33
Other borrowings		65,496		1,534		4.68		18,567		195		2.10
Total interest-bearing liabilities		1,485,871		13,212		1.78		1,413,042		2,445		0.35
Non-interest bearing liabilities:
Demand deposits		418,941						437,430
Other liabilities		20,560						15,411
Total non-interest bearing liabilities		439,501						452,841
Stockholders' equity		174,801						192,090
Total Liabilities and Stockholders' Equity	$	2,100,173					$	2,057,973
Net interest income/spread (tax equivalent basis)				32,104		2.69%				33,365		3.30%
Tax-equivalent basis adjustment				(369)						(370)
Net interest income			$	31,735					$	32,995
Net interest margin (tax equivalent basis)						3.17%						3.41%

4044

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

Increase/(Decrease)
Six months ended June 30, 2022 Compared to
Six months ended June 30, 2021
Variance due to
Volume
Rate
Net
(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
$
(35)
$
193
$
158
Securities available for sale:
Taxable
1,306
164
1,470
Tax-exempt securities
288
(94)
194
Total securities
1,594
70
1,664
Loans receivable
(954)
(291)
(1,245)
Total interest-earning assets
605
(28)
577
Interest-bearing liabilities:
Interest-bearing demand and money market
82
(88)
(6)
Savings
21
18
39
Time
(143)
(207)
(350)
Total interest-bearing deposits
(40)
(277)
(317)
Short-term borrowings
(10)
(24)
(34)
Other borrowings
(206)
13
(193)
Total interest-bearing liabilities
(256)
(288)
(544)
Net interest income (tax-equivalent basis)
$
861
$
260
$
1,121



	Increase/(Decrease)
	Six months ended June 30, 2023 Compared to
	Six months ended June 30, 2022
	Variance due to
	Volume		Rate		Net
	(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks	$	(336)	$	177	$	(159)
Securities available for sale:
Taxable		328		679		1,007
Tax-exempt securities		(95)		(48)		(143)
Total securities		233		631		864
Loans receivable		4,017		4,784		8,801
Total interest-earning assets		3,914		5,592		9,506
Interest-bearing liabilities:
Interest-bearing demand and money market		(194)		1,884		1,690
Savings		(28)		95		67
Time		1,002		5,201		6,203
Total interest-bearing deposits		780		7,180		7,960
Short-term borrowings		399		1,069		1,468
Other borrowings		757		582		1,339
Total interest-bearing liabilities		1,936		8,831		10,767
Net interest income (tax-equivalent basis)	$	1,978	$	(3,239)	$	(1,261)

Comparison of Operating Results for the Six Months Ended June 30, ~~2022~~2023 to June 30, ~~2021~~2022

General

For the six months ended June 30, ~~2022,~~2023, net income totaled ~~$13,983,000~~$12,285,000 compared to ~~$11,296,000~~$13,983,000 earned in the ~~similar period in 2021.~~six months ended June 30, 2022. The ~~increase~~decrease in net income for the six months ended June 30, ~~2022~~2023 was due primarily to a ~~$1,166,000 increase~~$1,260,000 decrease in net interest income and a ~~$1,652,000 increase~~$2,133,000 decrease in total other income, ~~and a $2,400,000~~net. A $2,050,000 decrease in the provision for ~~loan losses.~~credit loss expense offset a portion of the reduced income. Earnings per share for the six-months ended June 30, ~~2022~~2023 were ~~$1.71~~$1.52 per share for basic shares and $1.51 per share for fully diluted shares, compared to ~~$1.38~~$1.71 per share for basic shares and for fully diluted shares for the six months ended June 30, ~~2021.~~2022. The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, ~~2022~~2023 were ~~1.37%~~1.18% and ~~14.68%~~14.17%, respectively, compared to ~~1.16%~~1.37% and ~~11.49%~~14.68%, respectively, for the same period in ~~2021.~~2022.

The following table sets forth changes in net income:




(dollars in thousands)	Six months ended		Six months ended
	June 30, 2022 to June 30, 2021		June 30, 2023 to June 30, 2022
Net income six months ended June 30, 2021	$	11,296
Net income six months ended June 30, 2022			$	13,983
Change due to:
Net interest income		1,166		(1,260)
Provision for loan losses		2,400
Provision for credit losses				2,050
Service charges and fees		164		(281)
Net gains on sales of securities and loans		(159)		(199)
Net gains on sales of foreclosed real estate owned		427		(427)
Earnings and proceeds on bank-owned life insurance		57		(183)
Other income		1,163		(1,043)
Salaries and employee benefits		(1,146)		(539)
Occupancy, furniture and equipment		(107)		(63)
Data processing related		(129)		(295)
Professional fees		(98)		373
All other expenses		(206)		(220)
Income tax expense		(845)		389
Net income six months ended June 30, 2022	$	13,983
Net income six months ended June 30, 2023			$	12,285

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, ~~2022~~2023 totaled ~~$33,365,000~~$32,104,000 which was ~~$1,121,000 higher~~$1,261,000 lower than the comparable period in ~~2021.~~2022. The ~~increase~~decrease in net interest income was due primarily to a ~~$1,664,000~~$10,767,000 increase in total interest expense, which was slightly offset by a $9,506,000 increase in in total interest income (fte) ~~on securities due to purchases of securities.~~. The ~~fte~~(fte) net interest spread and net interest margin were ~~3.30%~~2.69% and ~~3.41%~~3.17%, respectively, for the six months ended June 30, ~~2022~~2023 compared to ~~3.39%~~3.30% and ~~3.51%~~3.41%, respectively, for the same period in ~~2021.~~2022. See “Non-GAAP Financial Measures” described above on page ~~37.~~40.

For the six-months ended June 30, ~~2022,~~2023, interest income (fte) totaled ~~$35,810,000~~$45,316,000 with a yield on average earning assets of ~~3.65%~~4.47% compared to ~~$35,233,000~~$35,810,000 and ~~3.84%~~3.65% for the ~~2021~~2022 period. Average loans ~~decreased $39.6~~increased $162.8 million during the six-months ended June 30, ~~2022,~~2023, over the comparable period of ~~2021,~~2022, while average securities increased ~~$183.2~~$27.5 million. Average earning assets totaled ~~$1.960~~$2.027 billion for the six months ended June 30, ~~2022,~~2023, an increase of ~~$124.2~~$67.2 million, over the average for the same period in ~~2021.~~2022. See “Non-GAAP Financial Measures” described above on page ~~37.~~40.

Interest expense for the six months ended June 30, ~~2022~~2023 totaled ~~$2,445,000~~$13,212,000 at an average cost of ~~0.35%~~1.78% compared to ~~$2,989,000~~$2,445,000 and ~~0.45%~~0.35%, respectively, for the same period in ~~2021.~~2022. The ~~decrease~~increase in interest expense during the six-months ended June 30, ~~2022~~2023 reflects the ~~repricing~~overall higher level of ~~higher cost certificates to current~~ market interest ~~rates at maturity. The~~rates. During the six months ended June 30, 2023, the average cost of time deposits, which is the most significant component of funding costs, ~~decreased 0.08%~~increased 2.06% compared to the same six-month period of last year, while short-term borrowing costs increased 2.86% and other borrowing costs increased 2.58% compared to the same six-month period of last year.

Provision for ~~Loan~~Credit Losses

The ~~Company’s provision~~Company released a portion of the allowance for ~~loan~~credit losses during the six months ended June 30, 2023, which resulted in a credit to expense for the six months ended June 30, ~~2022 was $600,000,~~2023 of $1,450,000, compared to ~~$3,000,000~~$600,000 for the six months ended June 30, ~~2021. The decreased provision reflects a reduction in certain qualitative factors related to the COVID-19 pandemic.~~2022. The Company makes provisions for ~~loan~~credit losses in an amount necessary to maintain the allowance for ~~loan~~credit losses at an

acceptable level. The Company recorded a net charge-off of ~~$25,000~~$548,000 for the six months ended June 30, ~~2022,~~2023, compared to a net charge-off of ~~$810,000~~$25,000 for the ~~same~~similar period in ~~2021.~~2022. At June 30, ~~2022,~~2023, the allowance for ~~loan~~credit losses related to loans receivable represented ~~1.21%~~1.11% of loans receivable. Additionally, at June 30, 2023, the allowance for ~~loan~~credit losses related to loans receivable represented ~~2,532%~~542% of non-performing ~~loans, excluding loans acquired with credit quality deterioration.~~loans.

Other Income

Other income totaled ~~$5,828,000~~$3,695,000 for the six months ended June 30, ~~2022,~~2023, compared to ~~$4,176,000~~$5,828,000 for the same period in ~~2021.~~2022. The ~~increase~~decrease was due primarily to $954,000 of income recognized in 2022 on ~~previously acquired~~payoffs of purchased impaired loans that were carried at a ~~discount, and a $427,000 gain~~discount. Gains on ~~the sale~~sales of ~~a property carried in~~ foreclosed real estate ~~owned. All~~owned decreased $427,000, while all other categories of other income ~~increased $137,000,~~decreased $752,000, net.

Other Expense

Other expense for the six months ended June 30, ~~2022~~2023 totaled ~~$20,630,000,~~$21,374,000 which was ~~$1,686,000~~$744,000, or 3.6%, higher than the same period of ~~2021,~~2022, due primarily to a ~~$1,146,000~~$539,000 increase in salaries and employee ~~benefits costs.~~benefits. All other categories of other expense increased $205,000, net.

Income Tax Expense

Income tax expense totaled $3,321,000 for an effective tax rate of 21.4% for the six months ended June 30, 2023 compared to $3,610,000 for an effective tax rate of 20.5% for the six months ended June 30, 2022 compared to $2,765,000 for an effective tax rate of 19.7% for the six months ended June 30, 2021. The increase in the effective tax rate in the 2022 period reflects the increased level of taxable income.2022.

‎

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

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

Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of June 30, ~~2022,~~2023, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decrease of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.

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

As of June 30, ~~2022,~~2023, the Company had a ~~positive~~negative 90-day interest sensitivity gap of ~~$33.0~~$95.4 million or ~~1.6%~~4.5% of total assets, compared to the ~~$175.1~~$46.7 million interest sensitivity gap, or ~~8.5%~~2.3% of total assets, as of December 31, ~~2021.~~2022. At June 30, ~~2022,~~2023, rate-sensitive assets repricing within 90 days ~~decreased $100.5~~increased $16.2 million since December 31, 2022 due to a ~~$105.7~~$14.0 million ~~decrease~~increase in ~~interest-bearing deposits.~~loans repricing. Rate-sensitive liabilities repricing within 90 days increased ~~$41.6~~$64.9 million since year end due primarily to a ~~$41.8~~$72.7 million increase in ~~deposits repricing.~~time deposits. A ~~positive~~negative gap means that rate-sensitive ~~assets~~liabilities are greater than rate-sensitive ~~liabilities~~assets at the time interval. This would indicate that in a rising rate environment, ~~yield on interest-earning assets~~the cost of interest-bearing liabilities in the 90-day time frame could increase faster than the ~~cost of interest-bearing liabilities.~~yield on interest-earning assets. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

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

4447

June 30, ~~2022~~2023

Rate Sensitivity Table

(dollars in thousands)



	3 Months		3-12 Months		1 to 3 Years		Over 3 Years		Total		3 Months		3-12 Months		1 to 3 Years		Over 3 Years		Total
Federal funds sold and interest-bearing deposits	$	79,487	$	248	$	—	$	—	$	79,735	$	3,036	$	—	$	—	$	—	$	3,036
Securities		10,598		29,843		81,153		319,283		440,877		10,449		33,599		83,635		275,938		403,621
Loans Receivable		232,971		209,150		394,527		567,669		1,404,317		232,807		245,909		511,524		587,459		1,577,699
Total RSA	$	323,056	$	239,241	$	475,680	$	886,952	$	1,924,929	$	246,292	$	279,508	$	595,159	$	863,397	$	1,984,356
Non-maturity interest-bearing deposits	$	140,605	$	131,433	$	347,359	$	244,290	$	863,687	$	105,291	$	108,412	$	286,489	$	194,076	$	694,268
Time Deposits		133,479		204,236		135,923		19,514		493,152		162,947		310,038		127,829		11,158		611,972
Borrowings		15,954		26,352		32,533		—		74,839		73,442		47,521		84,191		6,823		211,977
Total RSL	$	290,038	$	362,021	$	515,815	$	263,804	$	1,431,678	$	341,680	$	465,971	$	498,509	$	212,057	$	1,518,217
Interest Sensitivity Gap	$	33,018	$	(122,780)	$	(40,135)	$	623,148	$	493,251	$	(95,388)	$	(186,463)	$	96,650	$	651,340	$	466,139
Cumulative Gap		33,018		(89,762)		(129,897)		493,251				(95,388)		(281,851)		(185,201)		466,139
RSA/RSL-cumulative		111.38%		86.23%		88.88%		134.45%				72.08%		65.10%		85.82%		130.70%

December 31, 2021
December 31, 2022

Interest Sensitivity Gap	$	175,100	$	(170,159)	$	11,040	$	524,379	$	540,360	$	(46,676)	$	(158,452)	$	27,463	$	647,143	$	469,478
Cumulative Gap		175,100		4,941		15,981		540,360				(46,676)		(205,128)		(177,665)		469,478
RSA/RSL-cumulative		170.5%		100.7%		101.4%		138.4%				83.1%		70.3%		85.0%		138.5%

‎

4548

Item 4. Controls and Procedures

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

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

‎

4649

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Not applicable.

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

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

(b) Use of Proceeds. Not Applicable

(c) Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the quarter ended June 30, ~~2022.~~2023.

Issuer Purchases of Equity Securities
Maximum Number
Total Number of
(or Approximate
Total
Shares (or Units)
Dollar Value) of Shares
Number
Average
Purchased as Part of
(or Units)
of Shares
Price Paid
Publicly
that May Yet Be
(or Units)
Per Share
Announced Plans
Purchased Under the
Purchased
(or Unit)
or Programs *
Plans or Programs
April 1 – 30, 2022
—
$
—
—
477,714
May 1 – 31, 2022
26,984
26.66
26,984
450,730
June 1 – 30, 2022
20,486
25.21
20,486
430,244
Total
47,470
$
26.03
47,470
430,244


	Issuer Purchases of Equity Securities
							Maximum Number
					Total Number of		(or Approximate
	Total				Shares (or Units)		Dollar Value) of Shares
	Number		Average		Purchased as Part of		(or Units)
	of Shares		Price Paid		Publicly		that May Yet Be
	(or Units)		Per Share		Announced Plans		Purchased Under the
	Purchased		(or Unit)		or Programs *		Plans or Programs
April 1 – 30, 2023		72,181	$	27.04		72,181		310,709
May 1 – 31, 2023		36,615		26.29		36,615		274,094
June 1 – 30, 2023		-		-		-		274,094
Total		108,796	$	26.79		108,796		274,094

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

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

‎

4750

Item 6. Exhibits



No.	Description
3(i)	Amended and Restated Articles of Incorporation of Norwood Financial Corp⁽¹⁾
3(ii)	Bylaws of Norwood Financial Corp⁽²⁾
4.0	Specimen Stock Certificate of Norwood Financial Corp⁽³⁾
~~10.1~~	~~2014 Equity Incentive Plan, As Amended~~⁽⁴⁾
~~10.2~~	~~Employment Agreement dated May 9, 2022, by and among Norwood Financial Corp, Wayne Bank and James O. Donnelly~~⁽⁵⁾
~~10.3~~	~~Stock Award Agreement, dated May 10, 2022, between Norwood Financial Corp and James O. Donnelly~~⁽⁶⁾
~~10.4~~	~~Salary Continuation Agreement, dated May 10, 2022, between Wayne Bank and James O. Donnelly~~⁽⁷⁾
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO
32	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of Sarbanes Oxley Act of 2002
101	The following materials from the Company’s Form 10-Q for the quarter ended June 30, ~~2022,~~2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.
101.INS	Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document)
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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

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

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

~~(4)Incorporated by reference into this document from Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-266622) filed with the Commission on August 8, 2022.~~

~~(5)Incorporated by reference into this document from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 12, 2022.~~

~~(6)Incorporated by reference into this document from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 12, 2022.~~

~~(7)Incorporated by reference into this document from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 12, 2022.~~

‎

4851

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		NORWOOD FINANCIAL CORP

Date: August ~~12, 2022~~11, 2023	By:	/s/ James O. Donnelly
		James O. Donnelly
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: August ~~12, 2022~~11, 2023		/s/ William S. Lance
		William S. Lance
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

4952



	June 30, 2022		December 31, 2021
Outstanding Balance	$	9,701	$	12,862
Carrying Amount	$	6,631	$	8,304



	2022		2021
Balance at beginning of period	$	1,884	$	1,365
Additions		—		—
Accretion		(420)		(357)
Reclassification and other		(395)		11
Balance at end of period	$	1,069	$	1,019



	Increase/(Decrease)
	Six months ended June 30, 2022 Compared to
	Six months ended June 30, 2021
	Variance due to
	Volume		Rate		Net
	(dollars in thousands)
Interest-earning assets:
Interest-bearing deposits with banks	$	(35)	$	193	$	158
Securities available for sale:
Taxable		1,306		164		1,470
Tax-exempt securities		288		(94)		194
Total securities		1,594		70		1,664
Loans receivable		(954)		(291)		(1,245)
Total interest-earning assets		605		(28)		577
Interest-bearing liabilities:
Interest-bearing demand and money market		82		(88)		(6)
Savings		21		18		39
Time		(143)		(207)		(350)
Total interest-bearing deposits		(40)		(277)		(317)
Short-term borrowings		(10)		(24)		(34)
Other borrowings		(206)		13		(193)
Total interest-bearing liabilities		(256)		(288)		(544)
Net interest income (tax-equivalent basis)	$	861	$	260	$	1,121