Penns Woods Bancorp 10Q 2021 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☑			Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended March 31, 2021.


☐			Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from to .

No. 0-17077

(Commission File Number)

PENNS WOODS BANCORP INC.

(Exact name of Registrant as specified in its charter)


Pennsylvania	300 Market Street, P.O. Box 967	23-2226454
(State or other jurisdiction of	Williamsport	(I.R.S. Employer Identification No.)
incorporation or organization)	Pennsylvania	17703-0967
	(Address of principal executive offices)	(Zip Code)

(570) 322-1111

Registrant’s telephone number, including area code

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $5.55 par value

PWOD

The Nasdaq Global Select Market

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

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

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


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

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

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

On May 1, 2020 there were 7,060,829 shares of the Registrant’s common stock outstanding.

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PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q


		Page
		Number

Part I	Financial Information

Item 1.	Financial Statements	3

Consolidated Balance Sheet (Unaudited) as of March 31, 2021 and December 31, 2020		3

Consolidated Statement of Income (Unaudited) for the Three Months Ended March 30, 2021 and 2020		4

Consolidated Statement of Comprehensive Income (Unaudited) for the Three Ended March 31, 2021 and 2020		5

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three Ended March 31, 2021 and 2020		6

Consolidated Statement of Cash Flows (Unaudited) for the Three Months Ended March 31, 2021 and 2020		7

Notes to Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

Part II	Other Information

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	44

Signatures		45

Exhibit Index and Exhibits		46

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


	March 31,		December 31,
(In Thousands, Except Share Data)	2021		2020
ASSETS:
Noninterest-bearing balances	$	28,539	$	31,821
Interest-bearing balances in other financial institutions	249,149		181,537

Total cash and cash equivalents	277,688		213,358

Investment debt securities, available for sale, at fair value	166,895		162,261
Investment equity securities, at fair value	1,265		1,288
Investment securities, trading	44		40
Restricted investment in bank stock, at fair value	15,032		15,377
Loans held for sale	2,568		5,239
Loans	1,335,899		1,344,327
Allowance for loan losses	(14,202)		(13,803)
Loans, net	1,321,697		1,330,524
Premises and equipment, net	34,910		32,702
Accrued interest receivable	8,583		8,394
Bank-owned life insurance	33,839		33,638

Goodwill	17,104		17,104
Intangibles	618		671
Operating lease right-of-use asset	3,088		3,136
Deferred tax asset	3,717		2,526
Other assets	9,144		8,385
TOTAL ASSETS	$	1,896,192	$	1,834,643

LIABILITIES:
Interest-bearing deposits	$	1,085,448	$	1,045,086
Noninterest-bearing deposits	478,916		449,357
Total deposits	1,564,364		1,494,443

Short-term borrowings	6,650		5,244
Long-term borrowings	141,094		153,475
Accrued interest payable	988		1,112
Operating lease liability	3,130		3,175
Other liabilities	15,903		13,048
TOTAL LIABILITIES	1,732,129		1,670,497

SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; 0 shares issued	0		0
Common stock, par value 5.55, 22,500,000 shares authorized; 7,537,242 and 7,532,576 shares issued; 7,057,017 and 7,052,351 outstanding	41,873		41,847
Additional paid-in capital	52,818		52,523
Retained earnings	83,948		82,769
Accumulated other comprehensive loss:
Net unrealized gain on available for sale securities	3,095		4,714
Defined benefit plan	(5,560)		(5,596)
Treasury stock at cost, 480,225	(12,115)		(12,115)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY	164,059		164,142
Non-controlling interest	4		4
TOTAL SHAREHOLDERS' EQUITY	164,063		164,146
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,896,192	$	1,834,643

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)


	Three Months Ended March 31,
(In Thousands, Except Per Share Data)		2021		2020
INTEREST AND DIVIDEND INCOME:
Loans, including fees		$	13,345	$	14,657
Investment securities:
Taxable		819		1,010
Tax-exempt		171		145
Dividend and other interest income		260		349
TOTAL INTEREST AND DIVIDEND INCOME		14,595		16,161
INTEREST EXPENSE:
Deposits		1,684		3,035
Short-term borrowings		2		22
Long-term borrowings		839		943
TOTAL INTEREST EXPENSE		2,525		4,000
NET INTEREST INCOME		12,070		12,161
PROVISION FOR LOAN LOSSES		515		750
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,555		11,411
NON-INTEREST INCOME:
Service charges		383		549
Net debt securities gains, available for sale		138		21
Net equity securities (losses) gains		(23)		20
Net securities gains (losses), trading		4		(14)
Bank-owned life insurance		173		192
Gain on sale of loans		908		444
Insurance commissions		157		127
Brokerage commissions		219		369
Debit card income		380		274
Other		275		455
TOTAL NON-INTEREST INCOME		2,614		2,437
NON-INTEREST EXPENSE:
Salaries and employee benefits		5,598		5,667
Occupancy		976		702
Furniture and equipment		809		860
Software amortization		198		250
Pennsylvania shares tax		352		285
Professional fees		583		622
Federal Deposit Insurance Corporation deposit insurance		221		194

Marketing		63		53
Intangible amortization		53		62
Other		1,098		1,415
TOTAL NON-INTEREST EXPENSE		9,951		10,110
INCOME BEFORE INCOME TAX PROVISION		4,218		3,738
INCOME TAX PROVISION		771		661
CONSOLIDATED NET INCOME		$	3,447	$	3,077
Less: Net income attributable to noncontrolling interest		6		4
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.		$	3,441	$	3,073
EARNINGS PER SHARE - BASIC		$	0.49	$	0.44
EARNINGS PER SHARE - DILUTED		$	0.49	$	0.43
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC		7,055,116		7,040,740
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED		7,055,116		7,102,990
DIVIDENDS DECLARED PER SHARE		$	0.32	$	0.32

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended March 31,
(In Thousands)		2021		2020
Net Income		$	3,441	$	3,073
Other comprehensive (loss) income:
Change in unrealized (loss) gain on available for sale securities		(1,911)		694
Tax effect		401		(146)
Net realized gain on available for sale securities included in net income		(138)		(21)
Tax effect		29		4
Amortization of unrecognized pension gain		46		41
Tax effect		(10)		(8)
Total other comprehensive (loss) income		(1,583)		564
Comprehensive income		$	1,858	$	3,637

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

Three months ended:


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS		TREASURY STOCK		NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)	SHARES	AMOUNT
Balance, December 31, 2020	7,532,576	$	41,847	$	52,523	$	82,769	$	(882)	$	(12,115)	$	4	$	164,146
Net income						3,441						6		3,447

Other comprehensive loss								(1,583)						(1,583)
Stock-based compensation				220										220
Dividends declared ($0.32 per share)						(2,262)								(2,262)
Common shares issued for employee stock purchase plan	939	5		15										20
Director Compensation Plan	3,727	21		60										81
Distributions to noncontrolling interest												(6)		(6)
Balance, March 31, 2021	7,537,242	$	41,873	$	52,818	$	83,948	$	(2,465)	$	(12,115)	$	4	$	164,063


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE LOSS		TREASURY STOCK		NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)	SHARES	AMOUNT
Balance, December 31, 2019	7,520,740	$	41,782	$	51,487	$	76,583	$	(2,777)	$	(12,115)	$	22	$	154,982
Net income						3,073						4		3,077

Other comprehensive income								564						564
Stock-based compensation				198										198
Dividends declared ($0.32 per share)						(2,253)								(2,253)
Common shares issued for employee stock purchase plan	751	4		16										20


Balance, March 31, 2020	7,521,491	$	41,786	$	51,701	$	77,403	$	(2,213)	$	(12,115)	$	26	$	156,588

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	Three Months Ended March 31,
(In Thousands)	2021		2020
OPERATING ACTIVITIES:
Net Income	$	3,447	$	3,077
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	839		760
Gain on sale of premise and equipment	0		(14)
Amortization of intangible assets	53		62
Provision for loan losses	515		750
Stock based compensation	220		198
Accretion and amortization of investment security discounts and premiums	251		171
Net securities gains, available for sale	(138)		(21)
Originations of loans held for sale	(26,658)		(14,977)
Proceeds of loans held for sale	30,237		15,359
Gain on sale of loans	(908)		(444)
Net equity securities losses (gains)	23		(20)
Net securities (gains) losses, trading	(4)		14


Earnings on bank-owned life insurance	(173)		(192)
Increase in deferred tax asset	(761)		(84)
Proceeds on sales of investment securities receivable	0		6,627
Other, net	2,447		(2,658)
Net cash provided by operating activities	9,390		8,608
INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities	11,372		2,774
Proceeds from calls and maturities of available for sale securities	3,428		2,598
Purchases of available for sale securities	(21,955)		(11,753)
Net decrease in loans	8,312		5,861
Acquisition of premises and equipment	(197)		(1,547)
Proceeds from the sale of premises and equipment	0		336
Proceeds from the sale of foreclosed assets	246		226
Purchase of bank-owned life insurance	(26)		(26)
Proceeds from bank-owned life insurance death benefit	0		248
Investment in limited partnership	(711)		(370)
Proceeds from redemption of regulatory stock	1,082		1,139
Purchases of regulatory stock	(737)		(2,222)
Net cash used for investing activities	814		(2,736)
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits	40,362		4,716
Net increase (decrease) in noninterest-bearing deposits	29,559		(1,987)
Proceeds from long-term borrowings	0		35,000
Repayment of long-term borrowings	(15,000)		(25,000)
Net increase in short-term borrowings	1,406		12,821
Finance lease principal payments	(34)		(17)
Dividends paid	(2,262)		(2,253)
Distributions to non-controlling interest	(6)		0
Issuance of common stock	101		20

Net cash provided by financing activities	54,126		23,300
NET INCREASE IN CASH AND CASH EQUIVALENTS	64,330		29,172
CASH AND CASH EQUIVALENTS, BEGINNING	213,358		48,589
CASH AND CASH EQUIVALENTS, ENDING	$	277,688	$	77,761




SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	2,649	$	4,036
Income taxes paid	0		0
Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities	2,653		0

Transfer of loans to foreclosed real estate	0		139

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

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

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

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

Note 2. Accumulated Other Comprehensive Gain (loss)

The changes in accumulated other comprehensive (loss) gain by component shown net of tax and parenthesis indicating debits, as of March 31, 2021 and 2020 were as follows:


	Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
(In Thousands)	Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total		Net Unrealized Gain (Loss) on Available for Sale Securities		Defined Benefit Plan		Total
Beginning balance	$	4,714	$	(5,596)	$	(882)	$	2,455	$	(5,232)	$	(2,777)
Other comprehensive (loss) gain before reclassifications	(1,510)		0		(1,510)		548		0		548
Amounts reclassified from accumulated other comprehensive (loss) gain	(109)		36		(73)		(17)		33		16
Net current-period other comprehensive (loss) income	(1,619)		36		(1,583)		531		33		564

Ending balance	$	3,095	$	(5,560)	$	(2,465)	$	2,986	$	(5,199)	$	(2,213)

The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of March 31, 2021 and 2020 were as follows:


Details about Accumulated Other Comprehensive Loss Components	Amount Reclassified from Accumulated Other Comprehensive Loss				Affected Line Item in the Consolidated Statement of Income
	Three months ended March 31, 2021		Three months ended March 31, 2020
Net unrealized gain on available for sale securities	$	138	$	21	Net debt securities gains, available for sale
Income tax effect	(29)		(4)		Income tax provision
Total reclassifications for the period	$	109	$	17

Net unrecognized pension costs	$	(46)	$	(41)	Other non-interest expense
Income tax effect	10		8		Income tax provision
Total reclassifications for the period	$	(36)	$	(33)

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Note 3. Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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

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

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

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these

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financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

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

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

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

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

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all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

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

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

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

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

Note 4. Per Share Data

There are 0 convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 841,275 stock options, with an average exercise price of $28.17, outstanding on March 31, 2021. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the three period due to the average market price of common shares of $20.21, respectively, exceeding the exercise price of the options issued. There were a total of 864,300 stock options, with an average exercise price of $29.20, outstanding on March 31, 2020. A portion of these options were included, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $29.57 exceeding the exercise price of the options issued for all years except for 2017.


	Three Months Ended March 31,
		2021	2020
Weighted average common shares issued		7,535,341	7,520,965
Weighted average treasury stock shares		(480,225)	(480,225)
Weighted average common shares outstanding - basic		7,055,116	7,040,740
Dilutive effect of outstanding stock options		0	62,250
Weighted average common shares outstanding - basic and diluted		7,055,116	7,102,990

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Note 5. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at March 31, 2021 and December 31, 2020 are as follows:


	March 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):

Mortgage-backed securities	$	1,792	$	4	$	0	$	1,796

State and political securities	109,662		4,132		(542)		113,252
Other debt securities	51,523		740		(416)		51,847
Total debt securities	$	162,977	$	4,876	$	(958)	$	166,895

Investment equity securities:

Other equity securities	$	1,300	$	1	$	(36)	$	1,265


Trading:

Other equity securities	$	50	$	0	$	(6)	$	44


	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In Thousands)	Cost		Gains		Losses		Value
Available for sale (AFS):

Mortgage-backed securities	$	2,118	$	23	$	0	$	2,141

State and political securities	102,690		5,382		(59)		108,013
Other debt securities	51,486		828		(207)		52,107
Total debt securities	$	156,294	$	6,233	$	(266)	$	162,261

Investment equity securities:

Other equity securities	$	1,300	$	10	$	(22)	$	1,288


Trading:

Other equity securities	$	50	$	0	$	(10)	$	40

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at March 31, 2021 and December 31, 2020.


	March 31, 2021
	Less than Twelve Months				Twelve Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):



State and political securities	$	27,816	$	(532)	$	897	$	(10)	$	28,713	$	(542)
Other debt securities	19,500		(289)		3,953		(127)		23,453		(416)
Total debt securities	$	47,316	$	(821)	$	4,850	$	(137)	$	52,166	$	(958)

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	December 31, 2020
	Less than Twelve Months				Twelve Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	Value		Losses		Value		Losses		Value		Losses
Available for sale (AFS):



State and political securities	$	12,311	$	(51)	$	900	$	(8)	$	13,211	$	(59)
Other debt securities	5,964		(74)		4,429		(133)		10,393		(207)
Total debt securities	$	18,275	$	(125)	$	5,329	$	(141)	$	23,604	$	(266)

At March 31, 2021, there were a total of 62 securities in a continuous unrealized loss position for less than twelve months and 7 individual securities that were in a continuous unrealized loss position for twelve months or greater.

The Company reviews its position quarterly and has determined that, at March 31, 2021, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at March 31, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)	Amortized Cost		Fair Value
Due in one year or less	$	11,176	$	11,158
Due after one year to five years	71,403		72,665
Due after five years to ten years	70,964		73,612
Due after ten years	9,434		9,460
Total	$	162,977	$	166,895

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

The following table represents gross realized gains and losses from the sales of debt securities available for sale:


	Three Months Ended March 31,
(In Thousands)		2021		2020
Available for sale (AFS):
Gross realized gains:



State and political securities		$	0	$	1
Other debt securities		138		20
Total gross realized gains		$	138	$	21

Gross realized losses:



State and political securities		$	0	$	0
Other debt securities		0		0
Total gross realized losses		$	0	$	0

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

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

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At March 31, 2021 and December 31, 2020, we had $1,265,000 and $1,288,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2021 and 2020:



	Three Months Ended March 31,
(In Thousands)		2021		2020
Net (losses) gains recognized in equity securities during the period		$	(23)	$	20
Less: Net gains realized on the sale of equity securities during the period		0		0
Unrealized gains recognized in equity securities held at reporting date		$	(23)	$	20

Net gains and losses on trading account securities are as follows for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
(In Thousands)		2021		2020
Net gains on sale transactions		$	0	$	0
Net mark-to-market gains (losses)		4		(14)
Net gain (loss) on trading account securities		$	4	$	(14)

Note 6. Loans

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

The following table presents the related aging categories of loans, by segment, as of March 31, 2021 and December 31, 2020:


	March 31, 2021
			Past Due		Past Due 90
			30 To 89		Days Or More		Non-
(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	181,171	$	23	$	2	$	863	$	182,059
Real estate mortgage:
Residential	575,008		2,513		476		1,739		579,736
Commercial	357,225		584		57		5,859		363,725
Construction	39,604		128		0		53		39,785
Consumer automobile loans	149,917		316		72		151		150,456
Other consumer installment loans	19,241		417		0		0		19,658
	1,322,166		$	3,981	$	607	$	8,665	1,335,419
Net deferred loan fees and discounts	480								480
Allowance for loan losses	(14,202)								(14,202)
Loans, net	$	1,308,444							$	1,321,697

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	December 31, 2020
			Past Due		Past Due 90
			30 To 89		Days Or More		Non-
(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	163,583	$	247	$	48	$	865	$	164,743
Real estate mortgage:
Residential	580,292		6,386		983		2,060		589,721
Commercial	366,363		533		150		6,142		373,188
Construction	38,587		667		0		55		39,309
Consumer automobile loans	155,472		900		31		0		156,403
Other consumer installment loans	19,485		455		0		0		19,940
	1,323,782		$	9,188	$	1,212	$	9,122	1,343,304
Net deferred loan fees and discounts	1,023								1,023
Allowance for loan losses	(13,803)								(13,803)
Loans, net	$	1,311,002							$	1,330,524

The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
	2021				2020
(In Thousands)	Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis		Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis
Commercial, financial, and agricultural	$	28	$	0	$	9	$	0
Real estate mortgage:
Residential	9		0		9		0
Commercial	30		0		42		0
Construction	1		0		0		0
Consumer automobile loans	0		0		2		0
Other consumer installment loans	0		0		0		0
	$	68	$	0	$	62	$	0

Impaired Loans

Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks individually evaluate such loans for impairment and do not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard or worse. Management may also elect to measure an individual loan for impairment if less than $100,000 on a case-by-case basis.

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

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2021 and December 31, 2020:


	March 31, 2021
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	803	$	3,590	$	—
Real estate mortgage:
Residential	4,626		4,626		—
Commercial	5,886		5,886		—
Construction	120		120		—
Consumer automobile loans	0		0		—
Installment loans to individuals	0		0		—
	11,435		14,222		—
With an allowance recorded:
Commercial, financial, and agricultural	60		60		1
Real estate mortgage:
Residential	1,543		1,543		330
Commercial	5,841		5,841		1,638
Construction	8		8		1
Consumer automobile loans	201		201		73
Installment loans to individuals	0		0		0
	7,653		7,653		2,043
Total:
Commercial, financial, and agricultural	863		3,650		1
Real estate mortgage:
Residential	6,169		6,169		330
Commercial	11,727		11,727		1,638
Construction	128		128		1
Consumer automobile loans	201		201		73
Installment loans to individuals	0		0		0
	$	19,088	$	21,875	$	2,043

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	December 31, 2020
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	865	$	3,652	$	—
Real estate mortgage:
Residential	5,023		5,023		—
Commercial	6,354		6,354		—
Construction	124		124		—
Consumer automobile loans	0		0		—
Installment loans to individuals	0		0		—
	12,366		15,153		—
With an allowance recorded:
Commercial, financial, and agricultural	0		0		0
Real estate mortgage:
Residential	1,294		1,294		224
Commercial	3,023		3,023		811
Construction	0		0		0
Consumer automobile loans	0		0		0
Installment loans to individuals	0		0		0
	4,317		4,317		1,035
Total:
Commercial, financial, and agricultural	865		3,652		0
Real estate mortgage:
Residential	6,317		6,317		224
Commercial	9,377		9,377		811
Construction	124		124		0
Consumer automobile loans	0		0		0
Installment loans to individuals	0		0		0
	$	16,683	$	19,470	$	1,035

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
	2021						2020
(In Thousands)	Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans		Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans
Commercial, financial, and agricultural	$	864	$	0	$	0	$	2,155	$	1	$	0
Real estate mortgage:
Residential	6,081		51		0		5,953		57		0
Commercial	9,167		28		0		8,568		26		0
Construction	122		0		0		65		0		0
Consumer automobile	76		0		0		76		0		0
Other consumer installment loans	0		0		0		8		0		0
	$	16,310	$	79	$	0	$	16,825	$	84	$	0

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Troubled Debt Restructurings

The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

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


	Three Months Ended March 31,
	2021
(In Thousands, Except Number of Contracts)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural	0	$	0	$	0
Real estate mortgage:
Residential	1	687		687
Commercial	1	125		125
Construction	0	0		0
	2	$	812	$	812

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

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

The amount of foreclosed residential real estate held at March 31, 2021 and December 31, 2020, totaled $68,000 and $401,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2021 and December 31, 2020, totaled $421,000 and $629,154, respectively.

The Company began offering short-term loan modifications to provide relief to borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made in a good faith basis in response to COVID-19 who were current at the time the modification program is implemented do not need to be accounted for as TDRs. Loan modifications and payment deferrals have been at historical high levels as the impact of the pandemic continues. As of March 31, 2021, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on 1,365 loans with 70 loans remaining in their deferral period with an aggregate outstanding balance of $12,345,000. These loan modifications met applicable requirements to not be considered troubled debt restructurings. The Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act (the “Economic Aid Act”) passed in December 2020 extended the CARES Act provisions permitting financial institutions to suspend TDR assessment and reporting requirements under generally accepted accounting principles until the earlier of 60 days after the date that the President terminates the COVID-19 national emergency or January 1, 2022. The number of customers seeking loan modifications or payment deferrals may increase as the effects of the pandemic continue.

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Internal Risk Ratings

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

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 2021 loan review has an aggregate commercial relationship threshold of $1,750,000 which can consist of outstanding loans, commercial real estate mortgages and outstanding commitments. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.

The following table presents the credit quality categories identified above as of March 31, 2021 and December 31, 2020:


	March 31, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)			Residential		Commercial		Construction						Totals
Pass	$	180,038	$	574,785	$	343,898	$	39,595	$	150,456	$	19,658	$	1,308,430
Special Mention	180		2,474		9,253		0		0		0		11,907
Substandard	1,841		2,477		10,574		190		0		0		15,082
	$	182,059	$	579,736	$	363,725	$	39,785	$	150,456	$	19,658	$	1,335,419


	December 31, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)			Residential		Commercial		Construction						Totals
Pass	$	162,694	$	584,599	$	355,616	$	39,192	$	156,403	$	19,938	$	1,318,442
Special Mention	180		556		7,973		0		0		0		8,709
Substandard	1,869		4,566		9,599		117		0		2		16,153
	$	164,743	$	589,721	$	373,188	$	39,309	$	156,403	$	19,940	$	1,343,304

Allowance for Loan Losses

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

The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the 2 components represents the Banks' ALL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that are collectively evaluated for impairment are grouped into 2 classes for evaluation. A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.

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

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

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

Activity in the allowance is presented for the three months ended March 31, 2021 and 2020:


t	Three Months Ended March 31, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,936	$	4,460	$	3,635	$	134	$	1,906	$	261	$	1,471	$	13,803
Charge-offs	(35)		(14)		0		0		(96)		(29)		0		(174)
Recoveries	5		3		0		5		17		28		0		58
Provision	700		(48)		541		3		(92)		(25)		(564)		515
Ending Balance	$	2,606	$	4,401	$	4,176	$	142	$	1,735	$	235	$	907	$	14,202


	Three Months Ended March 31, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,779	$	4,306	$	3,210	$	118	$	1,780	$	278	$	423	$	11,894
Charge-offs	(14)		(41)		0		0		(75)		(100)		0		(230)
Recoveries	21		21		0		2		1		41		0		86
Provision	111		251		204		40		149		48		(53)		750
Ending Balance	$	1,897	$	4,537	$	3,414	$	160	$	1,855	$	267	$	370	$	12,500

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

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

The Company has a concentration of the following to gross loans at March 31, 2021 and 2020:


	March 31,
	2021		2020
Owners of residential rental properties	16.73	%	16.04	%
Owners of commercial rental properties	13.66	%	12.53	%

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2021 and December 31, 2020:


	March 31, 2021
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)			Residential		Commercial		Construction								Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1	$	330	$	1,638	$	1	$	73	$	0	$	0	$	2,043
Collectively evaluated for impairment	2,605		4,071		2,538		141		1,662		235		907		12,159
Total ending allowance balance	$	2,606	$	4,401	$	4,176	$	142	$	1,735	$	235	$	907	$	14,202

Loans:
Individually evaluated for impairment	$	863	$	6,169	$	11,727	$	128	$	201	$	0			$	19,088

Collectively evaluated for impairment	181,196		573,567		351,998		39,657		150,255		19,658				1,316,331
Total ending loans balance	$	182,059	$	579,736	$	363,725	$	39,785	$	150,456	$	19,658			$	1,335,419


	December 31, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)			Residential		Commercial		Construction								Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	0	$	224	$	811	$	0	$	0	$	0	$	0	$	1,035
Collectively evaluated for impairment	1,936		4,236		2,824		134		1,906		261		1,471		12,768
Total ending allowance balance	$	1,936	$	4,460	$	3,635	$	134	$	1,906	$	261	$	1,471	$	13,803

Loans:
Individually evaluated for impairment	$	865	$	6,317	$	9,377	$	124	$	0	$	0			$	16,683

Collectively evaluated for impairment	163,878		583,404		363,811		39,185		156,403		19,940				1,326,621
Total ending loans balance	$	164,743	$	589,721	$	373,188	$	39,309	$	156,403	$	19,940			$	1,343,304

Note 7. Net Periodic Benefit Cost-Defined Benefit Plans

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

The following sets forth the components of the net periodic benefit/cost of the domestic non-contributory defined benefit plan for the three months ended March 31, 2021 and 2020, respectively:


	Three Months Ended March 31,
(In Thousands)		2021		2020

Interest cost		$	127	$	160
Expected return on plan assets		(386)		(318)


Amortization of net loss		46		41
Net periodic benefit		$	(213)	$	(117)

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Employer Contributions

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2020, that it expected to contribute a minimum of $500,000 to its defined benefit plan in 2021. As of March 31, 2021, there were contributions of $200,000 made to the plan with additional contributions of at least $300,000 anticipated during the remainder of 2021.

Note 8. Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to 1,000,000 shares to be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. During the three months ended March 31, 2021 and 2020, there were 939 and 751 shares issued under the Plan, respectively.

Note 9. Off-Balance Sheet Risk

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

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

Financial instruments whose contract amounts represent credit risk are as follows at March 31, 2021 and December 31, 2020:


(In Thousands)	March 31, 2021		December 31, 2020
Commitments to extend credit	$	216,331	$	198,512
Standby letters of credit	10,091		10,120
Credit exposure from the sale of assets with recourse	9,634		9,182
	$	236,056	$	217,814

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

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

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Note 10. Fair Value Measurements

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.


Level I:						Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:						Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:						Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

This hierarchy requires the use of observable market data when available.

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of March 31, 2021 and December 31, 2020, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	March 31, 2021
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Investment securities, available for sale:

Mortgage-backed securities	$	0	$	1,796	$	0	$	1,796

State and political securities	0		113,252		0		113,252
Other debt securities	0		51,847		0		51,847
Investment equity securities:

Other equity securities	1,265		0		0		1,265
Investment securities, trading:

Other equity securities	44		0		0		44


	December 31, 2020
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Investment securities, available for sale:

Mortgage-backed securities	$	0	$	2,141	$	0	$	2,141

State and political securities	0		108,013		0		108,013
Other debt securities	0		52,107		0		52,107
Investment equity securities:

Other equity securities	1,288		0		0		1,288
Investment securities, trading:

Other equity securities	40		0		0		40

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The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of March 31, 2021 and December 31, 2020, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	March 31, 2021
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	0	$	0	$	14,856	$	14,856
Other real estate owned	0		0		68		68


	December 31, 2020
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	0	$	0	$	15,648	$	15,648
Other real estate owned	0		0		401		401

The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of March 31, 2021 and December 31, 2020:

March 31, 2021

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

10,231

Discounted cash flow

Temporary reduction in payment amount

3% to (63)%

(15)%

4,625

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(4)%

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

December 31, 2020

Quantitative Information About Level III Fair Value Measurements

(In Thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range

Weighted Average

Impaired loans

8,624

Discounted cash flow

Temporary reduction in payment amount

17% to (63)%

(18)%

7,024

Appraisal of collateral (1)

Appraisal adjustments (1)

0% to (30)%

(8)%

Other real estate owned

401

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

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

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

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

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Note 11. Fair Value of Financial Instruments

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

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

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

The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at March 31, 2021 and December 31, 2020:


	Carrying		Fair		Fair Value Measurements at March 31, 2021
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:
Cash and cash equivalents (1)	$	277,688	$	277,688	$	277,688	$	0	$	0




Restricted investment in bank stock (1)	15,032		15,032		15,032		0		0
Loans held for sale (1)	2,568		2,568		2,568		0		0
Loans, net	1,321,697		1,314,153		0		0		1,314,153
Bank-owned life insurance (1)	33,839		33,839		33,839		0		0
Accrued interest receivable (1)	8,583		8,583		8,583		0		0

Financial liabilities:
Interest-bearing deposits	$	1,085,448	$	1,088,714	$	839,452	$	0	$	249,262
Noninterest-bearing deposits (1)	478,916		478,916		478,916		0		0
Short-term borrowings (1)	6,650		6,650		6,650		0		0
Long-term borrowings	141,094		145,456		0		0		145,456
Accrued interest payable (1)	988		988		988		0		0

(1) The financial instrument is carried at cost at March 31, 2021, which approximate the fair value of the instruments

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	Carrying		Fair		Fair Value Measurements at December 31, 2020
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:
Cash and cash equivalents (1)	$	213,358	$	213,358	$	213,358	$	0	$	0



Restricted investment in bank stock (1)	15,377		15,377		15,377		0		0
Loans held for sale (1)	5,239		5,239		5,239		0		0
Loans, net	1,330,524		1,339,993		0		0		1,339,993
Bank-owned life insurance (1)	33,638		33,638		33,638		0		0
Accrued interest receivable (1)	8,394		8,394		8,394		0		0

Financial liabilities:
Interest-bearing deposits	$	1,045,086	$	1,048,281	$	781,441	$	0	$	266,840
Noninterest-bearing deposits (1)	449,357		449,357		449,357		0		0
Short-term borrowings (1)	5,244		5,244		5,244		0		0
Long-term borrowings	153,475		159,575		0		0		159,575
Accrued interest payable (1)	1,112		1,112		1,112		0		0

(1) The financial instrument is carried at cost at December 31, 2020, which approximate the fair value of the instruments

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

Note 12. Stock Options

In 2020, the Company adopted the 2020 Equity Incentive Plan which replaced the 2014 Equity Incentive Plan that did not have any remaining shares available for issuance. The plans are designed to help the Company attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, restricted stock, restricted stock units, and other equity-based awards may be granted as part of the plan.

As of January 1, 2021, the Company had a total of 841,275 stock options outstanding. The Company did not issue any stock options during the period ended March 31, 2021.


Stock Options Granted
Date	Shares	Forfeited	Outstanding	Strike Price		Vesting Period	Expiration
March 11, 2020	119,300	0	119,300	$	25.31	3 years	10 years
March 11, 2020	119,200	0	119,200	25.31		5 years	10 years
March 15, 2019	120,900	(5,700)	115,200	28.01		3 years	10 years
March 15, 2019	119,100	(5,550)	113,550	28.01		5 years	10 years
August 24, 2018	75,300	(5,250)	70,050	30.67		3 years	10 years
August 24, 2018	149,250	(10,650)	138,600	30.67		5 years	10 years
January 5, 2018	18,750	0	18,750	30.07		3 years	10 years
January 5, 2018	18,750	0	18,750	30.07		5 years	10 years
March 24, 2017	69,375	(9,000)	60,375	29.47		3 years	10 years
March 24, 2017	35,625	(2,250)	33,375	29.47		5 years	10 years
August 27, 2015	58,125	(24,000)	34,125	28.02		5 years	10 years

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A summary of stock option activity is presented below:


	March 31, 2021			March 31, 2020
	Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding, beginning of year	841,275	$	28.17	625,800	$	29.29
Granted	0	0		238,500	25.34
Exercised	0	0		0	0
Forfeited	0	0		0	0
Expired	0	0		0	0
Outstanding, end of period	841,275	$	28.17	864,300	$	29.20

Exercisable, end of period	113,250	$	29.13	62,625	$	29.47

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

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

Note 13. Leases

The following table shows finance lease right of use assets and finance lease liabilities as of:



(In Thousands)	Statement of Financial Condition classification	March 31, 2021		December 31, 2020
Finance lease right of use assets	Premises and equipment, net	$	7,758	$	5,257
Finance lease liabilities	Long-term borrowings	8,094		5,475

The following table shows the components of finance and operating lease expense for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
(In Thousands)		2021		2020

Finance Lease Cost:
Amortization of right-of-use asset		$	152	$	50
Interest expense		71		53
Operating lease cost		76		91

Variable lease cost		0		0
Total Lease Cost		$	299	$	194

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A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:



(In Thousands)	Operating		Finance
2021	$	219	$	314
2022	298		419
2023	273		421
2024	262		427
2025	265		929
2026 and thereafter	2,911		9,664
Total undiscounted cash flows	4,228		12,174
Discount on cash flows	(1,098)		(4,080)
Total lease liability	$	3,130	$	8,094

The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of March 31, 2021.



	Operating		Finance
Weighted-average term (years)	18.1		25.1
Weighted-average discount rate	3.51	%	3.19	%

Note 14. Reclassification of Comparative Amounts

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

Note 15. Subsequent Events

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

Note 16. Risks and Uncertainties

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

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CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; (vi) the length and extent of the economic contraction as a result of the COVID-19 pandemic; or (vii) the effect of changes in the business cycle and downturns in the local, regional or national economies; and (viii) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 and in other filings made by the Company under the Securities Exchange Act of 1934.

You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

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

EARNINGS SUMMARY

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

Summary Results

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

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

Reconciliation of GAAP and Non-GAAP Financial Measures


(Dollars in Thousands, Except Per Share Data)	Three Months Ended March 31,
	2021		2020
GAAP net income	$	3,441	$	3,073
Less: net securities gains, net of tax	94		22
Non-GAAP core earnings	$	3,347	$	3,051


	Three Months Ended March 31,
	2021		2020
Return on average assets (ROA)	0.75	%	0.74	%
Less: net securities gains, net of tax	0.02	%	0.01	%
Non-GAAP core ROA	0.73	%	0.73	%


		Three Months Ended March 31,
		2021		2020
Return on average equity (ROE)		8.59	%	7.83	%
Less: net securities gains, net of tax		0.24	%	0.06	%
Non-GAAP core ROE	.	8.35	%	7.77	%


	Three Months Ended March 31,
	2021		2020
Basic earnings per share (EPS)	$	0.49	$	0.44
Less: net securities gains, net of tax	0.02		—
Non-GAAP core operating EPS	$	0.47	$	0.44

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	Three Months Ended March 31,
	2021		2020
Diluted EPS	$	0.49	$	0.43
Less: net securities gains, net of tax	0.02		—
Non-GAAP diluted core EPS	$	0.47	$	0.43

Interest and Dividend Income

Interest and dividend income for the three months ended March 31, 2021 decreased to $14,595,000 compared to $16,161,000 for the same period of 2020 as the interest rate environment remains at a level below historical levels. Loan portfolio income decreased due to a decrease in average rate paid on loans and a decrease in the average loan portfolio balance. Investment securities and dividend income decreased as the increase in the average portfolio balance was more than offset by a decrease in the average rate earned on the portfolio. The decrease in dividend and other interest income is due to a decrease in the amount of dividends received on restricted investment in bank stock held.

Interest and dividend income composition for the three months ended March 31, 2021 and 2020 was as follows:


	Three Months Ended
	March 31, 2021				March 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Loans including fees	$	13,345	91.44	%	$	14,657	90.69	%	$	(1,312)	(8.95)	%
Investment securities:
Taxable	819		5.61		1,010		6.25		(191)		(18.91)
Tax-exempt	171		1.17		145		0.90		26		17.93
Dividend and other interest income	260		1.78		349		2.16		(89)		(25.50)
Total interest and dividend income	$	14,595	100.00	%	$	16,161	100.00	%	$	(1,566)	(9.69)	%

Interest Expense

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

Interest expense composition for the three months ended March 31, 2021 and 2020 was as follows:


	Three Months Ended
	March 31, 2021				March 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Deposits	$	1,684	66.69	%	$	3,035	75.88	%	$	(1,351)	(44.51)	%
Short-term borrowings	2		0.08		22		0.55		(20)		(90.91)
Long-term borrowings	839		33.23		943		23.58		(104)		(11.03)
Total interest expense	$	2,525	100.00	%	$	4,000	100.01	%	$	(1,475)	(36.88)	%

Net Interest Margin

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

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customers have received stimulus funding. Rates paid on interest-bearing liabilities were decreased significantly since March 31, 2020 resulting in a decline in rate paid of 60 bps as compared to the three months ended March 31, 2020. The rate paid on short-term borrowings decreased significantly as the balance consists primarily of securities sold under agreement to repurchase. These rate decreases partially offset the decline in earning asset yield.

The following is a schedule of average balances and associated yields for the three months ended March 31, 2021 and 2020:


	AVERAGE BALANCES AND INTEREST RATES
	Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
(In Thousands)	Average Balance (1)		Interest		Average Rate		Average Balance (1)		Interest		Average Rate
Assets:
Tax-exempt loans (3)	$	45,534	$	349	3.11	%	$	52,979	$	404	3.07	%
All other loans	1,293,395		13,069		4.10	%	1,303,838		14,338		4.42	%
Total loans (2)	1,338,929		13,418		4.06	%	1,356,817		14,742		4.37	%



Taxable securities	145,047		1,033		2.89	%	142,788		1,273		3.63	%
Tax-exempt securities	36,369		216		2.41	%	23,773		184		3.15	%
Total securities	181,416		1,249		2.79	%	166,561		1,457		3.56	%

Interest-bearing deposits	195,995		46		0.10	%	26,716		86		1.29	%

Total interest-earning assets	1,716,340		14,713		3.48	%	1,550,094		16,285		4.23	%

Other assets	124,074						112,219

Total assets	$	1,840,414					$	1,662,313

Liabilities and shareholders’ equity:
Savings	$	214,636	44		0.08	%	$	177,840	91		0.21	%
Super Now deposits	289,236		267		0.37	%	219,826		424		0.78	%
Money market deposits	306,000		267		0.35	%	210,708		477		0.91	%
Time deposits	254,460		1,106		1.76	%	379,259		2,043		2.17	%
Total interest-bearing deposits	1,064,332		1,684		0.64	%	987,633		3,035		1.24	%

Short-term borrowings	5,680		2		0.14	%	10,847		22		0.85	%
Long-term borrowings	141,483		839		2.40	%	159,920		943		2.37	%
Total borrowings	147,163		841		2.32	%	170,767		965		2.28	%

Total interest-bearing liabilities	1,211,495		2,525		0.85	%	1,158,400		4,000		1.39	%

Demand deposits	445,759						326,817
Other liabilities	22,872						19,991
Shareholders’ equity	160,288						157,105

Total liabilities and shareholders’ equity	$	1,840,414					$	1,662,313
Interest rate spread					2.63	%					2.84	%
Net interest income/margin			$	12,188	2.88	%			$	12,285	3.19	%

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
(In Thousands)		2021		2020
Total interest income		$	14,595	$	16,161
Total interest expense		2,525		4,000
Net interest income		12,070		12,161
Tax equivalent adjustment		118		124
Net interest income (fully taxable equivalent)		$	12,188	$	12,285

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The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three months ended March 31, 2021 and 2020:


	Three Months Ended March 31,
	2021 vs. 2020
	Increase (Decrease) Due to
(In Thousands)		Volume		Rate		Net
Interest income:
Tax-exempt loans		$	(60)	$	5	$	(55)
All other loans		(126)		(1,143)		(1,269)

Taxable investment securities		21		(261)		(240)
Tax-exempt investment securities		83		(51)		32
Interest bearing deposits		103		(143)		(40)
Total interest-earning assets		21		(1,593)		(1,572)

Interest expense:
Savings deposits		17		(64)		(47)
Super Now deposits		110		(267)		(157)
Money market deposits		161		(371)		(210)
Time deposits		(595)		(342)		(937)
Short-term borrowings		(7)		(13)		(20)
Long-term borrowings		(116)		12		(104)
Total interest-bearing liabilities		(430)		(1,045)		(1,475)
Change in net interest income		$	451	$	(548)	$	(97)

Provision for Loan Losses

The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed annually for the Banks. Management remains committed to an aggressive program of problem loan identification and resolution.

The allowance for loan losses is determined by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards and trends with respect to non-performing loans and its knowledge and experience with specific lending segments.

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at March 31, 2021, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

When determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.

The allowance for loan losses increased from $13,803,000 at December 31, 2020 to $14,202,000 at March 31, 2021. The increase in the allowance for loan losses was primarily driven by the economic uncertainity caused by the COVID-19 pandemic. At March 31, 2021 and December 31, 2020, the allowance for loan losses to total loans was 1.06% and 1.03%, respectively.

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

Nonperforming loans decreased to $9,272,000 at March 31, 2021 from $11,300,000 at March 31, 2020. The majority of nonperforming loans involve loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses. The ratio of nonperforming loans to total loans was 0.69% and 0.84% at March 31, 2021 and 2020, respectively, and the ratio of the allowance for loan losses to nonperforming loans was 153.17% and 110.62% at March 31, 2021 and 2020, respectively. Internal loan review and analysis coupled with changes in the loan portfolio composition and the impact of the COVID-19 pandemic resulted in a provision for loan losses of $515,000 for the three months ended March 31, 2021.

The following is a table showing total nonperforming loans as of:


	Total Nonperforming Loans
(In Thousands)	90 Days Past Due		Non-accrual		Total
March 31, 2021	$	607	$	8,665	$	9,272
December 31, 2020	1,212		9,122		10,334
September 30, 2020	791		9,762		10,553
June 30, 2020	1,279		9,818		11,097
March 31, 2020	1,503		9,797		11,300

Non-interest Income

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

Non-interest income composition for the three months ended March 31, 2021 and 2020 was as follows:


	Three Months Ended
	March 31, 2021				March 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Service charges	$	383	14.65	%	$	549	22.53	%	$	(166)	(30.24)	%
Net debt securities gains, available for sale	138		5.28		21		0.86		117		(557.14)
Net equity securities (losses) gains	(23)		(0.88)		20		0.82		(43)		215.00
Net securities gains (losses), trading	4		0.15		(14)		(0.57)		18		(128.57)
Bank-owned life insurance	173		6.62		192		7.88		(19)		(9.90)
Gain on sale of loans	908		34.74		444		18.22		464		104.50
Insurance commissions	157		6.01		127		5.21		30		23.62
Brokerage commissions	219		8.38		369		15.14		(150)		(40.65)
Debit card income	380		14.54		274		11.24		106		38.69
Other	275		10.51		455		18.67		(180)		(39.56)
Total non-interest income	$	2,614	100.00	%	$	2,437	100.00	%	$	177	7.26	%

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Non-interest Expense

Total non-interest expense decreased $159,000 three months ended March 31, 2021 compared to the same period of 2020. The decrease in salaries and employee benefits is attributable to a staff reduction resulting from a change in banking channels utilized by customers during the COVID-19 pandemic. Furniture and equipment expenses decreased as maintenance costs have decreased and a decrease in the level of depreciation. Software amortization decreased as the number of vendors is being consolidated resulting in new licensing fee structures at a lower cost. The fluctuation in professional fees consists primarily of an decrease in legal fees. Occupancy expenses have increased primarily due to recently opened branches. Other expense decreased primarily from the change in expense associated with the defined benefit pension and a decrease in the amortization of the low income housing partnerships.

Non-interest expense composition for the three months ended March 31, 2021 and 2020 was as follows:


	Three Months Ended
	March 31, 2021				March 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Salaries and employee benefits	$	5,598	56.26	%	$	5,667	56.05	%	$	(69)	(1.22)	%
Occupancy	976		9.81		702		6.94		274		39.03
Furniture and equipment	809		8.13		860		8.51		(51)		(5.93)
Software amortization	198		1.99		250		2.47		(52)		(20.80)
Pennsylvania shares tax	352		3.54		285		2.82		67		23.51
Professional fees	583		5.86		622		6.15		(39)		(6.27)
Federal Deposit Insurance Corporation deposit insurance	221		2.22		194		1.92		27		13.92

Marketing	63		0.63		53		0.52		10		18.87
Intangible amortization	53		0.53		62		0.61		(9)		(14.52)
Other	1,098		11.03		1,415		14.01		(317)		(22.40)
Total non-interest expense	$	9,951	100.00	%	$	10,110	100.00	%	$	(159)	(1.57)	%

Provision for Income Taxes

Income taxes increased $110,000 for the three months ended March 31, 2021 compared to the same period of 2020. The effective tax rate for the three months ended March 31, 2021 was 18.28% compared to 17.68% for the same period of 2020. The Company currently is in a deferred tax asset position. Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate carry forward period and therefore does not require a valuation allowance.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents increased $64,330,000 from $213,358,000 at December 31, 2020 to $277,688,000 at March 31, 2021, primarily as a result of the following activities during the three months ended March 31, 2021.

Loans Held for Sale

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

Loans

Gross loans decreased $8,428,000 since December 31, 2020 due primarily to a decrease in both residential and commercial real estate mortgage categories in addition to a decrease in the consumer automobile loan segment of the portfolio. These decreases were partially offset by growth in commercial, financial and agricultural loans. The economic environment caused by the COVID-19 pandemic has negatively impacted loan demand; however, demand has seen an uptick during the latter part of the first quarter of 2021.

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The allocation of the loan portfolio, by category, as of March 31, 2021 and December 31, 2020 is presented below:


	March 31, 2021				December 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Commercial, financial, and agricultural	$	182,059	13.63	%	$	164,743	12.25	%	$	17,316	10.51	%
Real estate mortgage:
Residential	579,736		43.40		589,721		43.87		(9,985)		(1.69)	%
Commercial	363,725		27.23		373,188		27.76		(9,463)		(2.54)	%
Construction	39,785		2.98		39,309		2.92		476		1.21	%
Consumer automobile loans	150,456		11.26		156,403		11.63		(5,947)		(3.80)	%
Other consumer installment loans	19,658		1.47		19,940		1.48		(282)		(1.41)	%
Net deferred loan fees and discounts	480		0.03		1,023		0.09		(543)		(53.08)	%
Gross loans	$	1,335,899	100.00	%	$	1,344,327	100.00	%	$	(8,428)	(0.63)	%

The following table shows the amount of accrual and non-accrual TDRs at March 31, 2021 and December 31, 2020:


	March 31, 2021						December 31, 2020
(In Thousands)	Accrual		Non-accrual		Total		Accrual		Non-accrual		Total
Commercial, financial, and agricultural	$	926	$	860	$	1,786	$	988	$	862	$	1,850
Real estate mortgage:
Residential	4,241		758		4,999		3,889		90		3,979
Commercial	2,258		4,251		6,509		2,107		4,423		6,530


	$	7,425	$	5,869	$	13,294	$	6,984	$	5,375	$	12,359

Investments

The fair value of the investment debt securities portfolio at March 31, 2021 increased $4,634,000 since December 31, 2020, while the amortized cost of the portfolio increased $6,683,000. The increase in the investment portfolio amortized value occurred within the state and political segment of the portfolio. The mortgage-backed segment was reduced as bonds prepaid due to the low interest rate environment. The other debt segment of the investment portfolio is primarily corporate bonds and this segment was held constant. The municipal segment was increased as bonds with a final maturity of one to five years have been purchased. The portfolio continues to be actively managed in order to reduce interest rate and market risk. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 82.79% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

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

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

The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has remained flat at $1,300,000 for March 31, 2021 and December 31, 2020 while the fair value decreased $23,000 over the same time period.

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The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at March 31, 2021 follows:


	A- to AAA					B- to BBB+				Not Rated				Total
(In Thousands)	Amortized Cost			Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale (AFS):

Mortgage-backed securities	$	1,792	7	$	1,796	$	—	$	—	$	—	$	—	$	1,792	$	1,796

State and political securities	107,656			111,126		1,320		1,435		686		691		109,662		113,252
Other debt securities	25,473			25,543		12,101		12,301		13,949		14,003		51,523		51,847
Total debt securities AFS	$	134,921		$	138,465	$	13,421	$	13,736	$	14,635	$	14,694	$	162,977	$	166,895

Financing Activities

Deposits

Total deposits increased $69,921,000 from December 31, 2020 to March 31, 2021. The increase in core deposits (deposits less time deposits) has provided relationship driven funding for the loan and investment portfolios. Driving deposit growth was the receipt of PPP funding by commercial customers, stimulus funding by retail customers, and customers becoming more risk averse and seeking safety in a bank deposit. Emphasis during 2020 and 2021 has been on increasing the utilization of electronic (internet and mobile) deposit banking among our customers. Utilization of internet and mobile banking has increased since the start of 2020 due to these efforts coupled with a change in consumer behavior due to the business and travel restrictions caused by the COVID-19 pandemic.

Deposit balances and their changes for the periods being discussed follow:


	March 31, 2021				December 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Demand deposits	$	478,916	30.61	%	$	449,357	30.07	%	$	29,559	6.58	%
NOW accounts	290,355		18.56		287,775		19.26		2,580		0.90
Money market deposits	324,207		20.72		283,742		18.99		40,465		14.26
Savings deposits	224,890		14.38		209,924		14.05		14,966		7.13
Time deposits	245,996		15.73		263,645		17.63		(17,649)		(6.69)
Total deposits	$	1,564,364	100.00	%	$	1,494,443	100.00	%	$	69,921	4.68	%

Borrowed Funds

Total borrowed funds decreased 6.91%, or $10,975,000, to $147,744,000 at March 31, 2021 compared to $158,719,000 at December 31, 2020. The decrease in long term borrowings occurred as a fixed rate borrowing matured. Securities sold under agreement to repurchase have increased as customers balances have increased.


	March 31, 2021				December 31, 2020				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount		%
Short-term borrowings:


Securities sold under agreement to repurchase	$	6,650	4.50	%	$	5,244	3.30	%	$	1,406	26.81	%
Total short-term borrowings	6,650		4.50		5,244		3.30		1,406		26.81
Long-term borrowings:
Long-term FHLB borrowings	133,000		90.01		148,000		93.25		(15,000)		(10.14)
Long-term finance lease	8,094		5.48		5,475		3.45		2,619		47.84

Total long-term borrowings	141,094		95.50		153,475		96.70		(12,381)		(8.07)
Total borrowed funds	$	147,744	100.00	%	$	158,719	100.00	%	$	(10,975)	(6.91)	%

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Short-Term Borrowings

The following table provides further information in regards to secured borrowings that have been accounted for as repurchase agreements.


	Remaining Contractual Maturity Overnight and Continuous
(In Thousands)	March 31, 2021		December 31, 2020
Investment debt securities pledged, fair value	$	10,256	$	11,672
Repurchase agreements	6,650		5,244

Capital

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

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

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

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The Company's capital ratios as of March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021				December 31, 2020
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	149,476	11.447	%	$	147,887	11.267	%
For Capital Adequacy Purposes	58,761		4.500		59,066		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	91,407		7.000		91,880		7.000
To Be Well Capitalized	84,878		6.500		85,317		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	158,038	12.102	%	$	159,490	12.151	%
For Capital Adequacy Purposes	104,471		8.000		105,005		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	137,118		10.500		137,820		10.500
To Be Well Capitalized	130,588		10.000		131,257		10.000
Tier I Capital (to Risk-weighted Assets)
Actual	$	149,476	11.447	%	$	147,887	11.267	%
For Capital Adequacy Purposes	78,349		6.000		78,754		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	110,994		8.500		111,568		8.500
To Be Well Capitalized	104,465		8.000		105,005		8.000
Tier I Capital (to Average Assets)
Actual	$	149,476	8.224	%	$	147,887	8.436	%
For Capital Adequacy Purposes	72,702		4.000		70,122		4.000
To Be Well Capitalized	90,878		5.000		87,652		5.000

Jersey Shore State Bank's capital ratios as of March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021				December 31, 2020
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	104,864	11.135	%	$	103,812	10.906	%
For Capital Adequacy Purposes	42,379		4.500		42,835		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	65,923		7.000		66,632		7.000
To Be Well Capitalized	61,214		6.500		61,872		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	110,875	11.773	%	$	112,862	11.857	%
For Capital Adequacy Purposes	75,342		8.000		76,149		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	98,886		10.500		99,945		10.500
To Be Well Capitalized	94,177		10.000		95,186		10.000
Tier I Capital (to Risk-weighted Assets)	-				-
Actual	$	104,864	10.964	%	$	103,812	10.906	%
For Capital Adequacy Purposes	57,386		6.000		57,113		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	81,297		8.500		80,910		8.500
To Be Well Capitalized	76,515		8.000		76,150		8.000
Tier I Capital (to Average Assets)
Actual	$	104,864	8.156	%	$	103,812	8.062	%
For Capital Adequacy Purposes	51,429		4.000		51,507		4.000
To Be Well Capitalized	64,286		5.000		64,384		5.000

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Luzerne Bank's capital ratios as of March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021				December 31, 2020
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	40,761	11.195	%	$	40,206	11.156	%
For Capital Adequacy Purposes	16,385		4.500		16,218		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	25,487		7.000		25,228		7.000
To Be Well Capitalized	23,667		6.500		23,426		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	45,312	12.445	%	$	42,759	11.865	%
For Capital Adequacy Purposes	29,128		8.000		28,830		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	38,230		10.500		37,840		10.500
To Be Well Capitalized	36,410		10.000		36,038		10.000
Tier I Capital (to Risk-weighted Assets)
Actual	$	40,761	11.195	%	$	40,206	11.156	%
For Capital Adequacy Purposes	21,846		6.000		21,624		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	30,949		8.500		30,634		8.500
To Be Well Capitalized	29,128		8.000		28,832		8.000
Tier I Capital (to Average Assets)
Actual	$	40,761	7.739	%	$	40,206	7.860	%
For Capital Adequacy Purposes	21,068		4.000		20,461		4.000
To Be Well Capitalized	26,335		5.000		25,576		5.000

Liquidity; Interest Rate Sensitivity and Market Risk

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

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

1. Net Loans to Total Assets, 85% maximum

2. Net Loans to Total Deposits, 100% maximum

3. Cumulative 90 day Maturity GAP %, +/- 20% maximum

4. Cumulative 1 Year Maturity GAP %, +/- 25% maximum

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

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

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

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money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit, provides core funding to satisfy depositor, borrower, and creditor needs.

Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a total current maximum borrowing capacity at the FHLB of $571,174,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $57,000,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled $133,000,000 as of March 31, 2021.

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

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

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

Interest Rate Sensitivity

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

The following is a rate shock forecast for the twelve month period ending March 31, 2022 assuming a static balance sheet as of March 31, 2021.


	Parallel Rate Shock in Basis Points
(In Thousands)	-200			-100			Static		+100			+200			+300			+400
Net interest income	$	44,892		$	47,706		$	50,894	$	54,615		$	58,324		$	61,773		$	65,193
Change from static	(6,002)			(3,188)			—		3,721			7,430			10,879			14,299
Percent change from static	-11.79		%	-6.26		%	—		7.31		%	14.60		%	21.38		%	28.10		%

The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

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Inflation

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

Paycheck Protection Program

The Company participated in the Paycheck Protection Program ('PPP"). Loans retained by the bank through this program total $29,200,000 in loans with over 400 loan applications processed.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at both the level of the Company and the Banks. The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party. There have been no substantial changes in the Company’s gap analysis or simulation analysis compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 2020. Additional information and details are provided in the “Liquidity, Interest Rate Sensitivity, and Market Risk” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Certain risk factors are set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

The following table provides certain information with respect to the Company's repurchase of common stock during the quarter ended March 31, 2021.


Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Units) Purchased	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month #1 (January 1 - January 31, 2021)	—	—	—	513,669
Month #2 (February 1 - February 28, 2021)	—	—	—	513,669
Month #3 (March 1 - March 31, 2021)	—	—	—	513,669

On April 13, 2021, the Board of Directors authorized the repurchase of up to 353,000 shares, or approximately 5%, of the outstanding shares of the Company for a one year period ending April 30, 2022.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


3(i)						Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2019).
3(ii)						Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020).
31(i)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
31(ii)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
32(i)						Section 1350 Certification of Chief Executive Officer.
32(ii)						Section 1350 Certification of Chief Financial Officer.
101						Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at March 31, 2021 and December 31, 2020; (ii) the Consolidated Statement of Income for the three months ended March 31, 2021 and 2020; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2021 and 2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2021 and 2020; (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 2021 and 2020 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.

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SIGNATURES

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


		PENNS WOODS BANCORP, INC.
		(Registrant)

Date:	May 10, 2021	/s/ Richard A. Grafmyre
		Richard A. Grafmyre, Chief Executive Officer
		(Principal Executive Officer)


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

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EXHIBIT INDEX


Exhibit 3(i)						Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 2019).
Exhibit 3(ii)						Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2020).
Exhibit 31(i)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer
Exhibit 31(ii)						Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer
Exhibit 32(i)						Section 1350 Certification of Chief Executive Officer
Exhibit 32(ii)						Section 1350 Certification of Chief Financial Officer
Exhibit 101						Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at March 31, 2021 and December 31, 2020; (ii) the Consolidated Statement of Income for the three months ended March 31, 2021 and 2020; (iii) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2021 and 2020; (iv) the Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2021 and 2020; (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 2021 and 2020 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.

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