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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 202 1

OR

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

For the transition period from __________ to __________

Commission file number 0-28364

Norwood Financial Corp

(Exact name of registrant as specified in its charter)

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

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

N/A

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

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

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

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

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

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

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

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

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

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

Class |  | Outstanding as of August 1, 2021
Common stock, par value $0.10 per share |  | 8,224,383

NORWOOD FINANCIAL CORP

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2021

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

‎

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NORWOOD FINANCIAL CORP

Consolidated Balance Sheets (unaudited)

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

| June 30, |  | December 31,
| 2021 |  | 2020
ASSETS |  |  |  |  |
Cash and due from banks | $ | 34,831 |  | $ | 19,445
Interest-bearing deposits with banks |  | 170,342 |  |  | 92,248
Cash and cash equivalents |  | 205,173 |  |  | 111,693
Securities available for sale, at fair value |  | 333,636 |  |  | 226,586
Loans receivable |  | 1,386,654 |  |  | 1,410,732
Less: Allowance for loan losses |  | 15,340 |  |  | 13,150
Net loans receivable |  | 1,371,314 |  |  | 1,397,582
Regulatory stock, at cost |  | 4,084 |  |  | 3,981
Bank premises and equipment, net |  | 17,298 |  |  | 17,814
Bank owned life insurance |  | 39,665 |  |  | 39,608
Accrued interest receivable |  | 6,190 |  |  | 6,232
Foreclosed real estate owned |  | 844 |  |  | 965
Goodwill |  | 29,266 |  |  | 29,290
Other intangibles |  | 461 |  |  | 530
Other assets |  | 17,633 |  |  | 17,583
TOTAL ASSETS | $ | 2,025,564 |  | $ | 1,851,864
LIABILITIES |  |  |  |  |
Deposits: |  |  |  |  |
Non-interest bearing demand | $ | 435,824 |  | $ | 359,559
Interest-bearing |  | 1,253,117 |  |  | 1,175,826
Total deposits |  | 1,688,941 |  |  | 1,535,385
Short-term borrowings |  | 83,599 |  |  | 63,303
Other borrowings |  | 36,259 |  |  | 42,459
Accrued interest payable |  | 1,462 |  |  | 1,601
Other liabilities |  | 14,804 |  |  | 14,331
TOTAL LIABILITIES |  | 1,825,065 |  |  | 1,657,079
STOCKHOLDERS’ EQUITY |  |  |  |  |
Preferred stock, no par value per share, |  |  |  |  |
authorized: 5,000,000 shares; issued: none |  | — |  |  | —
Common stock, $0.10 par value per share, |  |  |  |  |
authorized: 20,000,000 shares, |  |  |  |  |
issued: 2021: 8,245,301 shares, 2020: 8,236,331 shares |  | 825 |  |  | 824
Surplus |  | 95,951 |  |  | 95,388
Retained earnings |  | 100,818 |  |  | 93,796
Treasury stock at cost: 2021: 21,568 shares; 2020: 10,263 shares |  | (656) |  |  | (342)
Accumulated other comprehensive income |  | 3,561 |  |  | 5,119
TOTAL STOCKHOLDERS’ EQUITY |  | 200,499 |  |  | 194,785
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,025,564 |  | $ | 1,851,864

See accompanying notes to the unaudited consolidated financial statements.
‎

3

NORWOOD FINANCIAL CORP

Consolidated Statements of Income (unaudited)

(dollars in thousan ds, except per share data)

| Three Months Ended |  | Six Months Ended
| June 30, |  | June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
INTEREST INCOME |  |  |  |  |  |  |  |  |  |  |
Loans receivable, including fees | $ | 16,102 |  | $ | 10,767 |  | $ | 32,248 |  | $ | 21,450
Securities |  | 1,356 |  |  | 1,063 |  |  | 2,468 |  |  | 2,242
Other |  | 59 |  |  | 19 |  |  | 102 |  |  | 25
Total interest income |  | 17,517 |  |  | 11,849 |  |  | 34,818 |  |  | 23,717
INTEREST EXPENSE |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 1,205 |  |  | 1,630 |  |  | 2,459 |  |  | 3,420
Short-term borrowings |  | 73 |  |  | 73 |  |  | 142 |  |  | 184
Other borrowings |  | 186 |  |  | 279 |  |  | 388 |  |  | 581
Total interest expense |  | 1,464 |  |  | 1,982 |  |  | 2,989 |  |  | 4,185
NET INTEREST INCOME |  | 16,053 |  |  | 9,867 |  |  | 31,829 |  |  | 19,532
PROVISION FOR LOAN LOSSES |  | 1,500 |  |  | 1,300 |  |  | 3,000 |  |  | 2,000
NET INTEREST INCOME AFTER |  |  |  |  |  |  |  |  |  |  |
PROVISION FOR LOAN LOSSES |  | 14,553 |  |  | 8,567 |  |  | 28,829 |  |  | 17,532
OTHER INCOME |  |  |  |  |  |  |  |  |  |  |
Service charges and fees |  | 1,532 |  |  | 837 |  |  | 2,782 |  |  | 1,901
Income from fiduciary activities |  | 181 |  |  | 175 |  |  | 341 |  |  | 328
Net realized gains on sales of securities |  | — |  |  | — |  |  | 21 |  |  | 38
Gain on sale of loans, net |  | 109 |  |  | 65 |  |  | 138 |  |  | 121
Earnings and proceeds on bank owned life insurance |  | 194 |  |  | 212 |  |  | 568 |  |  | 420
Other |  | 171 |  |  | 103 |  |  | 326 |  |  | 239
Total other income |  | 2,187 |  |  | 1,392 |  |  | 4,176 |  |  | 3,047
OTHER EXPENSES |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  | 5,171 |  |  | 3,289 |  |  | 10,125 |  |  | 7,065
Occupancy, furniture & equipment, net |  | 1,186 |  |  | 906 |  |  | 2,406 |  |  | 1,875
Data processing and related operations |  | 562 |  |  | 466 |  |  | 1,166 |  |  | 903
Taxes, other than income |  | 229 |  |  | 214 |  |  | 534 |  |  | 427
Professional fees |  | 343 |  |  | 225 |  |  | 883 |  |  | 443
Federal Deposit Insurance Corporation insurance |  | 154 |  |  | 42 |  |  | 335 |  |  | 42
Foreclosed real estate |  | 13 |  |  | (2) |  |  | 42 |  |  | 14
Amortization of intangibles |  | 34 |  |  | 21 |  |  | 69 |  |  | 44
Merger related |  | — |  |  | 1,597 |  |  | — |  |  | 1,597
Other |  | 1,800 |  |  | 1,334 |  |  | 3,384 |  |  | 2,742
Total other expenses |  | 9,492 |  |  | 8,092 |  |  | 18,944 |  |  | 15,152
INCOME BEFORE INCOME TAXES |  | 7,248 |  |  | 1,867 |  |  | 14,061 |  |  | 5,427
INCOME TAX EXPENSE |  | 1,493 |  |  | 379 |  |  | 2,765 |  |  | 860
NET INCOME | $ | 5,755 |  | $ | 1,488 |  | $ | 11,296 |  | $ | 4,567
BASIC EARNINGS PER SHARE | $ | 0.70 |  | $ | 0.24 |  | $ | 1.38 |  | $ | 0.73
DILUTED EARNINGS PER SHARE | $ | 0.70 |  | $ | 0.24 |  | $ | 1.38 |  | $ | 0.73

See accompanying notes to the unaudited consolidated financial statements.

‎

4

NORWOOD FINANCIAL CORP

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

| Three Months Ended
| June 30,
| 2021 |  | 2020
Net income | $ | 5,755 |  | $ | 1,488
Other comprehensive income: |  |  |  |  |
Investment securities available for sale: |  |  |  |  |
Unrealized holding gain |  | 1,949 |  |  | 640
Tax effect |  | (409) |  |  | (135)
Reclassification of investment securities gains |  |  |  |  |
recognized in net income |  | — |  |  | —
Tax effect |  | — |  |  | —
Other comprehensive income |  | 1,540 |  |  | 505
Comprehensive Income | $ | 7,295 |  | $ | 1,993

| Six Months Ended
| June 30,
| 2021 |  | 2020
Net income | $ | 11,296 |  | $ | 4,567
Other comprehensive income |  |  |  |  |
Investment securities available for sale: |  |  |  |  |
Unrealized holding (loss) gain |  | (1,952) |  |  | 4,590
Tax effect |  | 411 |  |  | (965)
Reclassification of investment securities gains |  |  |  |  |
recognized in net income |  | (21) |  |  | (38)
Tax effect |  | 4 |  |  | 8
Other comprehensive (loss) income |  | (1,558) |  |  | 3,595
Comprehensive Income | $ | 9,738 |  | $ | 8,162

See accompanying notes to the unaudited consolidated financial statements.

‎

5

NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Six Months Ended June 30, 2021 and 2020

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

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |
|  | Common Stock |  |  |  |  | Retained |  | Treasury Stock |  | Comprehensive |  |  |
|  | Shares |  | Amount |  | Surplus |  | Earnings |  | Shares |  | Amount |  | Income |  | Total
Balance, December 31, 2020 |  |  | 8,236,331 |  | $ | 824 |  | $ | 95,388 |  | $ | 93,796 |  |  | 10,263 |  | $ | (342) |  | $ | 5,119 |  | $ | 194,785
Net Income |  |  | - |  |  | - |  |  | - |  |  | 11,296 |  |  | - |  |  | - |  |  | - |  |  | 11,296
Other comprehensive loss |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (1,558) |  |  | (1,558)
Cash dividends declared ($0.52 per share) |  |  | - |  |  | - |  |  | - |  |  | (4,274) |  |  | - |  |  | - |  |  | - |  |  | (4,274)
Acquisition of treasury stock |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 7,405 |  |  | (194) |  |  | - |  |  | (194)
Compensation expense related to restricted stock |  |  | - |  |  | - |  |  | 287 |  |  | - |  |  | 3,900 |  |  | (120) |  |  | - |  |  | 167
Stock options exercised |  |  | 8,970 |  |  | 1 |  |  | 169 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 170
Compensation expense related to stock options |  |  | - |  |  | - |  |  | 107 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 107
Balance, June 30, 2021 |  |  | 8,245,301 |  | $ | 825 |  | $ | 95,951 |  | $ | 100,818 |  |  | 21,568 |  | $ | (656) |  | $ | 3,561 |  | $ | 200,499
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |
|  | Common Stock |  |  |  |  | Retained |  | Treasury Stock |  | Comprehensive |  |  |
|  | Shares |  | Amount |  | Surplus |  | Earnings |  | Shares |  | Amount |  | Income |  | Total
Balance, December 31, 2019 |  |  | 6,340,563 |  | $ | 634 |  | $ | 49,471 |  | $ | 86,536 |  |  | 12,007 |  | $ | (400) |  | $ | 1,187 |  | $ | 137,428
Net Income |  |  | - |  |  | - |  |  | - |  |  | 4,567 |  |  | - |  |  | - |  |  | - |  |  | 4,567
Other comprehensive income |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 3,595 |  |  | 3,595
Cash dividends declared ($0.50 per share) |  |  | - |  |  | - |  |  | - |  |  | (3,164) |  |  | - |  |  | - |  |  | - |  |  | (3,164)
Acquisition of treasury stock |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 1,771 |  |  | (69) |  |  | - |  |  | (69)
Compensation expense related to restricted stock |  |  | - |  |  | - |  |  | 167 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 167
Stock options exercised |  |  | 2,005 |  |  | - |  |  | 38 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 38
Compensation expense related to stock options |  |  | - |  |  | - |  |  | 102 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 102
Balance, June 30, 2020 |  |  | 6,342,568 |  | $ | 634 |  | $ | 49,778 |  | $ | 87,939 |  |  | 13,778 |  | $ | (469) |  | $ | 4,782 |  | $ | 142,664

‎

6

NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Three Months Ended June 30, 2021 and 2020

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

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |
|  | Common Stock |  |  |  |  | Retained |  | Treasury Stock |  | Comprehensive |  |  |
|  | Shares |  | Amount |  | Surplus |  | Earnings |  | Shares |  | Amount |  | Income (Loss) |  | Total
Balance, March 31, 2021 |  |  | 8,240,081 |  | $ | 824 |  | $ | 95,717 |  | $ | 97,201 |  |  | 21,568 |  | $ | (656) |  | $ | 2,021 |  | $ | 195,107
Net Income |  |  | - |  |  | - |  |  | - |  |  | 5,755 |  |  | - |  |  | - |  |  | - |  |  | 5,755
Other comprehensive loss |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 1,540 |  |  | 1,540
Cash dividends declared ($0.26 per share) |  |  | - |  |  | - |  |  | - |  |  | (2,138) |  |  | - |  |  | - |  |  | - |  |  | (2,138)
Compensation expense related to restricted stock |  |  | - |  |  | - |  |  | 84 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 84
Stock options exercised |  |  | 5,220 |  |  | 1 |  |  | 97 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 98
Compensation expense related to stock options |  |  | - |  |  | - |  |  | 53 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 53
Balance, June 30, 2021 |  |  | 8,245,301 |  | $ | 825 |  | $ | 95,951 |  | $ | 100,818 |  |  | 21,568 |  | $ | (656) |  | $ | 3,561 |  | $ | 200,499
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |
|  | Common Stock |  |  |  |  | Retained |  | Treasury Stock |  | Comprehensive |  |  |
|  | Shares |  | Amount |  | Surplus |  | Earnings |  | Shares |  | Amount |  | Income |  | Total
Balance, March 31, 2020 |  |  | 6,342,568 |  | $ | 634 |  | $ | 49,644 |  | $ | 88,032 |  |  | 12,007 |  | $ | (400) |  | $ | 4,277 |  | $ | 142,187
Net Income |  |  | - |  |  | - |  |  | - |  |  | 1,488 |  |  | - |  |  | - |  |  | - |  |  | 1,488
Other comprehensive income |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 505 |  |  | 505
Cash dividends declared ($0.25 per share) |  |  | - |  |  | - |  |  | - |  |  | (1,581) |  |  | - |  |  | - |  |  | - |  |  | (1,581)
Compensation expense related to restricted stock |  |  | - |  |  | - |  |  | 83 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 83
Acquisition of treasury stock |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 1,771 |  |  | (69) |  |  | - |  |  | (69)
Compensation expense related to stock options |  |  | - |  |  | - |  |  | 51 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 51
Balance, June 30, 2020 |  |  | 6,342,568 |  | $ | 634 |  | $ | 49,778 |  | $ | 87,939 |  |  | 13,778 |  | $ | (469) |  | $ | 4,782 |  | $ | 142,664

See accompanying notes to the unaudited consolidated financial statements.
‎

7

NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands) |  |  |  |  |
| Six Months Ended June 30,
| 2021 |  | 2020
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |  |  |
Net Income | $ | 11,296 |  | $ | 4,567
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Provision for loan losses |  | 3,000 |  |  | 2,000
Depreciation |  | 748 |  |  | 562
Amortization of intangible assets |  | 69 |  |  | 44
Deferred income taxes |  | 362 |  |  | (477)
Net amortization of securities premiums and discounts |  | 749 |  |  | 613
Net realized gain on sales of securities |  | (21) |  |  | (38)
Earnings and proceeds on life insurance policies |  | (568) |  |  | (420)
Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net |  | (21) |  |  | (18)
Net gain on sale of loans |  | (138) |  |  | (121)
Loans originated for sale |  | (7,316) |  |  | (3,108)
Proceeds from sale of loans originated for sale |  | 7,454 |  |  | 3,183
Compensation expense related to stock options |  | 107 |  |  | 102
Compensation expense related to restricted stock |  | 167 |  |  | 167
Decrease (increase) in accrued interest receivable |  | 42 |  |  | (664)
(Decrease) increase in accrued interest payable |  | (139) |  |  | 394
Other, net |  | (959) |  |  | (6,234)
Net cash provided by operating activities |  | 14,832 |  |  | 552
CASH FLOWS FROM INVESTING ACTIVITIES |  |  |  |  |
Securities available for sale: |  |  |  |  |
Proceeds from sales |  | 1,127 |  |  | 8,224
Proceeds from maturities and principal reductions on mortgage-backed securities |  | 35,057 |  |  | 26,368
Purchases |  | (145,935) |  |  | (17,145)
Purchase of regulatory stock |  | (2,188) |  |  | (2,685)
Redemption of regulatory stock |  | 2,085 |  |  | 3,852
Net decrease (increase) in loans |  | 24,984 |  |  | (64,286)
Proceeds from bank-owned life insurance policies |  | 511 |  |  | —
Purchase of premises and equipment |  | (374) |  |  | (374)
Proceeds from sales of bank premises and fixed assets |  | 158 |  |  | —
Proceeds from sales of foreclosed real estate owned |  | 126 |  |  | 609
Net cash used in investing activities |  | (84,449) |  |  | (45,437)
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |  |  |
Net increase in deposits |  | 153,299 |  |  | 128,709
Net increase (decrease) in short-term borrowings |  | 20,296 |  |  | (7,052)
Repayments of other borrowings |  | (6,200) |  |  | (15,615)
Proceeds from other borrowings |  | — |  |  | 10,000
Stock options exercised |  | 170 |  |  | 38
Purchase of treasury stock |  | (194) |  |  | (69)
Cash dividends paid |  | (4,274) |  |  | (3,165)
Net cash provided by financing activities |  | 163,097 |  |  | 112,846
Increase in cash and cash equivalents |  | 93,480 |  |  | 67,961
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |  | 111,693 |  |  | 15,415
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 205,173 |  | $ | 83,376

‎

8

NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited) (continued)

(dollars in thousands) |  |  |  |  |
| Six Months Ended June 30,
| 2021 |  | 2020
Supplemental Disclosures of Cash Flow Information |  |  |  |  |
Cash payments for: |  |  |  |  |
Interest on deposits and borrowings | $ | 3,128 |  | $ | 3,791
Income taxes paid, net of refunds | $ | 3,441 |  | $ | 93
Supplemental Schedule of Noncash Investing Activities: |  |  |  |  |
Transfers of loans to foreclosed real estate and repossession of other assets | $ | 408 |  | $ | 161
Dividends payable | $ | 2,138 |  | $ | 1,581

See accompanying notes to the unaudited consolidated financial statements.

‎

9

Notes to the Unaudited Consolidated Financial Statements

1. Basis of Presentation

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

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

2. Revenue Recognition

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

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

| Three months ended
| June 30,
(dollars in thousands) |  |  |  |  |
Noninterest Income | 2021 |  | 2020
In-scope of Topic 606: |  |  |  |  |
Service charges on deposit accounts | $ | 98 |  | $ | 89
ATM fees |  | 107 |  |  | 104
Overdraft fees |  | 230 |  |  | 148
Safe deposit box rental |  | 25 |  |  | 24
Loan related service fees |  | 404 |  |  | 82
Debit card fees |  | 586 |  |  | 369
Fiduciary activities |  | 181 |  |  | 175
Commissions on mutual funds and annuities |  | 29 |  |  | 26
Other income |  | 171 |  |  | 103
Noninterest Income (in-scope of Topic 606) |  | 1,831 |  |  | 1,120
Out-of-scope of Topic 606: |  |  |  |  |
Net realized gains on sales of securities |  | — |  |  | —
Loan servicing fees |  | 53 |  |  | (5)
Gains on sales of loans |  | 109 |  |  | 65
Earnings on and proceeds from bank-owned life insurance |  | 194 |  |  | 212
Noninterest Income (out-of-scope of Topic 606) |  | 356 |  |  | 272
Total Noninterest Income | $ | 2,187 |  | $ | 1,392

10

| Six months ended
| June 30,
(dollars in thousands) |  |  |  |  |
Noninterest Income | 2021 |  | 2020
In-scope of Topic 606: |  |  |  |  |
Service charges on deposit accounts | $ | 195 |  | $ | 185
ATM fees |  | 207 |  |  | 199
Overdraft fees |  | 458 |  |  | 491
Safe deposit box rental |  | 53 |  |  | 54
Loan related service fees |  | 649 |  |  | 182
Debit card fees |  | 1,078 |  |  | 710
Fiduciary activities |  | 341 |  |  | 328
Commissions on mutual funds and annuities |  | 64 |  |  | 64
Other income |  | 326 |  |  | 239
Noninterest Income (in-scope of Topic 606) |  | 3,371 |  |  | 2,452
Out-of-scope of Topic 606: |  |  |  |  |
Net realized gains on sales of securities |  | 21 |  |  | 38
Loan servicing fees |  | 78 |  |  | 16
Gains on sales of loans |  | 138 |  |  | 121
Earnings on and proceeds from bank-owned life insurance |  | 568 |  |  | 420
Noninterest Income (out-of-scope of Topic 606) |  | 805 |  |  | 595
Total Noninterest Income | $ | 4,176 |  | $ | 3,047

Earnings Per Share

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

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

(in thousands) | Three Months Ended |  | Six Months Ended
| June 30, |  | June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Weighted average shares outstanding | 8,219 |  | 6,329 |  | 8,223 |  | 6,329
Less: Unvested restricted shares | (35) |  | (36) |  | (37) |  | (36)
Basic EPS weighted average shares outstanding | 8,184 |  | 6,293 |  | 8,186 |  | 6,293
Basic EPS weighted average shares outstanding | 8,184 |  | 6,293 |  | 8,186 |  | 6,293
Add: Dilutive effect of stock options and restricted shares | 21 |  | 24 |  | 22 |  | 24
Diluted EPS weighted average shares outstanding | 8,205 |  | 6,317 |  | 8,208 |  | 6,317

For the three and six month periods ended June 30, 2021, there were 115,100 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of the Company’s common stock of $26.00 per share as of June 30, 2021.

For the three and six month periods ended June 30, 2020, there were 82,600 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of Norwood common stock of $24.79 per share as of June 30, 2020.

4. Stock-Based Compensation

During the six-month period ended June 30, 2021, 1,000 stock options were granted at a price of $26.35 per share. As of June 30, 2021, there was $107,000 of total unrecognized compensation cost related to non-vested options granted in 2020 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2021. Compensation costs related to stock options amounted to $107,000 and $102,000 during the six-month periods ended June 30, 2021 and 2020, respectively.

11

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

|  |  | Weighted |  |  |  |  |
|  |  | Average Exercise |  | Weighted Average |  | Aggregate
|  |  | Price |  | Remaining |  | Intrinsic Value
| Options |  | Per Share |  | Contractual Term |  | ($000)
Outstanding at January 1, 2021 | 215,970 |  | $ | 25.73 |  | 6.0 | Yrs. |  | $ | 743
Granted | 1,000 |  |  | 26.35 |  | 10.0 |  |  |  |
Exercised | (8,970) |  |  | 18.91 |  | 2.4 |  |  |  |
Forfeited | (2,250) |  |  | 33.72 |  | 7.7 |  |  |  |
Outstanding at June 30, 2021 | 205,750 |  | $ | 25.94 |  | 5.7 | Yrs. |  | $ | 662
Exercisable at June 30, 2021 | 171,000 |  | $ | 25.75 |  | 4.9 | Yrs. |  | $ | 662

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The market price was $26.00 per share as of June 30, 2021 and $26.17 per share as of December 31, 2020.

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

| 2021 |  | 2020
|  |  | Weighted-Average |  |  |  |  | Weighted-Average
| Number of |  | Grant Date |  | Number of |  | Grant Date
| Restricted Stock |  | Fair Value |  | Restricted Stock |  | Fair Value
Non-vested, January 1, | 39,135 |  | $ | 30.72 |  | 36,195 |  | $ | 36.23
Granted | — |  |  | — |  | — |  |  | —
Vested | — |  |  | — |  | — |  |  | —
Forfeited | (3,900) |  |  | 30.86 |  | — |  |  | —
Non-vested, June 30, | 35,235 |  | $ | 30.71 |  | 36,195 |  | $ | 36.23

The expected future compensation expense relating to the 35,235 shares of non-vested restricted stock outstanding as of June 30, 2021 is $914,000. This cost will be recognized over the remaining vesting period of 4.5 years. Compensation costs related to restricted stock amounted to $167,000 and $167,000 during the six-month periods ended June 30, 2021 and 2020, respectively.

12

5. Accumulated Other Comprehensive Income (Loss)

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

| Unrealized gains (losses) on
| available for sale
| securities (a)
Balance as of December 31, 2020 | $ | 5,119
Other comprehensive loss before reclassification |  | (1,541)
Amount reclassified from accumulated other comprehensive income |  | (17)
Total other comprehensive loss |  | (1,558)
Balance as of June 30, 2021 | $ | 3,561
| Unrealized gains (losses) on
| available for sale
| securities (a)
Balance as of December 31, 2019 | $ | 1,187
Other comprehensive income before reclassification |  | 3,625
Amount reclassified from accumulated other comprehensive income |  | (30)
Total other comprehensive income |  | 3,595
Balance as of June 30, 2020 | $ | 4,782
| Unrealized gains (losses) on
| available for sale
| securities (a)
Balance as of March 31, 2021 | $ | 2,021
Other comprehensive loss before reclassification |  | 1,540
Amount reclassified from accumulated other comprehensive loss |  | -
Total other comprehensive loss |  | 1,540
Balance as of June 30, 2021 | $ | 3,561
| Unrealized gains (losses) on
| available for sale
| securities (a)
Balance as of March 31, 2020 | $ | 4,277
Other comprehensive income before reclassification |  | 505
Amount reclassified from accumulated other comprehensive income |  | -
Total other comprehensive income |  | 505
Balance as of June 30, 2020 | $ | 4,782

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

13

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

|  | Amount Reclassified |  |
|  | From Accumulated |  |
|  | Other |  |
|  | Comprehensive |  |
|  | Income (Loss) (a) |  | Affected Line Item in
|  | Three months ended |  | Consolidated
|  | June 30, |  | Statements
Details about other comprehensive income |  | 2021 |  |  | 2020 |  | of Income
Unrealized gains on available for sale securities |  | $ | — |  |  | $ | — |  | Net realized gains on sales of securities
Tax effect |  |  | — |  |  |  | — |  | Income tax expense
|  | $ | — |  |  | $ | — |  |
|  | Six months ended |  |
|  | June 30, |  |
|  | 2021 |  |  | 2020 |  |
Unrealized gains on available for sale securities |  | $ | 21 |  |  | $ | 38 |  | Net realized gains on sales of securities
Tax effect |  |  | (4) |  |  |  | (8) |  | Income tax expense
|  | $ | 17 |  |  | $ | 30 |  |

(a) Amounts in parentheses indicate debits to net income

6. Off-Balance Sheet Financial Instruments and Guarantees

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

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

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

(in thousands) | June 30,
| 2021 |  | 2020
Commitments to grant loans | $ | 80,647 |  | $ | 61,826
Unfunded commitments under lines of credit |  | 131,309 |  |  | 78,092
Standby letters of credit |  | 5,820 |  |  | 4,065
| $ | 217,776 |  | $ | 143,983

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

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

14

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

7. Securities

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

| June 30, 2021
|  |  |  | Gross |  | Gross |  |  |
| Amortized |  | Unrealized |  | Unrealized |  | Fair
| Cost |  | Gains |  | Losses |  | Value
| (In Thousands)
Available for Sale: |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 10,079 |  | $ | 33 |  | $ | — |  | $ | 10,112
U.S. Government agencies |  | 11,187 |  |  | 81 |  |  | (127) |  |  | 11,141
States and political subdivisions |  | 106,109 |  |  | 2,559 |  |  | (382) |  |  | 108,286
Mortgage-backed securities- |  |  |  |  |  |  |  |  |  |  |
government sponsored entities |  | 203,048 |  |  | 2,210 |  |  | (1,161) |  |  | 204,097
Total debt securities | $ | 330,423 |  | $ | 4,883 |  | $ | (1,670) |  | $ | 333,636

| December 31, 2020
|  |  |  | Gross |  | Gross |  |  |
| Amortized |  | Unrealized |  | Unrealized |  | Fair
| Cost |  | Gains |  | Losses |  | Value
| (In Thousands)
Available for Sale: |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies | $ | 3,998 |  | $ | - |  | $ | (29) |  | $ | 3,969
States and political subdivisions |  | 70,672 |  |  | 2,419 |  |  | - |  |  | 73,091
Corporate obligations |  | 3,019 |  |  | 13 |  |  | - |  |  | 3,032
Mortgage-backed securities-government |  |  |  |  |  |  |  |  |  |  |
sponsored entities |  | 143,712 |  |  | 2,809 |  |  | (27) |  |  | 146,494
Total debt securities | $ | 221,401 |  | $ | 5,241 |  | $ | (56) |  | $ | 226,586

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

| June 30, 2021
| Less than 12 Months |  | 12 Months or More |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
U.S. Government agencies | $ | 3,871 |  | $ | (127) |  | $ | - |  | $ | - |  | $ | 3,871 |  | $ | (127)
States and political subdivisions |  | 32,086 |  |  | (382) |  |  | - |  |  | - |  |  | 32,086 |  |  | (382)
Mortgage-backed securities-government sponsored entities |  | 97,540 |  |  | (1,161) |  |  | - |  |  | - |  |  | 97,540 |  |  | (1,161)
| $ | 133,497 |  | $ | (1,670) |  | $ | - |  | $ | - |  | $ | 133,497 |  | $ | (1,670)

| December 31, 2020
| Less than 12 Months |  | 12 Months or More |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
U.S. Government agencies | $ | 3,969 |  | $ | (29) |  | $ | - |  | $ | - |  | $ | 3,969 |  | $ | (29)
Mortgage-backed securities-government sponsored entities |  | 4,980 |  |  | (27) |  |  | - |  |  | - |  |  | 4,980 |  |  | (27)
| $ | 8,949 |  | $ | (56) |  | $ | - |  | $ | - |  | $ | 8,949 |  | $ | (56)

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At June 30, 2021, the Company had 59 debt securities in an unrealized loss position in the less than twelve months category and no debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2021. Management believes that all unrealized losses represent temporary impairment of the securities as the Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.

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

| Available for Sale
| Amortized Cost |  | Fair Value
|  | (In Thousands)
Due in one year or less | $ | 1,459 |  | $ | 1,465
Due after one year through five years |  | 10,544 |  |  | 10,884
Due after five years through ten years |  | 35,105 |  |  | 35,221
Due after ten years |  | 80,267 |  |  | 81,969
|  | 127,375 |  |  | 129,539
Mortgage-backed securities-government sponsored entities |  | 203,048 |  |  | 204,097
| $ | 330,423 |  | $ | 333,636

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

| Three Months |  | Six Months
| Ended June 30, |  | Ended June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Gross realized gains | $ | — |  | $ | — |  | $ | 21 |  | $ | 38
Gross realized losses |  | — |  |  | — |  |  | — |  |  | —
Net realized gain | $ | — |  | $ | — |  | $ | 21 |  | $ | 38
Proceeds from sales of securities | $ | — |  | $ | — |  | $ | 1,127 |  | $ | 8,224

Securities with a carrying value of $286,324,000 and $199,361,000 at June 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

8. Loans Receivable and Allowance for Loan Losses

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

| June 30, 2021 |  |  | December 31, 2020 |
Real Estate Loans: |  |  |  |  |  |  |  |  |  |  |
Residential | $ | 258,130 |  | 18.6 | % |  | $ | 263,127 |  | 18.6 | %
Commercial |  | 597,906 |  | 43.0 |  |  |  | 579,104 |  | 41.0 |
Agricultural |  | 64,245 |  | 4.6 |  |  |  | 66,334 |  | 4.7 |
Construction |  | 21,839 |  | 1.6 |  |  |  | 21,005 |  | 1.5 |
Commercial loans |  | 250,872 |  | 18.1 |  |  |  | 283,741 |  | 20.1 |
Other agricultural loans |  | 41,836 |  | 3.0 |  |  |  | 40,929 |  | 2.9 |
Consumer loans to individuals |  | 154,792 |  | 11.1 |  |  |  | 158,049 |  | 11.2 |
Total loans |  | 1,389,620 |  | 100.0 | % |  |  | 1,412,289 |  | 100.0 | %
Deferred fees, net |  | (2,966) |  |  |  |  |  | (1,557) |  |  |
Total loans receivable |  | 1,386,654 |  |  |  |  |  | 1,410,732 |  |  |
Allowance for loan losses |  | (15,340) |  |  |  |  |  | (13,150) |  |  |
Net loans receivable | $ | 1,371,314 |  |  |  |  | $ | 1,397,582 |  |  |

During 2020 and 2021 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the United States Small Business Administration (“SBA”). The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of June 30, 2021 and December 31, 2020, the Company had outstanding principal balances of $74.2 million and $95.0 million,

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respectively, in PPP loans. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. As of June 30, 2021, $77.6 million of PPP loans have been forgiven. PPP loans are included in the Commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $4.3 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.

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

| June 30, 2021 |  | December 31, 2020
Outstanding Balance | $ | 13,526 |  | $ | 15,570
Carrying Amount | $ | 8,398 |  | $ | 9,281

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

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

| 2021 |  | 2020
Balance at beginning of period | $ | 1,365 |  | $ | —
Additions |  | — |  |  | —
Accretion |  | (357) |  |  | —
Reclassification and other |  | 11 |  |  | —
Balance at end of period | $ | 1,019 |  | $ | —

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

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

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

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

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Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of June 30, 2021 and December 31, 2020, foreclosed real estate owned totaled $844,000 and $965,000, respectively. During the six months ended June 30, 2021, there were no additions to the foreclosed real estate category. The Co mpany disposed of a parcel of the one property that was previously transferred to foreclosed real estate owned with a carrying value of $121,000 through the sale of the property. As of June 30, 2021, the Company has initiated formal foreclosure proceedings on four properties classified as consumer residential mortgages with an aggregate carrying value of $489,000.

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

| Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  | Commercial |  |  | Other |  | Consumer |  |  |
| Residential |  | Commercial |  |  | Agricultural |  | Construction |  | Loans |  |  | Agricultural |  | Loans |  | Total
June 30, 2021 | (In thousands)
Individually evaluated for impairment | $ | — |  | $ | 1,206 |  | $ | 858 |  | $ | — |  | $ | 20 |  | $ | 125 |  | $ | — |  | $ | 2,209
Loans acquired with deteriorated credit quality |  | 572 |  |  | 3,460 |  |  | 1,906 |  |  | 202 |  |  | 131 |  |  | 2,127 |  |  | — |  |  | 8,398
Collectively evaluated for impairment |  | 257,558 |  |  | 593,240 |  |  | 61,481 |  |  | 21,637 |  |  | 250,721 |  |  | 39,584 |  |  | 154,792 |  |  | 1,379,013
Total Loans | $ | 258,130 |  | $ | 597,906 |  | $ | 64,245 |  | $ | 21,839 |  | $ | 250,872 |  | $ | 41,836 |  | $ | 154,792 |  | $ | 1,389,620

| Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  | Commercial |  |  | Other |  | Consumer |  |  |
| Residential |  | Commercial |  |  | Agricultural |  | Construction |  | Loans |  |  | Agricultural |  | Loans |  | Total
| (In thousands)
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | - |  | $ | 2,582 |  | $ | — |  | $ | - |  | $ | 80 |  | $ | — |  | $ | - |  | $ | 2,662
Loans acquired with deteriorated credit quality |  | 591 |  |  | 3,995 |  |  | 2,043 |  |  | 194 |  |  | 246 |  |  | 2,212 |  |  | - |  |  | 9,281
Collectively evaluated for impairment |  | 262,536 |  |  | 572,527 |  |  | 64,291 |  |  | 20,811 |  |  | 283,415 |  |  | 38,717 |  |  | 158,049 |  |  | 1,400,346
Total Loans | $ | 263,127 |  | $ | 579,104 |  | $ | 66,334 |  | $ | 21,005 |  | $ | 283,741 |  | $ | 40,929 |  | $ | 158,049 |  | $ | 1,412,289

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

|  |  |  | Unpaid |  |  |
| Recorded |  | Principal |  | Associated
| Investment |  | Balance |  | Allowance
June 30, 2021 |  |  |  |  | (in thousands) |  |
With no related allowance recorded: |  |  |  |  |  |  |  |
Real Estate Loans: |  |  |  |  |  |  |  |
Commercial | $ | 1,206 |  | $ | 2,078 |  | $ | —
Agriculture |  | 858 |  |  | 858 |  |  |
Commercial Loans |  | 20 |  |  | 20 |  |  | —
Other agricultural loans |  | 125 |  |  | 125 |  |  | —
Subtotal | $ | 2,209 |  | $ | 3,081 |  | $ | —
Total: |  |  |  |  |  |  |  |
Real Estate Loans: |  |  |  |  |  |  |  |
Commercial | $ | 1,206 |  | $ | 2,078 |  | $ | —
Agriculture |  | 858 |  |  | 858 |  |  |
Commercial Loans |  | 20 |  |  | 20 |  |  | —
Other agricultural loans |  | 125 |  |  | 125 |  |  | —
Total Impaired Loans | $ | 2,209 |  | $ | 3,081 |  | $ | —

|  |  |  | Unpaid |  |  |
| Recorded |  | Principal |  | Associated
| Investment |  | Balance |  | Allowance
December 31, 2020 |  |  |  |  | (in thousands) |  |
With no related allowance recorded: |  |  |  |  |  |  |  |
Real Estate Loans: |  |  |  |  |  |  |  |
Commercial | $ | 2,582 |  | $ | 3,234 |  | $ | —
Commercial Loans |  | 80 |  |  | 80 |  |  | —
Subtotal |  | 2,662 |  |  | 3,314 |  |  | —
Total: |  |  |  |  |  |  |  |
Real Estate Loans: |  |  |  |  |  |  |  |
Commercial |  | 2,582 |  |  | 3,234 |  |  | —
Commercial Loans |  | 80 |  |  | 80 |  |  | —
Total Impaired Loans | $ | 2,662 |  | $ | 3,314 |  | $ | —

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

| Average Recorded |  | Interest Income
| Investment |  | Recognized
| 2021 |  | 2020 |  | 2021 |  | 2020
Real Estate Loans: |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 1,467 |  | $ | 2,094 |  | $ | — |  | $ | 3
Agriculture |  | 858 |  |  | — |  |  | — |  |  | —
Commercial Loans |  | 29 |  |  | — |  |  | — |  |  | —
Other agricultural loans |  | 125 |  |  | — |  |  | — |  |  | —
Total | $ | 2,479 |  | $ | 2,094 |  | $ | — |  | $ | 3

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

| Average Recorded |  | Interest Income
| Investment |  | Recognized
| 2021 |  | 2020 |  | 2021 |  | 2020
Real Estate Loans: |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 1,541 |  | $ | 2,096 |  | $ | 1 |  | $ | 6
Agriculture |  | 858 |  |  | — |  |  | — |  |  | —
Commercial Loans |  | 19 |  |  | — |  |  | — |  |  | —
Other agricultural loans |  | 110 |  |  | — |  |  | — |  |  | —
Total | $ | 2,528 |  | $ | 2,096 |  | $ | 1 |  | $ | 6

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

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

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

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

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

|  |  |  | Special |  |  |  |  | Doubtful |  |  |
| Pass |  | Mention |  | Substandard |  | or Loss |  | Total
June 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate loans | $ | 586,338 |  | $ | 6,302 |  | $ | 5,266 |  | $ | — |  | $ | 597,906
Real estate - agricultural |  | 61,415 |  |  | 66 |  |  | 2,764 |  |  | — |  |  | 64,245
Commercial loans |  | 250,388 |  |  | 229 |  |  | 255 |  |  | — |  |  | 250,872
Other agricultural loans |  | 38,007 |  |  | 272 |  |  | 3,557 |  |  | — |  |  | 41,836
Total | $ | 936,148 |  | $ | 6,869 |  | $ | 11,842 |  | $ | — |  | $ | 954,859

|  |  |  | Special |  |  |  |  | Doubtful |  |  |
| Pass |  | Mention |  | Substandard |  | or Loss |  | Total
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate loans | $ | 566,418 |  | $ | 6,346 |  | $ | 6,340 |  | $ | — |  | $ | 579,104
Real estate - agricultural |  | 58,322 |  |  | 5,111 |  |  | 2,901 |  |  | — |  |  | 66,334
Commercial loans |  | 282,915 |  |  | 437 |  |  | 389 |  |  | — |  |  | 283,741
Other agricultural loans |  | 35,772 |  |  | 2,786 |  |  | 2,371 |  |  | — |  |  | 40,929
Total | $ | 943,427 |  | $ | 14,680 |  | $ | 12,001 |  | $ | — |  | $ | 970,108

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

| Performing |  | Nonperforming |  | Total
June 30, 2021 |  |  |  |  |  |  |  |
Residential real estate loans | $ | 257,644 |  | $ | 486 |  | $ | 258,130
Construction |  | 21,839 |  |  | — |  |  | 21,839
Consumer loans to individuals |  | 154,609 |  |  | 183 |  |  | 154,792
Total | $ | 434,092 |  | $ | 669 |  | $ | 434,761

| Performing |  | Nonperforming |  | Total
December 31, 2020 |  |  |  |  |  |  |  |
Residential real estate loans | $ | 262,556 |  | $ | 571 |  | $ | 263,127
Construction |  | 21,005 |  |  | — |  |  | 21,005
Consumer loans to individuals |  | 157,864 |  |  | 185 |  |  | 158,049
Total | $ | 441,425 |  | $ | 756 |  | $ | 442,181

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

| Current |  | 31-60 Days Past Due |  | 61-90 Days Past Due |  | Greater than 90 Days Past Due and still accruing |  | Nonaccrual |  | Total Past Due and Non-Accrual |  | Purchased Credit-Impaired |  | Total Loans
June 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real Estate loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential | $ | 256,368 |  | $ | 350 |  | $ | 354 |  | $ | - |  | $ | 486 |  | $ | 1,190 |  | $ | 572 |  | $ | 258,130
Commercial |  | 592,870 |  |  | 253 |  |  | 205 |  |  | - |  |  | 1,118 |  |  | 1,576 |  |  | 3,460 |  |  | 597,906
Agricultural |  | 61,663 |  |  | - |  |  | - |  |  | - |  |  | 676 |  |  | 676 |  |  | 1,906 |  |  | 64,245
Construction |  | 21,637 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 202 |  |  | 21,839
Commercial loans |  | 249,414 |  |  | 105 |  |  | 53 |  |  | - |  |  | 1,169 |  |  | 1,327 |  |  | 131 |  |  | 250,872
Other agricultural loans |  | 39,020 |  |  | 381 |  |  |  |  |  | - |  |  | 308 |  |  | 689 |  |  | 2,127 |  |  | 41,836
Consumer loans |  | 154,437 |  |  | 166 |  |  | 6 |  |  | - |  |  | 183 |  |  | 355 |  |  | - |  |  | 154,792
Total | $ | 1,375,409 |  | $ | 1,255 |  | $ | 618 |  | $ | - |  | $ | 3,940 |  | $ | 5,813 |  | $ | 8,398 |  | $ | 1,389,620

| Current |  | 31-60 Days Past Due |  | 61-90 Days Past Due |  | Greater than 90 Days Past Due and still accruing |  | Nonaccrual |  | Total Past Due and Non-Accrual |  | Purchased Credit-Impaired |  | Total Loans
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real Estate loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential | $ | 261,406 |  | $ | 355 |  | $ | 204 |  | $ | - |  | $ | 571 |  | $ | 1,130 |  | $ | 591 |  | $ | 263,127
Commercial |  | 573,376 |  |  | 59 |  |  | - |  |  | - |  |  | 1,674 |  |  | 1,733 |  |  | 3,995 |  |  | 579,104
Agricultural |  | 63,615 |  |  | - |  |  | - |  |  |  |  |  | 676 |  |  | 676 |  |  | 2,043 |  |  | 66,334
Construction |  | 20,811 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 194 |  |  | 21,005
Commercial loans |  | 282,374 |  |  | 1,009 |  |  | 90 |  |  | - |  |  | 22 |  |  | 1,121 |  |  | 246 |  |  | 283,741
Other agricultural loans |  | 38,454 |  |  | - |  |  | - |  |  |  |  |  | 263 |  |  | 263 |  |  | 2,212 |  |  | 40,929
Consumer loans |  | 157,538 |  |  | 233 |  |  | 93 |  |  | - |  |  | 185 |  |  | 511 |  |  | - |  |  | 158,049
Total | $ | 1,397,574 |  | $ | 1,656 |  | $ | 387 |  | $ | - |  | $ | 3,391 |  | $ | 5,434 |  | $ | 9,281 |  | $ | 1,412,289

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

As of June 30, 2021, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2020. This increase is due primarily to an increase in the qualitative factors related to Lending Management and External Factors resulting from the resignation of the Company’s Chief Lending Officer. As of June 30, 2021, the Company has also continued to incorporate qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries and to recognize risk related to loans that have been granted deferral of payments due to COVID-19. At June 30, 2021, the allowance for loan losses includes $2.3 million of COVID related factors. The 2021 allowance for loan losses excludes growth in Paycheck Protection Program loans which are fully guaranteed by the Small Business Association as well as loans acquired from UpState which were recorded at fair value.

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

(In thousands) | Residential Real Estate |  | Commercial Real Estate |  | Construction |  | Commercial |  | Consumer |  | Total
Beginning balance, December 31, 2020 | $ | 1,960 |  | $ | 8,004 |  | $ | 150 |  | $ | 1,360 |  | $ | 1,676 |  | $ | 13,150
Charge Offs |  | (5) |  |  | (439) |  |  | — |  |  | (174) |  |  | (261) |  |  | (879)
Recoveries |  | 5 |  |  | 10 |  |  | — |  |  | 24 |  |  | 30 |  |  | 69
Provision for loan losses |  | 273 |  |  | 2,005 |  |  | (13) |  |  | 293 |  |  | 442 |  |  | 3,000
Ending balance, June 30, 2021 | $ | 2,233 |  | $ | 9,580 |  | $ | 137 |  | $ | 1,503 |  | $ | 1,887 |  | $ | 15,340
Ending balance individually evaluated ‎for impairment | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | —
Ending balance collectively evaluated ‎for impairment | $ | 2,233 |  | $ | 9,580 |  | $ | 137 |  | $ | 1,503 |  | $ | 1,887 |  | $ | 15,340

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

(In thousands) | Residential Real Estate |  | Commercial Real Estate |  | Construction |  | Commercial |  | Consumer |  | Total
Beginning balance, December 31, 2019 | $ | 1,552 |  | $ | 4,687 |  | $ | 95 |  | $ | 949 |  | $ | 1,226 |  | $ | 8,509
Charge Offs |  | (1) |  |  | (33) |  |  | — |  |  | (18) |  |  | (192) |  |  | (244)
Recoveries |  | 3 |  |  | 6 |  |  | — |  |  | 18 |  |  | 20 |  |  | 47
Provision for loan losses |  | 98 |  |  | 1,419 |  |  | (9) |  |  | 127 |  |  | 365 |  |  | 2,000
Ending balance, June 30, 2020 | $ | 1,652 |  | $ | 6,079 |  | $ | 86 |  | $ | 1,076 |  | $ | 1,419 |  | $ | 10,312
Ending balance individually evaluated ‎for impairment | $ | — |  | $ | 392 |  | $ | — |  | $ | — |  | $ | — |  | $ | 392
Ending balance collectively evaluated ‎for impairment | $ | 1,652 |  | $ | 5,687 |  | $ | 86 |  | $ | 1,076 |  | $ | 1,419 |  | $ | 9,920

(In thousands) | Residential Real Estate |  | Commercial Real Estate |  | Construction |  | Commercial |  | Consumer |  | Total
Beginning balance, March 31, 2020 | $ | 1,644 |  | $ | 4,915 |  | $ | 87 |  | $ | 1,064 |  | $ | 1,378 |  | $ | 9,088
Charge Offs |  | — |  |  | — |  |  | — |  |  | (18) |  |  | (76) |  |  | (94)
Recoveries |  | 1 |  |  | 2 |  |  | — |  |  | 8 |  |  | 7 |  |  | 18
Provision for loan losses |  | 7 |  |  | 1,162 |  |  | (1) |  |  | 22 |  |  | 110 |  |  | 1,300
Ending balance, June 30, 2020 | $ | 1,652 |  | $ | 6,079 |  | $ | 86 |  | $ | 1,076 |  | $ | 1,419 |  | $ | 10,312

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

As of June 30, 2021, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $136.6 million of loans outstanding, or 9.8% of total loans outstanding, and residential rentals with

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loans outstanding of $118.4 million, or 8.5% of loans outstanding. During 2021, the Company did not recognize any charge offs on loans in the named concentrations.

9. Operating Leases

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

The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on the Consolidated Balance Sheets. The lease cost associated with the operating leases for the six-month periods ending June 30, 2021 and 2020, amounted to $294,000 and $280,000 respectively.

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

| Operating
Weighted-average remaining term |  | 11.8
Weighted-average discount rate |  | 3.08%

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

Undiscounted cash flows due (in thousands) |  | Operating
2021 | $ | 281
2022 |  | 546
2023 |  | 534
2024 |  | 544
2025 |  | 561
2026 and thereafter |  | 3,319
Total undiscounted cash flows |  | 5,785
Discount on cash flows |  | (1,003)
Total lease liabilities | $ | 4,782

10. Fair Value of Assets and Liabilities

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

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

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

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

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 16 of the Company’s 2020 Form 10-K.

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

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

|  | Fair Value Measurement Using
|  | Reporting Date
Description |  | Total |  | Level 1 |  | Level 2 |  | Level 3
June 30, 2021 |  | (In thousands)
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 10,112 |  | $ | - |  | $ | 10,112 |  | $ | -
U.S. Government agencies |  |  | 11,141 |  |  |  |  |  | 11,141 |  |  |
States and political subdivisions |  |  | 108,286 |  |  | - |  |  | 108,286 |  |  | -
Mortgage-backed securities-government |  |  |  |  |  |  |  |  |  |  |  |
sponsored entities |  |  | 204,097 |  |  | - |  |  | 204,097 |  |  | -
Interest rate derivatives |  |  | 98 |  |  | - |  |  | 98 |  |  | -
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | 98 |  |  | - |  |  | 98 |  |  | -
Description |  | Total |  | Level 1 |  | Level 2 |  | Level 3
December 31, 2020 |  | (In thousands)
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 3,969 |  | $ | - |  | $ | 3,969 |  | $ | -
States and political subdivisions |  |  | 73,091 |  |  |  |  |  | 73,091 |  |  |
Corporate obligations |  |  | 3,032 |  |  | - |  |  | 3,032 |  |  | -
Mortgage-backed securities-government |  |  |  |  |  |  |  |  |  |  |  |
sponsored entities |  |  | 146,494 |  |  | - |  |  | 146,494 |  |  | -
Interest rate derivatives |  |  | 276 |  |  | - |  |  | 276 |  |  | -
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | 276 |  |  | - |  |  | 276 |  |  | -

Securities:

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

Interest rate derivatives:

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

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

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

|  |  |  |  | Fair Value Measurement Using Reporting Date
(In thousands) |  |  |  |  |  |  |  |  |  |  |  |
Description |  | Total |  | Level 1 |  | Level 2 |  | Level 3
June 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 2,209 |  | $ | - |  | $ | - |  | $ | 2,209
Foreclosed Real Estate Owned |  |  | 844 |  |  | - |  |  | - |  |  | 844
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 2,662 |  | $ | - |  | $ | - |  | $ | 2,662
Foreclosed Real Estate Owned |  |  | 965 |  |  | - |  |  | - |  |  | 965

Impaired loans (generally carried at fair value):

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

As of June 30, 2021, the fair value investment in impaired loans was $2,209,000 which included six loan relationships that did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of June 30, 2021, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $872,000 over the life of the loans.

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

Foreclosed real estate owned (carried at fair value):

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

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

| Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands) | Fair Value Estimate |  | Valuation Techniques | Unobservable Input |  | Range (Weighted Average)
June 30, 2021 |  |  |  |  |  |  |
Impaired loans | $ | 2,209 |  | Appraisal of collateral(1) | Appraisal adjustments(2) |  | 10.00%-10.00% (10.00%)
Foreclosed real estate owned | $ | 844 |  | Appraisal of collateral(1) | Liquidation Expenses(2) |  | 7.00% (7.00%)

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

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

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

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

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

Loans receivable (carried at cost):

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

Mortgage servicing rights (generally carried at cost)

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

Deposit liabilities (carried at cost):

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

Other borrowings (carried at cost):

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

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

| Fair Value Measurements at June 30, 2021
| Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents (1) | $ | 205,173 |  | $ | 205,173 |  | $ | 205,173 |  | $ | - |  | $ | -
Loans receivable, net |  | 1,371,314 |  |  | 1,454,066 |  |  | - |  |  | - |  |  | 1,454,066
Mortgage servicing rights |  | 327 |  |  | 479 |  |  | - |  |  | - |  |  | 479
Regulatory stock (1) |  | 4,084 |  |  | 4,084 |  |  | 4,084 |  |  | - |  |  | -
Bank owned life insurance (1) |  | 39,665 |  |  | 39,665 |  |  | 39,665 |  |  | - |  |  | -
Accrued interest receivable (1) |  | 6,190 |  |  | 6,190 |  |  | 6,190 |  |  | - |  |  | -
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 1,688,941 |  |  | 1,692,942 |  |  | 1,178,113 |  |  | - |  |  | 514,829
Short-term borrowings (1) |  | 83,599 |  |  | 83,599 |  |  | 83,599 |  |  | - |  |  | -
Other borrowings |  | 36,259 |  |  | 36,828 |  |  | - |  |  | - |  |  | 36,828
Accrued interest payable (1) |  | 1,462 |  |  | 1,462 |  |  | 1,462 |  |  | - |  |  | -
Off-balance sheet financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit and ‎outstanding letters of credit |  | - |  |  | - |  |  | - |  |  | - |  |  | -

| Fair Value Measurements at December 31, 2020
| Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents (1) | $ | 111,693 |  | $ | 111,693 |  | $ | 111,693 |  | $ | - |  | $ | -
Loans receivable, net |  | 1,397,582 |  |  | 1,493,480 |  |  | - |  |  | - |  |  | 1,493,480
Mortgage servicing rights |  | 337 |  |  | 476 |  |  | - |  |  | - |  |  | 476
Regulatory stock (1) |  | 3,981 |  |  | 3,981 |  |  | 3,981 |  |  | - |  |  | -
Bank owned life insurance (1) |  | 39,608 |  |  | 39,608 |  |  | 39,608 |  |  | - |  |  | -
Accrued interest receivable (1) |  | 6,232 |  |  | 6,232 |  |  | 6,232 |  |  | - |  |  | -
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 1,535,385 |  |  | 1,540,661 |  |  | 1,001,555 |  |  | - |  |  | 539,106
Short-term borrowings (1) |  | 63,303 |  |  | 63,303 |  |  | 63,303 |  |  | - |  |  | -
Other borrowings |  | 42,459 |  |  | 43,452 |  |  | - |  |  | - |  |  | 43,452
Accrued interest payable (1) |  | 1,601 |  |  | 1,601 |  |  | 1,601 |  |  | - |  |  | -
Off-balance sheet financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit and ‎outstanding letters of credit |  | - |  |  | - |  |  | - |  |  | - |  |  | -

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

11. Interest Rate Swaps

The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are not marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented. At June 30, 2021 and December 31, 2020, based upon the swap contract values, the company pledged cash in the amount of $350,000 as collateral for its interest rate swaps with a third-party financial institution. The fair value of the swaps as of June 30, 2021 and December 31, 2020 was $98,000 and $276,000, respectively.

‎

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Summary information regarding these derivatives is presented below:

(Amounts in thousands)
|  | Notional Amount |  |  |  |  |  | Fair Value
|  |  | June 30, 2021 |  |  | December 31, 2020 |  | Interest Rate Paid |  | Interest Rate Received |  |  | June 30, 2021 |  |  | December 31, 2020
Customer interest rate swap |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Maturing November, 2030 | $ | 7,049 |  | $ | 7,222 | 1 month LIBOR + Margin | Fixed |  | $ | 61 |  | $ | 165
Maturing December, 2030 |  | 4,677 |  |  | 4,800 | 1 month LIBOR + Margin | Fixed |  |  | 37 |  |  | 111
Total |  | $ | 11,726 |  | $ | 12,022 |  |  |  |  |  | $ | 98 |  | $ | 276
Third party interest rate swap |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Maturing November, 2030 | $ | 7,049 |  | $ | 7,222 |  | Fixed | 1 month LIBOR + Margin | $ | 61 |  | $ | 165
Maturing December, 2030 |  | 4,677 |  |  | 4,800 |  | Fixed | 1 month LIBOR + Margin |  | 37 |  |  | 111
Total |  | $ | 11,726 |  | $ | 12,022 |  |  |  |  |  | $ | 98 |  | $ | 276

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

|  | (Amounts in thousands)
|  | Assets |  | Liabilities
|  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
June 30, 2021 |  |  |  |  |  |  |  |
Interest rate derivatives |  | Other assets | $ | 98 |  | Other liabilities | $ | 98
December 31, 2020 |  |  |  |  |  |  |  |
Interest rate derivatives |  | Other assets |  | 276 |  | Other liabilities |  | 276

12. New and Recently Adopted Accounting Pronouncements

New Accounting Pronouncements Not Yet Adopted

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

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

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its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements

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

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

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

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

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR

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and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

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

In March 2021, the FASB issued ASU 2021-03, Intangibles – Goodwill and Other (Topic 350), which provides private companies and not-for-profit entities with an accounting alternative to elect not to monitor for goodwill impairment-triggering events during the reporting period and, instead, to evaluate the facts and circumstances as of the end of the reporting period to determine whether it is more likely than not that goodwill is impaired. The amendments in this Update are effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. An entity should not retroactively adopt the amendments in this Update for interim financial statements already issued in the year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Company’s financial statements.

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

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

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

Pursuant to the terms of the Merger Agreement, shareholders of UpState elected to receive for each share of UpState common stock they owned, either 0.9390 shares of the Company’s common stock or $33.33 in cash, or a combination of both. All shareholder elections were subject to the allocation and proration procedures set forth in the Merger Agreement which were intended to ensure that

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90% of the shares of UpState would be exchanged for the Company’s common stock and 10% of the shares of UpState would be exchanged for cash. In addition, under the terms of the Merger Agreement, UpState shareholders received an additional $0.67 per share in cash for each share of UpState common stock held. In the aggregate, the merger consideration paid to UpState shareholders consisted of approximately $8,845,198 in cash and 1,865,738 shares of the Company’s common stock.

The senior management of the Company and Wayne Bank remained the same following the completion of the Merger. UpState directors Jeffrey S. Gifford and Alexandra K. Nolan have been appointed to the boards of directors of the Company and Wayne Bank. In addition, the remaining former directors of UpState have been invited to join a regional advisory board. UpState President and CEO R. Michael Briggs has entered into a consulting agreement with Wayne Bank. The Company has retained the brand names of USNY Bank’s two units, Bank of the Finger Lakes and Bank of Cooperstown, and has also retained USNY Bank’s administration center in Geneva, New York. Scott D. White, unit President of Bank of Cooperstown, and Jeffrey E. Franklin, unit President of Bank of the Finger Lakes, will also remain in place as executives of their units.

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

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

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

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

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

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

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

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

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

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

The Company recorded goodwill associated with the acquisition of UpState totaling $17,935,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did no t recognize any impairment during the six months ended June 30, 2021.

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the six months ended June 30, 2021, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized on an accelerated basis over the useful life of such asset. The gross carrying amount of the core deposit intangible at June 30, 2021 was $409,000 with $74,000 accumulated amortization as of that date.

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

(In thousands) |  |
2021 | $ | 34
2022 |  | 63
2023 |  | 56
2024 |  | 48
2025 |  | 41
After five years |  | 93
| $ | 335

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14. Risks and Uncertainties

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

An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity; and (c) principal and interest payments deferred for ten months from the end of the coverage period. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. As of June 30, 2021, the Company has approved over 1,800 applications for $151.6 million of loans since the inception of the PPP.

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

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

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

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

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

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

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

Loan Type |  | Number of ‎Loans |  | Balance ‎(in thousands)
Real Estate Loans: |  |  |  |  |  |
Residential |  |  | — |  | $ | —
Commercial |  |  | 2 |  |  | 724
Agricultural |  |  | — |  |  | —
Construction |  |  | — |  |  | —
Commercial, financial and agricultural |  |  | 3 |  |  | 197
Other agricultural loans |  |  | — |  |  | —
Consumer loans to individuals |  |  | 7 |  |  | 94
Total |  |  | 12 |  | $ | 1,015

‎

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

Forward-Looking Statements

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

possible future impairment of intangible assets

our ability to effectively manage future growth

loan losses in excess of our allowance

the impact of the COVID-19 pandemic on us

risk of litigation from participation in the PPP loan program

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

risks inherent in commercial lending

real estate collateral which is subject to declines in value

potential other-than-temporary impairments

soundness of other financial institutions

interest rate risks

potential liquidity risk

deposits acquired through competitive bidding

availability of capital

regional economic factors

loss of senior officers

comparatively low legal lending limits

risks of new capital requirements

potential impact of Tax Cuts and Jobs Act

limited market for the Company’s stock

restrictions on ability to pay dividends

common stock may lose value

insider ownership

issuing additional shares may dilute ownership

competitive environment

certain anti-takeover provisions

extensive and complex governmental regulation and associated cost

cybersecurity

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

# Critical Accounting Policies

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

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

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

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

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

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

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

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

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

Changes in Financial Condition

General

Total assets as of June 30, 2021 were $2.026 billion compared to $1.852 billion as of December 31, 2020. The increase was due primarily to a $107.0 million increase in securities available-for-sale and a $78.1 million increase in interest-bearing deposits with banks. Both increases resulted from deposit growth related to economic stimulus programs.

Securities

The fair value of securities available for sale as of June 30, 2021 was $333.6 million compared to $226.6 million as of December 31, 2020. The increase in the securities portfolio is the result of purchases executed to invest excess liquidity and to provide pledging for public deposits.

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

| June 30, 2021 |  |  | December 31, 2020 |
(dollars in thousands) |  | Amount |  | % of portfolio |  |  |  | Amount |  | % of portfolio |
U.S. Treasury securities | $ | 10,112 |  | 3.0 | % |  | $ | — |  | — | %
U.S. Government agencies |  | 11,141 |  | 3.3 |  |  |  | 3,969 |  | 1.8 |
States and political subdivisions |  | 108,286 |  | 32.5 |  |  |  | 73,091 |  | 32.3 |
Corporate obligations |  | — |  | — |  |  |  | 3,032 |  | 1.3 |
Mortgage-backed securities- |  |  |  |  |  |  |  |  |  |  |
government sponsored entities |  | 204,097 |  | 61.2 |  |  |  | 146,494 |  | 64.6 |
Total | $ | 333,636 |  | 100.0 | % |  | $ | 226,586 |  | 100.0 | %

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

Loans

Loans receivable totaled $1.387 billion at June 30, 2021 compared to $1.411 billion as of December 31, 2020. The $24.1 million decrease recorded during the first six months of 2021 includes a $20.8 million reduction in PPP loans due to loan forgiveness. Organic loan growth for the six-month period ended June 30, 2021 resulted in a $3.3 million reduction in total loans. Commercial real estate loans increased $18.8 million during the six-month period ended June 30, 2021, but this was offset by limited growth or reductions in other loan categories. The Company also sold $7.3 million of residential mortgage loans during the six-month period ended June 30, 2021.

The allowance for loan losses totaled $15,340,000 as of June 30, 2021, and represented 1.11% of total loans outstanding, compared to $13,150,000, or 0.93% of total loans, at December 31, 2020. The Company had net charge-offs for the six months ended June 30, 2021 of $810,000 compared to $197,000 in the corresponding period in 2020. The Company’s management assesses the adequacy of the allowance for loan losses on a quarterly basis. The process includes an analysis of the risks inherent in the loan portfolio. It includes an analysis of impaired loans and a historical review of credit losses by loan type. Other factors considered include concentration of credit in specific industries, economic and industry conditions, trends in delinquencies and loan classifications, and loan growth. In addition, management has included qualitative factors during 2021 which are specifically related to the economic impact of the COVID-19 pandemic. Management considers the allowance adequate at June 30, 2021 based on the Company’s criteria. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, which might be incurred in the future.

As of June 30, 2021, non-performing loans totaled $3,940,000 or 0.28% of total loans compared to $3,391,000, or 0.24%, of total loans at December 31, 2020. At June 30, 2021, non-performing assets totaled $4,784,000 million, or 0.24%, of total assets, compared to $4,356,000, or 0.24%, of total assets at December 31, 2020.

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

(dollars in thousands) | June 30, 2021 |  |  | December 31, 2020 |
Loans accounted for on a non-accrual basis: |  |  |  |  |  |  |
Real Estate |  |  |  |  |  |  |
Residential | $ | 486 |  |  | $ | 571 |
Commercial |  | 1,118 |  |  |  | 1,674 |
Agricultural |  | 676 |  |  |  | 676 |
Construction |  | — |  |  |  | — |
Commercial and financial loans |  | 1,169 |  |  |  | 22 |
Other agricultural loans |  | 308 |  |  |  | 263 |
Consumer loans to individuals |  | 183 |  |  |  | 185 |
Total non-accrual loans * |  | 3,940 |  |  |  | 3,391 |
Accruing loans which are contractually |  |  |  |  |  |  |
past due 90 days or more |  | — |  |  |  | — |
Total non-performing loans |  | 3,940 |  |  |  | 3,391 |
Foreclosed real estate |  | 844 |  |  |  | 965 |
Total non-performing assets | $ | 4,784 |  |  | $ | 4,356 |
Purchased credit impaired loans (a) | $ | 8,398 |  |  | $ | 9,281 |
Allowance for loans losses | $ | 15,340 |  |  | $ | 13,150 |
Coverage of non-performing loans (a) (b) |  | 389% | % |  |  | 388% | %
Non-performing loans to total loans(a) |  | 0.28 | % |  |  | 0.24 | %
Non-performing loans to total assets(a) |  | 0.19 | % |  |  | 0.18 | %
Non-performing assets to total assets(a) |  | 0.24 | % |  |  | 0.24 | %

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

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

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

Since the inception of the CARES Act, over 1,200 of our loan customers had requested loan payment deferrals or payments of interest only on loans totaling $274.3 million. In accordance with interagency guidance and the CARES Act issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty. As of June 30, 2021, twelve loans with an outstanding balance of $1.0 million remain in forbearance.

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

Deposits

During the six-month period ended June 30, 2021, total deposits increased $153.6 million due primarily to the impact from the PPP and other economic stimulus programs.

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

(dollars in thousands) | June 30, 2021 |  | December 31, 2020
Non-interest bearing demand | $ | 435,824 |  | $ | 359,559
Interest-bearing demand |  | 184,265 |  |  | 149,692
Money market deposit accounts |  | 291,224 |  |  | 259,974
Savings |  | 266,800 |  |  | 232,329
Time deposits <$100,000 |  | 169,894 |  |  | 180,316
Time deposits >$100,000 |  | 340,934 |  |  | 353,515
Total | $ | 1,688,941 |  | $ | 1,535,385

Borrowings

Other borrowings as of June 30, 2021, totaled $36.3 million compared to $42.5 million as of December 31, 2020. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $20.3 million due to a $20.3 million increase in repurchase agreements.

Other borrowings consisted of the following:

(dollars in thousands) | June 30, 2021 |  | December 31, 2020
Notes with the FHLB: |  |  |  |  |
Amortizing fixed rate borrowing due March 2022 at 1.748% | $ | 679 |  | $ | 1,126
Amortizing fixed rate borrowing due August 2022 at 1.94% |  | 2,375 |  |  | 3,376
Amortizing fixed rate borrowing due October 2022 at 1.88% |  | 2,207 |  |  | 3,021
Amortizing fixed rate borrowing due October 2023 at 3.24% |  | 4,868 |  |  | 5,865
Amortizing fixed rate borrowing due December 2023 at 3.22% |  | 2,601 |  |  | 3,096
Fixed rate term borrowing due December 2023 at 1.95% |  | 10,000 |  |  | 10,000
Amortizing fixed rate borrowing due December 2023 at 1.73% |  | 6,408 |  |  | 7,616
Amortizing fixed rate borrowing due April 2024 at 0.91% |  | 7,121 |  |  | 8,359
| $ | 36,259 |  | $ | 42,459

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Stockholders’ Equity and Capital Ratios

As of June 30, 2021, stockholders’ equity totaled $200.5 million, compared to $194.8 million as of December 31, 2020. The net change in stockholders’ equity included $11.3 million of net income, which was partially offset by $4.3 million of dividends declared. In addition, total equity decreased $1.6 million due to a decrease in the fair value of securities in the available for sale portfolio, net of tax. This decrease in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities. Because of interest rate volatility, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

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

| June 30, 2021 |  | December 31, 2020
Tier 1 Capital |  |  |
(To average assets) | 8.41% |  | 8.71%
Tier 1 Capital |  |  |
(To risk-weighted assets) | 12.06% |  | 11.65%
Common Equity Tier 1 Capital |  |  |
(To risk-weighted assets) | 12.06% |  | 11.65%
Total Capital |  |  |
(To risk-weighted assets) | 13.17% |  | 12.62%

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

Liquidity

As of June 30, 2021, the Company had cash and cash equivalents of $205.2 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $333.6 million which could be used for liquidity needs. This totals $538.8 million of liquidity and represents 26.6% of total assets compared to $338.3 million and 18.3% of total assets as of December 31, 2020. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of June 30, 2021 and December 31, 2020. Based upon these measures, the Company believes its liquidity is adequate.

Capital Resources

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

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

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

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $586,850,000 as of June 30, 2021, of which $36,259,000 was outstanding in the form of borrowings. As of December 31, 2020, the maximum borrowing capacity was $686,360,000, of which $42,459,000 of borrowings was outstanding. Additionally, as of June 30, 2021, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $169,916,000 as collateral for specific municipal deposits.

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

Non-GAAP Financial Measures

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

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Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis, | Three Months Ended June 30,
dollars in thousands) | 2021 |  | 2020
| Average |  |  |  | Average |  | Average |  |  |  | Average
| Balance |  | Interest |  | Rate |  | Balance |  | Interest |  | Rate
| (2) |  | (1) |  | (3) |  | (2) |  | (1) |  | (3)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits with banks | $ | 176,530 |  | $ | 59 |  |  | 0.13% |  | $ | 71,626 |  | $ | 19 |  |  | 0.11%
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | 247,611 |  |  | 966 |  |  | 1.56 |  |  | 139,431 |  |  | 701 |  |  | 2.01
Tax-exempt (1) |  | 64,084 |  |  | 494 |  |  | 3.08 |  |  | 54,264 |  |  | 458 |  |  | 3.38
Total securities available for sale (1) |  | 311,695 |  |  | 1,460 |  |  | 1.87 |  |  | 193,695 |  |  | 1,159 |  |  | 2.39
Loans receivable (1) (4) (5) |  | 1,401,890 |  |  | 16,208 |  |  | 4.62 |  |  | 977,358 |  |  | 10,892 |  |  | 4.46
Total interest-earning assets |  | 1,890,115 |  |  | 17,727 |  |  | 3.75 |  |  | 1,242,679 |  |  | 12,070 |  |  | 3.89
Non-interest earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | 22,455 |  |  |  |  |  |  |  |  | 15,493 |  |  |  |  |  |
Allowance for loan losses |  | (15,143) |  |  |  |  |  |  |  |  | (9,566) |  |  |  |  |  |
Other assets |  | 114,023 |  |  |  |  |  |  |  |  | 87,953 |  |  |  |  |  |
Total non-interest earning assets |  | 121,335 |  |  |  |  |  |  |  |  | 93,880 |  |  |  |  |  |
Total Assets | $ | 2,011,450 |  |  |  |  |  |  |  | $ | 1,336,559 |  |  |  |  |  |
Liabilities and Stockholders' Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand and money market | $ | 461,221 |  | $ | 214 |  |  | 0.19 |  | $ | 245,096 |  | $ | 126 |  |  | 0.21
Savings |  | 266,832 |  |  | 41 |  |  | 0.06 |  |  | 187,236 |  |  | 25 |  |  | 0.05
Time |  | 532,939 |  |  | 950 |  |  | 0.71 |  |  | 371,847 |  |  | 1,479 |  |  | 1.59
Total interest-bearing deposits |  | 1,260,992 |  |  | 1,205 |  |  | 0.38 |  |  | 804,179 |  |  | 1,630 |  |  | 0.81
Short-term borrowings |  | 77,592 |  |  | 73 |  |  | 0.38 |  |  | 61,415 |  |  | 73 |  |  | 0.48
Other borrowings |  | 37,787 |  |  | 186 |  |  | 1.98 |  |  | 54,666 |  |  | 279 |  |  | 2.04
Total interest-bearing liabilities |  | 1,376,371 |  |  | 1,464 |  |  | 0.43 |  |  | 920,260 |  |  | 1,982 |  |  | 0.86
Non-interest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  | 421,499 |  |  |  |  |  |  |  |  | 255,671 |  |  |  |  |  |
Other liabilities |  | 14,459 |  |  |  |  |  |  |  |  | 17,156 |  |  |  |  |  |
Total non-interest bearing liabilities |  | 435,958 |  |  |  |  |  |  |  |  | 272,827 |  |  |  |  |  |
Stockholders' equity |  | 199,121 |  |  |  |  |  |  |  |  | 143,472 |  |  |  |  |  |
Total Liabilities and Stockholders' Equity | $ | 2,011,450 |  |  |  |  |  |  |  | $ | 1,336,559 |  |  |  |  |  |
Net interest income/spread (tax equivalent basis) |  |  |  |  | 16,263 |  |  | 3.32% |  |  |  |  |  | 10,088 |  |  | 3.03%
Tax-equivalent basis adjustment |  |  |  |  | (210) |  |  |  |  |  |  |  |  | (221) |  |  |
Net interest income |  |  |  | $ | 16,053 |  |  |  |  |  |  |  | $ | 9,867 |  |  |
Net interest margin (tax equivalent basis) |  |  |  |  |  |  |  | 3.44% |  |  |  |  |  |  |  |  | 3.25%

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

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

(3)Annualized

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

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

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

| Increase/(Decrease)
| Three months ended June 30, 2021 Compared to
| Three months ended June 30, 2020
| Variance due to
| Volume |  | Rate |  | Net
| (dollars in thousands)
Interest-earning assets: |  |  |  |  |  |  |  |
Interest-bearing deposits with banks | $ | 32 |  | $ | 8 |  | $ | 40
Securities available for sale: |  |  |  |  |  |  |  |
Taxable |  | 495 |  |  | (230) |  |  | 265
Tax-exempt securities |  | 81 |  |  | (45) |  |  | 36
Total securities |  | 576 |  |  | (275) |  |  | 301
Loans receivable |  | 4,770 |  |  | 546 |  |  | 5,316
Total interest-earning assets |  | 5,378 |  |  | 279 |  |  | 5,657
Interest-bearing liabilities: |  |  |  |  |  |  |  |
Interest-bearing demand and money market |  | 109 |  |  | (21) |  |  | 88
Savings |  | 10 |  |  | 6 |  |  | 16
Time |  | 355 |  |  | (884) |  |  | (529)
Total interest-bearing deposits |  | 474 |  |  | (899) |  |  | (425)
Short-term borrowings |  | 17 |  |  | (17) |  |  | —
Other borrowings |  | (87) |  |  | (6) |  |  | (93)
Total interest-bearing liabilities |  | 404 |  |  | (922) |  |  | (518)
Net interest income (tax-equivalent basis) | $ | 4,974 |  | $ | 1,201 |  | $ | 6,175

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

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

General

For the three months ended June 30, 2021, net income totaled $5,755,000 compared to $1,488,000 earned in the similar period in 2020. The increase in net income for the three months ended June 30, 2021 was due primarily to a $6,186,000 increase in net interest income which reflects the benefits realized from the acquisition of UpState. This increase was partially offset by a $200,000 increase in the provision for loan losses and a $1.4 million increase in other operating expenses. Earnings per share for the three-months ended June 30, 2021 were $0.70 per share for basic shares and fully diluted shares compared to $0.24 per share for basic shares and fully diluted shares for the three months ended June 30, 2020. The resulting annualized return on average assets and annualized return on average equity for the three months ended June 30, 2021 were 1.15% and 11.59%, respectively, compared to 0.45% and 4.17%, respectively, for the same period in 2020.

The following table sets forth changes in net income:

(dollars in thousands) | Three months ended
| June 30, 2021 to June 30, 2020
Net income three months ended June 30, 2020 | $ | 1,488
Change due to: |  |
Net interest income |  | 6,186
Provision for loan losses |  | (200)
Net gains on sales of securities and loans |  | 44
Service charges and fees |  | 695
Other income |  | 56
Salaries and employee benefits |  | (1,882)
Occupancy, furniture and equipment |  | (280)
Data processing related |  | (96)
FDIC insurance assessment |  | (112)
Professional fees |  | (118)
Merger related |  | 1,597
All other expenses |  | (509)
Income tax expense |  | (1,114)
Net income three months ended June 30, 2021 | $ | 5,755

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, 2021 totaled $16,263,000 which was $6,175,000 higher than the comparable period in 2020. The increase in net interest income was due primarily to a $5,316,000 increase in interest income (fte) on loans acquired in the acquisition of UpState. The fte net interest spread and net interest margin were 3.32% and 3.44%, respectively, for the three months ended June 30, 2021 compared to 3.03% and 3.25%, respectively, for the same period in 2020. The increase in the net interest spread reflects the growth in average interest-earning assets. See “Non-GAAP Financial Measures” above.

For the three-months ended June 30, 2021, interest income (fte) totaled $17,727,000 with a yield on average earning assets of 3.75% compared to $12,070,000 and 3.89% for the 2020 period. Average loans increased $424.5 million during the three-months ended June 30, 2021, over the comparable period of 2020, while average securities increased $118.0 million. Average earning assets totaled $1.890 billion for the three months ended June 30, 2021, an increase of $647.4 million over the average for the same period in 2020. All increases reflect asset growth resulting from the merger with UpState and growth in PPP loans. See “Non-GAAP Financial Measures” above.

Interest expense for the three months ended June 30, 2021 totaled $1,464,000 at an average cost of 0.43% compared to $1,982,000 and 0.86% for the same period in 2020. The decrease in interest expense during the three-months ended June 30, 2021 reflects the overall lower level of interest rates. The average cost of time deposits, which is the most significant component of funding costs, decreased 0.88% during the three months ended June 30, 2021.

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended June 30, 2021 was $1,500,000, compared to $1,300,000 for the three months ended June 30, 2020. The increased provision includes the increased risk related to the economic impact of the

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COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were $669,000 for the quarter ended June 30, 2021, compared to $76,000 for the similar period in 2020. At June 30, 2021, the allowance for loan losses represented 1.11% of loans receivable. Additionally, the allowance for loan losses represented 389% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other Income

Other income totaled $2,187,000 for the three months ended June 30, 2021, compared to $1,392,000 for the same period in 2020. The increase was due primarily to a $695,000 increase in service charges and fees. Net gains on the sale of loans totaled $109,000 for the three months ended June 30, 2021 compared to $65,000 in the three months ended June 30, 2020.

Other Expense

Other expense for the three months ended June 30, 2021 totaled $9,492,000, which was $1,400,000 higher than the same period of 2020, due primarily to the costs associated with the operation of four community offices acquired in the UpState merger.

Income Tax Expense

Income tax expense totaled $1,493,000 for an effective tax rate of 20.6% for the three months ended June 30, 2021 compared to $379,000 for an effective tax rate of 20.3% for the three months ended June 30, 2020. The increase in the effective tax rate in the 2021 period reflects the increased level of taxable income.

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46

Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis, | Six Months Ended June 30,
dollars in thousands) | 2021 |  | 2020
| Average |  |  |  | Average |  | Average |  |  |  | Average
| Balance |  | Interest |  | Rate |  | Balance |  | Interest |  | Rate
| (2) |  | (1) |  | (3) |  | (2) |  | (1) |  | (3)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest bearing deposits with banks | $ | 146,574 |  | $ | 102 |  |  | 0.14% |  | $ | 38,121 |  | $ | 25 |  |  | 0.13%
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | 219,807 |  |  | 1,735 |  |  | 1.58 |  |  | 142,922 |  |  | 1,496 |  |  | 2.09
Tax-exempt (1) |  | 58,934 |  |  | 928 |  |  | 3.15 |  |  | 57,256 |  |  | 944 |  |  | 3.30
Total securities available for sale (1) |  | 278,741 |  |  | 2,663 |  |  | 1.91 |  |  | 200,178 |  |  | 2,440 |  |  | 2.44
Loans receivable (1) (4) (5) |  | 1,410,160 |  |  | 32,468 |  |  | 4.60 |  |  | 952,272 |  |  | 21,711 |  |  | 4.56
Total interest-earning assets |  | 1,835,475 |  |  | 35,233 |  |  | 3.84 |  |  | 1,190,571 |  |  | 24,176 |  |  | 4.06
Non-interest earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | 21,698 |  |  |  |  |  |  |  |  | 15,108 |  |  |  |  |  |
Allowance for loan losses |  | (14,509) |  |  |  |  |  |  |  |  | (9,084) |  |  |  |  |  |
Other assets |  | 114,954 |  |  |  |  |  |  |  |  | 86,737 |  |  |  |  |  |
Total non-interest earning assets |  | 122,143 |  |  |  |  |  |  |  |  | 92,761 |  |  |  |  |  |
Total Assets | $ | 1,957,618 |  |  |  |  |  |  |  | $ | 1,283,332 |  |  |  |  |  |
Liabilities and Stockholders' Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand and money market | $ | 442,601 |  | $ | 434 |  |  | 0.20 |  | $ | 235,864 |  | $ | 276 |  |  | 0.23
Savings |  | 256,803 |  |  | 76 |  |  | 0.06 |  |  | 176,870 |  |  | 47 |  |  | 0.05
Time |  | 533,068 |  |  | 1,949 |  |  | 0.73 |  |  | 371,851 |  |  | 3,097 |  |  | 1.67
Total interest-bearing deposits |  | 1,232,472 |  |  | 2,459 |  |  | 0.40 |  |  | 784,585 |  |  | 3,420 |  |  | 0.87
Short-term borrowings |  | 70,971 |  |  | 142 |  |  | 0.40 |  |  | 53,153 |  |  | 184 |  |  | 0.69
Other borrowings |  | 39,330 |  |  | 388 |  |  | 1.97 |  |  | 54,244 |  |  | 581 |  |  | 2.14
Total interest-bearing liabilities |  | 1,342,773 |  |  | 2,989 |  |  | 0.45 |  |  | 891,982 |  |  | 4,185 |  |  | 0.94
Non-interest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  | 402,024 |  |  |  |  |  |  |  |  | 232,579 |  |  |  |  |  |
Other liabilities |  | 14,634 |  |  |  |  |  |  |  |  | 16,554 |  |  |  |  |  |
Total non-interest bearing liabilities |  | 416,658 |  |  |  |  |  |  |  |  | 249,133 |  |  |  |  |  |
Stockholders' equity |  | 198,187 |  |  |  |  |  |  |  |  | 142,217 |  |  |  |  |  |
Total Liabilities and Stockholders' Equity | $ | 1,957,618 |  |  |  |  |  |  |  | $ | 1,283,332 |  |  |  |  |  |
Net interest income/spread (tax equivalent basis) |  |  |  |  | 32,244 |  |  | 3.39% |  |  |  |  |  | 19,991 |  |  | 3.12%
Tax-equivalent basis adjustment |  |  |  |  | (415) |  |  |  |  |  |  |  |  | (459) |  |  |
Net interest income |  |  |  | $ | 31,829 |  |  |  |  |  |  |  | $ | 19,532 |  |  |
Net interest margin (tax equivalent basis) |  |  |  |  |  |  |  | 3.51% |  |  |  |  |  |  |  |  | 3.36%

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

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

(3)Annualized

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

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

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

| Increase/(Decrease)
| Six months ended June 30, 2021 Compared to
| Six months ended June 30, 2020
| Variance due to
| Volume |  | Rate |  | Net
| (dollars in thousands)
Interest-earning assets: |  |  |  |  |  |  |  |
Interest-bearing deposits with banks | $ | 71 |  | $ | 6 |  | $ | 77
Securities available for sale: |  |  |  |  |  |  |  |
Taxable |  | 707 |  |  | (468) |  |  | 239
Tax-exempt securities |  | 27 |  |  | (43) |  |  | (16)
Total securities |  | 734 |  |  | (511) |  |  | 223
Loans receivable |  | 10,476 |  |  | 281 |  |  | 10,757
Total interest-earning assets |  | 11,281 |  |  | (224) |  |  | 11,057
Interest-bearing liabilities: |  |  |  |  |  |  |  |
Interest-bearing demand and money market |  | 220 |  |  | (62) |  |  | 158
Savings |  | 19 |  |  | 10 |  |  | 29
Time |  | 732 |  |  | (1,880) |  |  | (1,148)
Total interest-bearing deposits |  | 971 |  |  | (1,932) |  |  | (961)
Short-term borrowings |  | 42 |  |  | (84) |  |  | (42)
Other borrowings |  | (158) |  |  | (35) |  |  | (193)
Total interest-bearing liabilities |  | 855 |  |  | (2,051) |  |  | (1,196)
Net interest income (tax-equivalent basis) | $ | 10,426 |  | $ | 1,827 |  | $ | 12,253

Comparison of Operating Results for the Six Months Ended June 30, 2021 to June 30, 2020

General

For the six months ended June 30, 2021, net income totaled $11,296,000 compared to $4,567,000 earned in the same period in 2020. The increase in net income for the six months ended June 30, 2021 was due primarily to a $12,297,000 million increase in net interest income which reflects the benefits realized from the acquisition of UpState. This increase was partially offset by a $1,000,000 increase in the provision for loan losses and a $3.8 million increase in other operating expenses. Earnings per share for the six months ended June 30, 2021 were $1.38 per share for basic shares and for fully diluted shares compared to $0.73 per share for basic shares and fully diluted shares for the six months ended June 30, 2020. The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, 2021 were 1.16% and 11.49%, respectively, compared to 0.72% and 6.46%, respectively, for the same period in 2020.

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The following table sets forth changes in net income:

(dollars in thousands) | Six months ended
| June 30, 2021 to June 30, 2020
Net income six months ended June 30, 2020 | $ | 4,567
Change due to: |  |
Net interest income |  | 12,297
Provision for loan losses |  | (1,000)
Service charges and fees |  | 881
Net gains on sales |  | —
Earnings and proceeds on bank-owned life insurance |  | 148
Other income |  | 100
Salaries and employee benefits |  | (3,060)
Occupancy, furniture and equipment |  | (531)
Data processing related |  | (263)
Professional fees |  | (440)
FDIC insurance assessment |  | (293)
Merger related |  | 1,597
All other expenses |  | (802)
Income tax expense |  | (1,905)
Net income six months ended June 30, 2021 | $ | 11,296

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2021 totaled $32,244,000 which was $12,253,000 higher than the comparable period in 2020. The increase in net interest income was due primarily to a $10,757,000 increase in interest income (fte) on loans resulting from the acquisition of UpState. The fte net interest spread and net interest margin were 3.39% and 3.51%, respectively, for the six months ended June 30, 2021 compared to 3.12% and 3.36%, respectively, for the same period in 2020. The increase in the net interest spread reflects the growth in average interest-earning assets. See “Non-GAAP Financial Measures” above.

For the six-months ended June 30, 2021, interest income (fte) totaled $35,233,000 with a yield on average earning assets of 3.84% compared to $24,176,000 and 4.06% for the 2020 period. Average loans increased $457.9 million during the six-months ended June 30, 2021, over the comparable period of 2020, while average securities increased $78.6 million. Average earning assets totaled $1.835 billion for the six months ended June 30, 2021, an increase of $644.9 million over the average for the same period in 2020. All increases reflect growth resulting from the merger with UpState and growth in PPP loans. See “Non-GAAP Financial Measures” above.

Interest expense for the six months ended June 30, 2021 totaled $2,989,000 at an average cost of 0.45% compared to $4,185,000 and 0.94% for the same period in 2020. The decrease in average cost during the 2021 quarter reflects the overall lower level of market interest rates. The average cost of time deposits, which is the most significant component of funding, decreased 0.94% during the period.

Provision for Loan Losses

The Company’s provision for loan losses for the six months ended June 30, 2021 was $3,000,000, compared to $2,000,000 for the six months ended June 30, 2020. The increased provision includes the increased risk related to the economic impact of the COVID-19 pandemic. The Company makes provisions for loan losses in an amount necessary to maintain the allowance for loan losses at an acceptable level. Net charge-offs were $810,000 for the six months ended June 30, 2021, compared to $197,000 for the similar period in 2020. At June 30, 2021, the allowance for loan losses represented 1.11% of loans receivable. Additionally, the allowance for loan losses represented 389% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other Income

Other income totaled $4,176,000 for the six months ended June 30, 2021, compared to $3,047,000 for the same period in 2020. The increase was due primarily to an $881,000 increase in service charges and fees. Net gains from the sale of securities totaled $21,000 for the six-months ended June 30, 2021, compared to $38,000 in the six-months ended June 30, 2020. Net gains on the sale of loans totaled $138,000 for the six-months ended June 30, 2021 compared to $121,000 in the six-months ended June 30, 2020.

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Income Tax Expense

Income tax expense totaled $2,765,000 for an effective tax rate of 19.7% for the six months ended June 30, 2021 compared to $860,000 for an effective tax rate of 15.8% for the six months ended June 30, 2020. The increase in the effective tax rate in the 2021 period reflects the increased level of taxable income.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

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

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

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

As of June 30, 2021, the Company had a positive 90-day interest sensitivity gap of $147.6 million or 7.3% of total assets, compared to the $106.2 million interest sensitivity gap, or 5.7% of total assets, as of December 31, 2020. Rate-sensitive assets repricing within 90 days increased $58.2 million due to a $77.6 million increase in interest-bearing deposits. Rate-sensitive liabilities repricing within 90 days increased $16.9 million since year end due primarily to a $12.2 million increase in deposits repricing. A positive gap means that rate-sensitive assets are greater than rate-sensitive liabilities at the time interval. This would indicate that in a rising rate environment, yield on interest-earning assets in the 90-day time frame could increase faster than the cost of interest-bearing liabilities. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

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

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June 30, 2021

Rate Sensitivity Table

(dollars in thousands)

| 3 Months |  | 3-12 Months |  | 1 to 3 Years |  | Over 3 Years |  | Total
Federal funds sold and interest-bearing deposits | $ | 169,896 |  | $ | — |  | $ | 446 |  | $ | — |  | $ | 170,342
Securities |  | 21,330 |  |  | 42,110 |  |  | 80,042 |  |  | 190,154 |  |  | 333,636
Loans Receivable |  | 206,581 |  |  | 267,659 |  |  | 426,621 |  |  | 485,793 |  |  | 1,386,654
Total RSA | $ | 397,807 |  | $ | 309,769 |  | $ | 507,109 |  | $ | 675,947 |  | $ | 1,890,632
Non-maturity interest-bearing deposits | $ | 113,336 |  | $ | 116,208 |  | $ | 306,456 |  | $ | 206,289 |  | $ | 742,289
Time Deposits |  | 115,691 |  |  | 226,288 |  |  | 144,696 |  |  | 24,153 |  |  | 510,828
Borrowings |  | 21,221 |  |  | 37,502 |  |  | 61,135 |  |  | — |  |  | 119,858
Total RSL | $ | 250,248 |  | $ | 379,998 |  | $ | 512,287 |  | $ | 230,442 |  | $ | 1,372,975
Interest Sensitivity Gap | $ | 147,559 |  | $ | (70,229) |  | $ | (5,178) |  | $ | 445,505 |  | $ | 517,657
Cumulative Gap |  | 147,559 |  |  | 77,330 |  |  | 72,152 |  |  | 517,657 |  |  |
RSA/RSL-cumulative |  | 158.97% |  |  | 112.27% |  |  | 106.32% |  |  | 137.70% |  |  |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Sensitivity Gap | $ | 106,233 |  | $ | 26,320 |  | $ | 649 |  | $ | 314,776 |  | $ | 447,978
Cumulative Gap |  | 106,233 |  |  | 132,553 |  |  | 133,202 |  |  | 447,978 |  |  |
RSA/RSL-cumulative |  | 145.5% |  |  | 122.0% |  |  | 112.4% |  |  | 135.0% |  |  |

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Item 4. Controls and Procedures

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

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

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53

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Not applicable.

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

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

(b) Use of Proceeds. Not Applicable

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

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

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

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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54

Item 6. Exhibits

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

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

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

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

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

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55

Signatures

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

|  |  | NORWOOD FINANCIAL CORP
Date: August 6, 2021 |  | By: | /s/ Lewis J. Critelli
|  |  | Lewis J. Critelli
|  |  | President and Chief Executive Officer
|  |  | (Principal Executive Officer)
Date: August 6, 2021 |  |  | /s/ William S. Lance
|  |  | William S. Lance
|  |  | Executive Vice President and
|  |  | Chief Financial Officer
|  |  | (Principal Financial Officer)

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